ofc-20240930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended			September 30, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from						to

Commission file number 1-14023

COPT DEFENSE PROPERTIES

(Exact name of registrant as specified in its charter)


Maryland						23-2947217
(State or other jurisdiction of						(IRS Employer
incorporation or organization)						Identification No.)


6711 Columbia Gateway Drive, Suite 300, Columbia, MD			21046
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (443) 285-5400

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of beneficial interest, $0.01 par value	CDP	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of October 21, 2024, 112,693,206 of COPT Defense Properties’ Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

TABLE OF CONTENTS

FORM 10-Q


		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (unaudited)	8






Notes to Consolidated Financial Statements (unaudited)		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

SIGNATURES		44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COPT Defense Properties and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)


	September 30, 2024		December 31, 2023
Assets
Properties, net:
Operating properties, net	$	3,289,959	$	3,246,806
Projects in development or held for future development	314,729		256,872
Total properties, net	3,604,688		3,503,678
Property - operating right-of-use assets	40,523		41,296


Cash and cash equivalents	34,478		167,820
Investment in unconsolidated real estate joint ventures	39,720		41,052
Accounts receivable, net	42,240		48,946
Deferred rent receivable	159,182		149,237
Lease incentives, net	63,034		61,331
Deferred leasing costs (net of accumulated amortization of $44,178 and $41,448, respectively)	71,815		70,057
Investing receivables (net of allowance for credit losses of $2,867 and $2,377, respectively)	83,536		81,512

Prepaid expenses and other assets, net	95,086		82,037
Total assets	$	4,234,302	$	4,246,966
Liabilities and equity
Liabilities:
Debt, net	$	2,390,839	$	2,416,287
Accounts payable and accrued expenses	134,112		133,315
Rents received in advance and security deposits	33,213		35,409
Dividends and distributions payable	33,915		32,644
Deferred revenue associated with operating leases	37,660		29,049
Property - operating lease liabilities	33,615		33,931

Other liabilities	15,917		18,996
Total liabilities	2,679,271		2,699,631
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	22,436		23,580
Equity:
Shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,693,206 at September 30, 2024 and 112,555,352 at December 31, 2023)	1,127		1,126
Additional paid-in capital	2,493,340		2,489,989
Cumulative distributions in excess of net income	(1,005,260)		(1,009,318)
Accumulated other comprehensive income	58		2,115
Total shareholders’ equity	1,489,265		1,483,912
Noncontrolling interests in subsidiaries:
Common units in COPT Defense Properties, L.P. (“CDPLP”)	28,918		25,502

Other consolidated entities	14,412		14,341
Noncontrolling interests in subsidiaries	43,330		39,843
Total equity	1,532,595		1,523,755
Total liabilities, redeemable noncontrolling interests and equity	$	4,234,302	$	4,246,966

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
Revenues
Lease revenue	$	170,549	$	155,268	$	501,601	$	459,510
Other property revenue	2,014		1,339		4,710		3,731
Construction contract and other service revenues	16,662		11,949		63,523		42,012
Total revenues	189,225		168,556		569,834		505,253
Operating expenses
Property operating expenses	68,881		61,788		199,037		182,808
Depreciation and amortization associated with real estate operations	38,307		37,620		114,819		112,215
Construction contract and other service expenses	16,127		11,493		61,746		40,249
Impairment losses	—		252,797		—		252,797
General, administrative, leasing and other expenses	11,416		10,576		35,195		31,424
Total operating expenses	134,731		374,274		410,797		619,493
Interest expense	(20,376)		(17,798)		(61,760)		(50,759)
Interest and other income, net	3,324		2,529		10,330		6,928
Gain on sales of real estate	—		—		—		49,392


Income (loss) before equity in income (loss) of unconsolidated entities and income taxes	37,442		(220,987)		107,607		(108,679)
Equity in income (loss) of unconsolidated entities	85		(68)		180		(21)
Income tax expense	(130)		(152)		(312)		(467)


