Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation and Other Compensation Matters

v3.6.0.2
Share-Based Compensation and Other Compensation Matters
 12 Months Ended
Dec. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation and Other Compensation Matters
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 following the approval of such plan by our common shareholders. 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 following the approval of such plan by our common shareholders. 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 table below sets forth our reporting for share based compensation cost (in thousands):
 
 
 For the Years Ended December 31,
 
 
2016
 
2015
 
2014
General, administrative and leasing expenses
 
$
5,816

 
$
5,574

 
$
5,307

Property operating expenses
 
1,027

 
1,000

 
857

Capitalized to development activities
 
610

 
824

 
886

Share-based compensation cost
 
$
7,453

 
$
7,398

 
$
7,050



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, 2016, unrecognized compensation costs related to unvested awards included:

•
$5.6 million on restricted shares expected to be recognized over a weighted average period of approximately three years;
•
$873,000 on PSUs expected to be recognized over a weighted average performance period of approximately two years and
•
$241,000 on deferred share awards expected to be recognized through May 2017.

We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax loss of $331,000 in 2016, $513,000 in 2015 and $3,000 in 2014 on options exercised and vesting restricted shares in connection with employees of that subsidiary.

Restricted Shares

The following table summarizes restricted shares under the share-based compensation plans for 2014, 2015 and 2016:
 
 
 Shares
 
Weighted Average Grant Date Fair Value
Unvested as of December 31, 2013
 
377,448

 
$
26.96

Granted
 
216,607

 
26.73

Forfeited
 
(21,335
)
 
25.10

Vested
 
(182,213
)
 
28.56

Unvested as of December 31, 2014
 
390,507

 
26.19

Granted
 
201,024

 
28.69

Forfeited
 
(10,550
)
 
26.05

Vested
 
(202,781
)
 
26.07

Unvested as of December 31, 2015
 
378,200

 
27.58

Granted
 
231,937

 
24.77

Forfeited
 
(22,907
)
 
25.31

Vested
 
(215,983
)
 
27.19

Unvested as of December 31, 2016
 
371,247

 
$
26.20

Unvested shares as of December 31, 2016 that are expected to vest
 
353,681

 
$
26.20



The aggregate intrinsic value of restricted shares that vested was $5.4 million in 2016, $4.9 million in 2015 and $4.9 million in 2014.

PSUs

We made the following grants of PSUs to executives from 2011 through 2016 (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, 2016
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

 
—

3/6/2014
 
49,103

 
1/1/2014
 
12/31/2016
 
1,723

 
8,849

3/5/2015
 
45,656

 
1/1/2015
 
12/31/2017
 
1,678

 
15,767

3/1/2016
 
26,299

 
1/1/2016
 
12/31/2018
 
1,000

 
24,850



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;
•
for the 2013 PSUs that vested on December 31, 2015, there was no payout value in connection with the vesting;
•
for the 2014 and 2015 PSUs issued to Mr. Wayne H. Lingafelter, our former Executive Vice President, Development & Construction Services, who departed on March 31, 2016, we issued 10,326 common shares on May 30, 2016 in settlement of such PSUs;
•
for the 2014 and 2015 PSUs issued to Mr. Roger A. Waesche, Jr., our former Chief Executive Officer, who departed on May 12, 2016, we issued 20,569 common shares on July 12, 2016 in settlement of such PSUs; and
•
for the 2014, 2015 and 2016 PSUs issued to Ms. Karen M. Singer, our former General Counsel and Secretary, who departed on August 31, 2016, we issued 2,248 common shares on October 30, 2016 in settlement of such PSUs

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 2014, 2015 and 2016 are set forth below:
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
Grant date fair value
 
$
38.21

 
$
36.76

 
$
35.09

Baseline common share value
 
$
23.90

 
$
29.28

 
$
26.52

Expected volatility of common shares
 
20.4
%
 
19.9
%
 
28.6
%
Risk-free interest rate
 
0.96
%
 
0.99
%
 
0.66
%


Deferred Share Awards

We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2015 and 2016 (dollars in thousands, except per share amounts):
Year of Grant
 
Number of Deferred Share Awards Granted
 
Aggregate Grant Date Fair Value
 
Grant Date Fair Value Per Share
2015
 
24,056

 
$
642

 
$
26.70

2016
 
24,944

 
671

 
26.89



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. In 2016, we issued 12,028 common shares in settlement of deferred share awards granted in 2015; these shares had a grant date fair value of $26.70 per share, and the aggregate intrinsic value of the shares on the settlement date was $322,000.

Options

We have not issued options since 2009, and all of our options were vested and fully expensed as of December 31, 2016. 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, 2013
 
640,927

 
$38.11
 
2
 
$
68

December 31, 2014
 
559,736

 
$39.60
 
2
 
$
167

December 31, 2015
 
425,347

 
$42.75
 
1
 
$
—

December 31, 2016
 
201,100

 
$43.35
 
1
 
$
31



The aggregate intrinsic value of options exercised was $300,000 in 2015 and $225,000 in 2014. No options were exercised in 2016.

Executive Transition Costs

Our Board of Trustees appointed Stephen E. Budorick, our Executive Vice President and Chief Operating Officer since September 2011, to become our President and Chief Executive Officer effective May 12, 2016, the date of the Company’s 2016 Annual Meeting of Shareholders. On that date, Roger A. Waesche, Jr., our current President and Chief Executive Officer, left the Company to pursue other interests, and he was not nominated for reelection as a Trustee. The Board appointed Mr. Budorick to our Board of Trustees after the 2016 Annual Meeting of Shareholders. In addition, our Executive Vice President, Development & Construction Services, Wayne H. Lingafelter, and our Senior Vice President, General Counsel and Secretary, Karen M. Singer, departed the Company to pursue other interests effective March 31, 2016 and August 31, 2016, respectively. We recognized executive transition costs of approximately $6.5 million in 2016 primarily for termination benefits in connection with the departures of Mr. Waesche, Mr. Lingafelter and Ms. Singer.