COPT Defense Properties Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation and Other Compensation Matters

Share-Based Compensation and Other Compensation Matters

12 Months Ended

Dec. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Compensation and Other Compensation Matters

Share-Based Compensation Plans

In May 2010, COPT adopted the Amended and Restated 2008 Omnibus Equity and Incentive Plan. COPT may issue equity-based awards under this plan to officers, employees, non-employee trustees and any other key persons of us and our subsidiaries, as defined in the plan. The plan provides for a maximum of 5.9 million common shares in COPT to be issued in the form of options, share appreciation rights, deferred share awards, restricted share awards, unrestricted share awards, performance shares, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards. The plan expires on May 13, 2020.

In March 1998, COPT adopted a long-term incentive plan for our Trustees and employees. This plan, which expired in March 2008, provided for the award of options, restricted shares and dividend equivalents.

Awards under these plans to nonemployee Trustees generally vest on the first anniversary of the grant date provided that the Trustee remains in his or her position. Awards granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employees remain employed by us. Options expire ten years after the date of grant. Shares for each of the share-based compensation plans are issued under registration statements on Form S-8 that became effective upon filing with the Securities and Exchange Commission. In connection with awards of common shares granted by COPT under such share-based compensation plans, COPLP issues to COPT an equal number of equity instruments with identical terms.

The following table summarizes restricted shares under the share-based compensation plans for 2013, 2014 and 2015:



	Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2012	434,643		$	29.67
Granted	193,833		25.91
Forfeited	(9,541	)	27.59
Vested	(241,487	)	30.97
Unvested at December 31, 2013	377,448		26.96
Granted	216,607		26.73
Forfeited	(21,335	)	25.10
Vested	(182,213	)	28.56
Unvested at December 31, 2014	390,507		26.19
Granted	201,024		28.69
Forfeited	(10,550	)	26.05
Vested	(202,781	)	26.07
Unvested at December 31, 2015	378,200		$	27.58
Unvested shares as of December 31, 2015 that are expected to vest	364,666		$	27.61

The aggregate intrinsic value of restricted shares that vested was $4.9 million in 2015, $4.9 million in 2014 and $6.3 million in 2013.

We made the following grants of PSUs to executives from 2011 through 2015 (dollars in thousands):



Grant Date	Number of PSUs Granted	Performance Period Commencement Date	Performance Period End Date	Grant Date Fair Value		Number of PSUs Outstanding as of December 31, 2015
3/3/2011	56,883	3/3/2011	3/2/2014	$	2,796	—
3/1/2012	54,070	1/1/2012	12/31/2014	1,772		—
3/1/2013	69.579	1/1/2013	12/31/2015	1,867		51,556
3/6/2014	49,103	1/1/2014	12/31/2016	1,723		37,843
3/5/2015	45,656	1/1/2015	12/31/2017	1,678		45,656

The PSUs each have three year performance periods concluding on the earlier of the respective performance period end dates set forth above or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:



Percentile Rank		Earned PSUs Payout %
75th or greater		200% of PSUs granted
50th or greater		100% of PSUs granted
25th		50% of PSUs granted
Below 25th		0% of PSUs granted

If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of fully-vested COPT common shares equal to the sum of:


•	the number of earned PSUs in settlement of the award plan; plus


•	the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned PSUs through the date of settlement had such shares been issued on the grant date, divided by the share price on such settlement date, as defined under the terms of the agreement.

If a performance period ends due to a sale event or qualified termination, the number of earned PSUs is prorated based on the portion of the three-year performance period that has elapsed. If employment is terminated by the employee or by us for cause, all PSUs are forfeited. PSUs do not carry voting rights.

Based on COPT’s total shareholder return relative to its peer group of companies:


•	for the 2011 PSUs that vested in 2014, there was no payout value in connection with the vesting;


•	for the 2012 PSUs that vested in 2014, we issued 40,309 common shares in settlement of the PSUs on March 5, 2015;


•	for 2013 and 2014 PSUs issued to Mr. Stephen E. Riffee, our former Chief Financial Officer who departed on February 3, 2015, we issued 15,289 common shares on March 5, 2015 in settlement of such PSUs; and


•	for the 2013 PSUs that vested on December 31, 2015, there was no payout value in connection with the vesting.

We computed grant date fair values for PSUs using Monte Carlo models and are recognizing these values over three-year periods that commenced on the respective grant dates. The grant date fair value and certain of the assumptions used in the Monte Carlo models for the PSUs granted in 2013, 2014 and 2015 are set forth below:



	For the Years Ended December 31,
	2015			2014			2013
Grant date fair value	$	36.76		$	35.09		$	26.84
Baseline common share value	$	29.28		$	26.52		$	25.85
Expected volatility of common shares	19.9		%	28.6		%	29.5		%
Risk-free interest rate	0.99		%	0.66		%	0.33		%

In 2015, nonemployee members of our Board of Trustees were granted a total of 24,056 deferred share awards with an aggregate grant date fair value of $642,000 ($26.70 per share). Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date elected by the Trustee (generally upon cessation of being a Trustee). In 2015, we issued 15,485 common shares in settlement of deferred share awards granted in 2014; these shares had a grant date fair value of $26.77 per share, and the aggregate intrinsic value of the shares on the settlement date was $413,000.

We have not issued options since 2009, and all of our options were vested and fully expensed as of December 31, 2015. The table below sets forth information regarding our outstanding options (dollars in thousands, except per share data):



	Options Outstanding and Exercisable	Weighted Average Exercise Price Per Share	Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
December 31, 2012	798,210	$37.62	3	$	325
December 31, 2013	640,927	$38.11	2	$	68
December 31, 2014	559,736	$39.60	2	$	167
December 31, 2015	425,347	$42.75	1	$	—

The aggregate intrinsic value of options exercised was $300,000 in 2015, $225,000 in 2014 and $258,000 in 2013.

We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax loss of $513,000 in 2015, $3,000 in 2014 and $122,000 in 2013 on options exercised and vesting restricted shares in connection with employees of that subsidiary.

The table below sets forth our reporting for share based compensation cost (in thousands):



	For the Years Ended December 31,
	2015		2014		2013
General, administrative and leasing expenses	$	5,574	$	5,307	$	5,412
Property operating expenses	1,000		857		1,118
Capitalized to development activities	824		886		1,075
Share-based compensation cost	$	7,398	$	7,050	$	7,605

The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of 0% for PSUs and deferred share awards and 0% to 5% for restricted shares.

As of December 31, 2015, unrecognized compensation costs related to unvested awards included:


•	$6.3 million on restricted shares expected to be recognized over a weighted average period of approximately two years;


•	$1.7 million on PSUs expected to be recognized over a weighted average performance period of approximately two years and


•	$223,000 on deferred share awards expected to be recognized through May 2016.