Net income (loss)	37,397		(221,207)		107,475		(109,167)
Net (income) loss attributable to noncontrolling interests:
Common units in CDPLP	(711)		3,691		(2,013)		1,882

Other consolidated entities	(601)		1,329		(1,654)		164



Net income (loss) attributable to common shareholders	$	36,085	$	(216,187)	$	103,808	$	(107,121)

Earnings per common share:


Net income (loss) attributable to common shareholders - basic	$	0.32	$	(1.94)	$	0.92	$	(0.96)



Net income (loss) attributable to common shareholders - diluted	$	0.32	$	(1.94)	$	0.92	$	(0.96)

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
Net income (loss)	$	37,397	$	(221,207)	$	107,475	$	(109,167)
Other comprehensive (loss) income:
Unrealized (loss) income on interest rate derivatives	(2,582)		2,042		1,309		6,816
Reclassification adjustments on interest rate derivatives recognized in interest expense	(1,170)		(1,146)		(3,522)		(2,711)


Total other comprehensive (loss) income	(3,752)		896		(2,213)		4,105
Comprehensive income (loss)	33,645		(220,311)		105,262		(105,062)
Comprehensive (income) loss attributable to noncontrolling interests	(1,116)		4,994		(3,511)		1,964
Comprehensive income (loss) attributable to common shareholders	$	32,529	$	(215,317)	$	101,751	$	(103,098)

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Income		Noncontrolling Interests		Total
For the Three Months Ended September 30, 2023
Balance at June 30, 2023 (112,538,555 common shares outstanding)	$	1,125	$	2,486,996	$	(762,617)	$	5,224	$	45,967	$	1,776,695

Redemption of common units	—		—		—		—		(86)		(86)


Share-based compensation (9,291 shares issued, net of redemptions)	—		1,052		—		—		1,407		2,459
Redemption of vested equity awards	—		(48)		—		—		—		(48)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		1,324		—		—		(1,324)		—
Comprehensive (loss) income	—		—		(216,187)		870		(5,588)		(220,905)
Dividends	—		—		(32,081)		—		—		(32,081)
Distributions to owners of common units in CDPLP	—		—		—		—		(547)		(547)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(7)		(7)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		393		—		—		—		393


Balance at September 30, 2023 (112,547,846 common shares outstanding)	$	1,125	$	2,489,717	$	(1,010,885)	$	6,094	$	39,822	$	1,525,873

For the Three Months Ended September 30, 2024
Balance at June 30, 2024 (112,650,930 common shares outstanding)	$	1,127	$	2,489,931	$	(1,008,087)	$	3,614	$	43,921	$	1,530,506


Conversion of common units to common shares (40,000 shares)	—		538		—		—		(538)		—

Redemption of common units	—		—		—		—		(142)		(142)
Share-based compensation (2,276 shares issued, net of redemptions)	—		1,012		—		—		1,729		2,741
Redemption of vested equity awards	—		(66)		—		—		—		(66)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		1,597		—		—		(1,597)		—
Comprehensive income (loss)	—		—		36,085		(3,556)		610		33,139
Dividends	—		—		(33,258)		—		—		(33,258)
Distributions to owners of common units in CDPLP	—		—		—		—		(645)		(645)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(8)		(8)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		328		—		—		—		328


Balance at September 30, 2024 (112,693,206 common shares outstanding)	$	1,127	$	2,493,340	$	(1,005,260)	$	58	$	43,330	$	1,532,595

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Equity (continued)

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Income		Noncontrolling Interests		Total
For the Nine Months Ended September 30, 2023
Balance at December 31, 2022 (112,423,893 common shares outstanding)	$	1,124	$	2,486,116	$	(807,508)	$	2,071	$	39,652	$	1,721,455




Redemption of common units	—		—		—		—		(540)		(540)


Share-based compensation (123,953 shares issued, net of redemptions)	1		3,092		—		—		3,543		6,636
Redemption of vested equity awards	—		(1,199)		—		—		—		(1,199)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		22		—		—		(22)		—
Comprehensive (loss) income	—		—		(107,121)		4,023		(3,820)		(106,918)
Dividends	—		—		(96,256)		—		—		(96,256)
Distributions to owners of common units in CDPLP	—		—		—		—		(1,639)		(1,639)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(22)		(22)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		1,686		—		—		—		1,686


Reclassification of redeemable noncontrolling interests to equity	—		—		—		—		2,670		2,670
Balance at September 30, 2023 (112,547,846 common shares outstanding)	$	1,125	$	2,489,717	$	(1,010,885)	$	6,094	$	39,822	$	1,525,873

For the Nine Months Ended September 30, 2024
Balance at December 31, 2023 (112,555,352 common shares outstanding)	$	1,126	$	2,489,989	$	(1,009,318)	$	2,115	$	39,843	$	1,523,755


Conversion of common units to common shares (40,000 shares)	—		538		—		—		(538)		—
Redemption of common units	—		—		—		—		(1,420)		(1,420)


Share-based compensation (97,854 shares issued, net of redemptions)	1		3,132		—		—		5,093		8,226
Redemption of vested equity awards	—		(1,194)		—		—		—		(1,194)
Adjustments to noncontrolling interests resulting from changes in ownership of CDPLP	—		(269)		—		—		269		—
Comprehensive income (loss)	—		—		103,808		(2,057)		2,065		103,816
Dividends	—		—		(99,750)		—		—		(99,750)
Distributions to owners of common units in CDPLP	—		—		—		—		(1,959)		(1,959)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(23)		(23)
Adjustments for changes in fair value of redeemable noncontrolling interests	—		1,144		—		—		—		1,144



Balance at September 30, 2024 (112,693,206 common shares outstanding)	$	1,127	$	2,493,340	$	(1,005,260)	$	58	$	43,330	$	1,532,595

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2024		2023
Cash flows from operating activities
Revenues from real estate operations received	$	513,267	$	476,679
Construction contract and other service revenues received	60,441		59,245
Property operating expenses paid	(196,123)		(183,061)
Construction contract and other service expenses paid	(54,728)		(51,220)
General, administrative, leasing and other expenses paid	(26,210)		(24,739)
Interest expense paid	(58,742)		(42,829)
Lease incentives paid	(13,893)		(21,072)
Sales-type lease costs paid	(1,680)		(7,236)


Interest and other income received	6,426		3,021

Other	1,119		848
Net cash provided by operating activities	229,877		209,636
Cash flows from investing activities
Acquisitions of operating properties and related intangible assets	(32,244)		—
Properties in development or held for future development	(129,387)		(211,100)
Tenant improvements on operating properties	(36,698)		(57,020)
Other capital improvements on operating properties	(22,572)		(13,310)


Proceeds from sale of properties	—		189,506



Leasing costs paid	(10,743)		(10,698)



Other	2,524		775
Net cash used in investing activities	(229,120)		(101,847)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	—		291,000
Unsecured senior notes	—		336,375


Repayments of debt
Revolving Credit Facility	—		(427,000)


Scheduled principal amortization	(1,879)		(2,289)
Other debt repayments	(27,649)		(15,902)





Common share dividends paid	(98,581)		(95,095)





Other	(6,401)		(6,055)
Net cash (used in) provided by financing activities	(134,510)		81,034
Net (decrease) increase in cash and cash equivalents and restricted cash	(133,753)		188,823
Cash and cash equivalents and restricted cash
Beginning of period	169,424		16,509
End of period	$	35,671	$	205,332

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2024		2023
Reconciliation of net income (loss) to net cash provided by operating activities:
Net income (loss)	$	107,475	$	(109,167)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and other amortization	116,605		114,041
Impairment losses	—		252,797


Amortization of deferred financing costs and net debt discounts	5,106		3,889
Change in net deferred rent receivable and liability	(1,103)		(2,899)
Gain on sales of real estate	—		(49,392)

Share-based compensation	7,826		6,226


Other	(2,399)		(2,382)
Changes in operating assets and liabilities:
Decrease in accounts receivable	6,503		3,111
Increase in lease incentives and prepaid expenses and other assets, net	(14,279)		(3,199)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	6,339		(5,436)
(Decrease) increase in rents received in advance and security deposits	(2,196)		2,047

Net cash provided by operating activities	$	229,877	$	209,636
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	167,820	$	12,337
Restricted cash at beginning of period	1,604		4,172
Cash and cash equivalents and restricted cash at beginning of period	$	169,424	$	16,509

Cash and cash equivalents at end of period	$	34,478	$	204,238
Restricted cash at end of period	1,193		1,094
Cash and cash equivalents and restricted cash at end of period	$	35,671	$	205,332
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(9,008)	$	(18,931)


Recognition of operating right-of-use assets and related lease liabilities	$	2,976	$	6,714
Recognition of finance right-of-use assets and related lease liabilities	$	—	$	434




Investment in unconsolidated real estate joint venture retained in property disposition	$	—	$	21,121






(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests	$	(2,213)	$	4,105

Dividends/distributions payable	$	33,915	$	32,645

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	538	$	—
Adjustments to noncontrolling interests resulting from changes in CDPLP ownership	$	269	$	(22)
Decrease in redeemable noncontrolling interests and increase in equity to adjust for changes in fair value of redeemable noncontrolling interests	$	(1,144)	$	(1,686)
Reclassification of redeemable noncontrolling interests to equity	$	—	$	2,670

See accompanying notes to consolidated financial statements.

COPT Defense Properties and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization

COPT Defense Properties (“COPT Defense”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) focused on owning, operating and developing properties in locations proximate to, or sometimes containing, key U.S. Government (“USG”) defense installations and missions (which we refer to herein as our Defense/IT Portfolio). Our tenants include the USG and their defense contractors, who are primarily engaged in priority national security activities, and who generally require mission-critical and high security property enhancements. As of September 30, 2024, our Defense/IT Portfolio included:

>194 operating properties totaling 22.2 million square feet comprised of 16.5 million square feet in 164 office properties and 5.7 million square feet in 30 single-tenant data center shells. We owned 24 of these data center shells through unconsolidated real estate joint ventures;

>five properties under development (two office properties and three data center shells) that will total approximately 831,000 square feet upon completion; and

>approximately 1,020 acres of land controlled that we believe could be developed into approximately 11.0 million square feet.

We also owned eight other operating properties totaling 2.1 million square feet and approximately 50 acres of other developable land in the Greater Washington, DC/Baltimore region as of September 30, 2024.

We conduct almost all of our operations and own almost all of our assets through our operating partnership, COPT Defense Properties, L.P. (“CDPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT Defense is the sole general partner. CDPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, CDPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Equity interests in CDPLP are in the form of common and preferred units. As of September 30, 2024, COPT Defense owned 97.5% of the outstanding CDPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT Defense carry certain redemption rights. The number of common units owned by COPT Defense is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT Defense, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT Defense common shareholders.

COPT Defense’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “CDP”.

2. Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements include the accounts of COPT Defense, the Operating Partnership, their subsidiaries and other entities in which COPT Defense has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2023 included in our 2023 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in our 2023 Annual Report on Form 10-K.

Reclassifications

We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standard Board (“FASB”) issued guidance to improve reportable segment disclosure requirements. This guidance requires disclosure of incremental segment information on an annual and interim basis and is effective for us beginning after December 15, 2024. Early adoption is permitted. The guidance will be applied retrospectively to all periods presented unless it is impracticable to do so. Upon application of this guidance, we expect to report certain additional segment disclosures, including information regarding our chief operating decision maker under the guidance and segment expenses, but otherwise do not expect it to affect our consolidated financial statements.

In December 2023, the FASB issued guidance to improve income tax disclosures. This guidance requires enhanced annual disclosures primarily related to existing rate reconciliation and income taxes paid disclosure requirements and is effective for us for annual periods beginning after December 15, 2024. Early adoption is permitted. We expect to apply this guidance prospectively. We are currently assessing the application of this guidance but do not expect it to materially affect our future related disclosures.

In March 2024, the FASB issued guidance to reduce complexity and diversity in practice in determining whether a profits interest award is accounted for as a share-based payment. This guidance is effective for us for annual and interim periods beginning after December 15, 2024. Early adoption is permitted. This guidance can be applied either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest or similar awards granted or modified on or after the effective date for our application of this guidance. We do not expect the adoption of this guidance to affect our consolidated financial statements.

3. Fair Value Measurements

Recurring Fair Value Measurements

The fair values of our interest rate derivatives, as disclosed in Note 9, are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default. However, as of September 30, 2024, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments were not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 8, we estimated the fair value of our unsecured senior notes based on quoted market rates for our senior notes (categorized within Level 1 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.

The table below sets forth our financial assets and liabilities accounted for at fair value on a recurring basis as of September 30, 2024 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):


Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets: (1)
Interest rate derivatives	$	—	$	754	$	—	$	754

Liabilities: (2)
Interest rate derivatives	$	—	$	409	$	—	$	409

(1)Included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheet.

(2)Included in the line entitled “other liabilities” on our consolidated balance sheet.

4. Properties, Net

Operating properties, net consisted of the following (in thousands):


	September 30, 2024		December 31, 2023
Land	$	491,304	$	482,964
Buildings and improvements	4,301,385		4,164,004
Less: Accumulated depreciation	(1,502,730)		(1,400,162)
Operating properties, net	$	3,289,959	$	3,246,806

In the nine months ended September 30, 2024, we acquired the following operating office properties:

>6841 Benjamin Franklin Drive, a 202,000 square foot property in Columbia, Maryland (included in the Fort Meade/BW Corridor sub-segment of our Defense/IT Portfolio reportable segment) that was 56% leased, for a purchase price of $15.0 million on March 15, 2024; and

>3900 Rogers Road, an 80,000 square foot property in San Antonio, Texas (included in the Lackland Air Force Base sub-segment of our Defense/IT Portfolio reportable segment) that was vacant on the acquisition date and subsequently leased in full, for a purchase price of $17.0 million on September 26, 2024.

The table below sets forth the allocation of the aggregate purchase price and transaction costs associated with these acquisitions (in thousands):


Land, operating properties	$	8,361
Building and improvements	16,635
Intangible assets on real estate acquisitions	7,248


Total acquisition cost	$	32,244

Intangible assets recorded in connection with these acquisitions included the following (dollars in thousands):


			Weighted Average Amortization Period (in Years)
Tenant relationship value	$	3,752	12.4
In-place lease value	2,229		2.4
Above-market leases	1,267		2.4
	$	7,248	7.6

5. Leases

Lessor Arrangements

We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. These leases encompass all, or a portion, of properties, with various expiration dates. Our lease revenue is comprised of: fixed-lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below-market lease intangibles; and variable-lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is not fixed under leases. The table below sets forth our composition of lease revenue recognized between fixed- and variable-lease revenue (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Lease revenue	2024		2023		2024		2023
Fixed	$	129,357	$	120,408	$	382,918	$	354,908
Variable	41,192		34,860		118,683		104,602
	$	170,549	$	155,268	$	501,601	$	459,510

Lessee Arrangements

As of September 30, 2024, our balance sheet included $43.0 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating with various expiration dates. Our property right-of-use assets and property lease liabilities on our consolidated balance sheets consisted of the following (in thousands):


Leases	Balance Sheet Location	September 30, 2024		December 31, 2023
Right-of-use assets
Operating leases - Property	Property - operating right-of-use assets	$	40,523	$	41,296
Finance leases - Property	Prepaid expenses and other assets, net	2,510		2,565
Total right-of-use assets		$	43,033	$	43,861
Lease liabilities
Operating leases - Property	Property - operating lease liabilities	$	33,615	$	33,931
Finance leases - Property	Other liabilities	397		415
Total lease liabilities		$	34,012	$	34,346

As of September 30, 2024, our operating leases had a weighted average remaining lease term of 53 years and a weighted average discount rate of 7.36%, while our finance leases had a weighted average remaining lease term of eight years and a weighted average discount rate of 9.14%. The table below presents our total property lease cost (in thousands):


	Statement of Operations Location	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Lease cost		2024		2023		2024		2023
Operating lease cost
Property leases - fixed	Property operating expenses	$	1,929	$	1,808	$	5,687	$	5,146
Property leases - variable	Property operating expenses	42		17		219		50
Finance lease cost
Amortization of property right-of-use assets	Property operating expenses	19		18		56		57
Interest on lease liabilities	Interest expense	9		10		28		33
		$	1,999	$	1,853	$	5,990	$	5,286

The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):


	For the Nine Months Ended September 30,
Supplemental cash flow information	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	5,232	$	4,432
Operating cash flows for financing leases	$	28	$	33
Financing cash flows for financing leases	$	18	$	14

Payments on property leases were due as follows (in thousands):


	September 30, 2024
Year Ending December 31,	Operating Leases		Finance Leases
2024 (1)	$	1,746	$	15
2025	2,589		63
2026	2,001		65
2027	2,016		67
2028	2,032		69
Thereafter	153,349		297
Total lease payments	163,733		576
Less: Amount representing interest	(130,118)		(179)
Lease liability	$	33,615	$	397

(1)Represents the three months ending December 31, 2024.

6. Real Estate Joint Ventures

Consolidated Real Estate Joint Ventures

The table below sets forth information as of September 30, 2024 pertaining to our investments in consolidated real estate joint ventures, which are each variable interest entities (dollars in thousands):


		Nominal Ownership %		September 30, 2024
	Date Formed			Total Assets		Encumbered Assets		Total Liabilities		Mortgage Debt
Entity			Location
LW Redstone Company, LLC (1)	3/23/2010	85%	Huntsville, Alabama	$	740,718	$	35,023	$	74,670	$	22,227
Stevens Investors, LLC	8/11/2015	95%	Washington, D.C.	130,342		—		2,599		—
M Square Associates, LLC	6/26/2007	50%	College Park, Maryland	97,273		56,446		49,272		47,741
				$	968,333	$	91,469	$	126,541	$	69,968

(1)We fund all capital requirements. Our partner receives distributions of $1.2 million of annual operating cash flows and we receive the remainder.

Unconsolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):


	Date Formed	Nominal Ownership %	Number of Properties	Carrying Value of Investment (1)
Entity				September 30, 2024		December 31, 2023
Redshift JV LLC	1/10/2023	10%	3	$	20,955	$	21,053
BREIT COPT DC JV LLC	6/20/2019	10%	9	9,781		10,629
Quark JV LLC	12/14/2022	10%	2	6,711		6,727
B RE COPT DC JV III LLC	6/2/2021	10%	2	2,273		2,643
B RE COPT DC JV II LLC (2)	10/30/2020	10%	8	(3,370)		(2,777)
			24	$	36,350	$	38,275

(1)Included $39.7 million and $41.1 million reported in “investment in unconsolidated real estate joint ventures” and $3.4 million and $2.8 million for investments with deficit balances reported in “other liabilities” on our consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively.

(2)Our investment in B RE COPT DC JV II LLC was lower than our share of the joint venture’s equity by $6.7 million as of September 30, 2024 and $6.8 million as of December 31, 2023 due to a difference between our cost basis and our share of the joint venture’s underlying equity in its net assets. We recognize adjustments to our share of the joint venture’s earnings and losses resulting from this basis difference in the underlying assets of the joint venture.

7. Investing Receivables

Investing receivables consisted of the following (in thousands):


	September 30, 2024		December 31, 2023
Notes receivable from the City of Huntsville	$	83,158	$	77,022
Other investing loan receivable	3,245		6,867
Amortized cost basis	86,403		83,889
Allowance for credit losses	(2,867)		(2,377)
Investing receivables, net	$	83,536	$	81,512

The balances above include accrued interest receivable, net of allowance for credit losses, of $4.5 million as of September 30, 2024 and $6.0 million as of December 31, 2023.

Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6) and carry an interest rate of 9.95%. Our other investing loan receivable as of September 30, 2024 carries an effective interest rate of 14.0% and matures in 2025.

The fair value of these receivables was approximately $86 million as of September 30, 2024 and $84 million as of December 31, 2023.

8. Debt, Net

Our debt consisted of the following (dollars in thousands):



	Carrying Value (1) as of					September 30, 2024
	September 30, 2024		December 31, 2023
					Stated Interest Rates		Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed-rate mortgage debt	$	37,391	$	66,314		3.82%		June 2026
Variable-rate secured debt	32,577		32,894			SOFR + 0.10% + 1.45% to 1.55% (2)		2025-2026 (3)
Total mortgage and other secured debt	69,968		99,208
Revolving Credit Facility	75,000		75,000			SOFR + 0.10% + 0.725% to 1.400% (4)		October 2026 (5)
Term Loan Facility	124,547		124,291			SOFR + 0.10% + 0.850% to 1.700% (6)		January 2026 (7)
Unsecured Senior Notes
2.25%, $400,000 aggregate principal	398,425		397,608			2.25% (8)		March 2026
5.25%, $345,000 aggregate principal (9)	337,132		335,802			5.25% (10)		September 2028
2.00%, $400,000 aggregate principal	397,838		397,471			2.00% (11)		January 2029
2.75%, $600,000 aggregate principal	592,048		591,212			2.75% (12)		April 2031
2.90%, $400,000 aggregate principal	395,584		395,265			2.90% (13)		December 2033
Unsecured note payable	297		430			0% (14)		May 2026
Total debt, net	$	2,390,839	$	2,416,287

(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $4.3 million as of September 30, 2024 and $5.3 million as of December 31, 2023.

(2)Including the effect of interest rate swaps that hedge the risk of interest rate changes, the weighted average interest rate on our variable-rate secured debt as of September 30, 2024 was 2.44%; excluding the effect of these swaps, the weighted average interest rate on this debt as of September 30, 2024 was 6.87%.

(3)Most of this debt matures in 2025, with the ability for us to extend such maturity by two 12-month periods at our option, provided that there is no default on the debt and we pay an extension fee of 0.10% of the debt balance for each extension period.

(4)The weighted average interest rate on the Revolving Credit Facility was 6.35% as of September 30, 2024, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(5)The facility matures in October 2026, with the ability for us to extend such maturity by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.0625% of the total availability under the facility for each extension period.

(6)The interest rate on this loan was 6.60% as of September 30, 2024, excluding the effect of interest rate swaps that hedge the risk of interest rate changes (see Note 9).

(7)This facility matures in January 2026, with the ability for us to extend such maturity by two 12-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.125% of the outstanding loan balance for each extension period.

(8)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.3 million as of September 30, 2024 and $1.9 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.48%.

(9)As described further in our 2023 Annual Report on Form 10-K, these notes have an exchange settlement feature under which the notes may, under certain circumstances, be exchangeable at the option of the holders. Upon exchange, the principal amount of notes is payable in cash, with the remainder of the exchange obligation, if any, as determined based on the exchange price per common share at the time of settlement, payable in cash, common shares or a combination thereof at our election. As of September 30, 2024, the exchange rate of the notes equaled 33.3882 of our common shares per $1,000 principal amount of notes (equivalent to an exchange price of approximately $29.95 per common share).

(10)The carrying value of these notes reflects unamortized commissions totaling $7.0 million as of September 30, 2024 and $8.1 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 5.83%.

(11)The carrying value of these notes reflects unamortized discounts and commissions totaling $1.5 million as of September 30, 2024 and $1.8 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.09%.

(12)The carrying value of these notes reflects unamortized discounts and commissions totaling $6.9 million as of September 30, 2024 and $7.6 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 2.94%.

(13)The carrying value of these notes reflects unamortized discounts and commissions totaling $3.6 million as of September 30, 2024 and $3.9 million as of December 31, 2023. The effective interest rate under the notes, including amortization of such costs, was 3.01%.

(14)This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $14,000 as of September 30, 2024 and $32,000 as of December 31, 2023.

All debt is owed by the Operating Partnership. While COPT Defense is not directly obligated by any debt, it has guaranteed CDPLP’s Revolving Credit Facility, Term Loan Facility and Unsecured Senior Notes. All of our mortgage and other secured debt as of September 30, 2024 was for consolidated real estate joint ventures (see Note 6).

The table below sets forth interest expense recognized on the 5.25% Exchangeable Senior Notes due 2028 (the “5.25% Notes”) for the three and nine months ended September 30, 2024 and 2023 (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023
Interest expense at stated interest rate	$	4,528	$	956	$	13,584	$	956
Interest expense associated with amortization of debt discount and issuance costs	393		124		1,162		124
Total	$	4,921	$	1,080	$	14,746	$	1,080

Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of September 30, 2024, we were compliant with these financial covenants.

Our debt matures on the following schedule (in thousands):


Year Ending December 31,	September 30, 2024
2024 (1)	$	455
2025	23,717
2026	646,300
2027	—
2028	345,000
Thereafter	1,400,000
Total	$	2,415,472	(2)

(1)Represents the three months ending December 31, 2024.

(2)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $24.6 million.

We capitalized interest costs of $712,000 in the three months ended September 30, 2024, $1.5 million in the three months ended September 30, 2023, $1.9 million in the nine months ended September 30, 2024 and $3.5 million in the nine months ended September 30, 2023.

The following table sets forth information pertaining to the fair value of our debt (in thousands):


	September 30, 2024				December 31, 2023
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Fixed-rate debt
Unsecured Senior Notes	$	2,121,027	$	1,968,894	$	2,117,358	$	1,876,611
Other fixed-rate debt	37,688		35,959		66,744		63,692
Variable-rate debt	232,124		233,373		232,185		232,270
	$	2,390,839	$	2,238,226	$	2,416,287	$	2,172,573

9. Interest Rate Derivatives

The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):


							Fair Value at
Notional Amount			Fixed Rate	Floating Rate Index	Effective Date	Expiration Date	September 30, 2024		December 31, 2023
$	10,460	(1)	1.678%	SOFR + 0.10%	8/1/2019	8/1/2026	$	343	$	571
$	22,250	(2)	0.573%	SOFR + 0.10%	4/1/2020	3/26/2025	411		1,084
$	150,000		3.742%	One-Month SOFR	2/1/2023	2/2/2026	(304)		681
$	50,000		3.747%	One-Month SOFR	2/1/2023	2/2/2026	(105)		222
							$	345	$	2,558

(1)The notional amount of this instrument is scheduled to amortize to $10.0 million.

(2)The notional amount of this instrument is scheduled to amortize to $22.1 million.

Each of these swaps was designated as a cash flow hedge of interest rate risk.

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):


		Fair Value at
Derivatives	Balance Sheet Location	September 30, 2024		December 31, 2023
Interest rate swaps designated as cash flow hedges	Prepaid expenses and other assets, net	$	754	$	2,558
Interest rate swaps designated as cash flow hedges	Other liabilities	$	(409)	$	—

The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):


	Amount of (Loss) Income Recognized in AOCI on Derivatives								Amount of Income Reclassified from AOCI into Interest Expense on Statement of Operations
Derivatives in Hedging Relationships	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2024		2023		2024		2023		2024		2023		2024		2023
Interest rate derivatives	$	(2,582)	$	2,042	$	1,309	$	6,816	$	1,170	$	1,146	$	3,522	$	2,711

Based on the fair value of our derivatives as of September 30, 2024, we estimate that approximately $708,000 of gains will be reclassified from accumulated other comprehensive income (“ AOCI”) as a decrease to interest expense over the next 12 months.

We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default o