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, 2017

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

Share-Based Compensation and Other Compensation Matters

Share-Based Compensation Plans

In May 2017, COPT adopted the 2017 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 3.4 million common shares in COPT to be issued in the form of options, share appreciation rights, restricted share unit awards, restricted share awards, unrestricted share awards, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards. This plan expires on May 11, 2027.

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. This plan, which was replaced by the 2017 Plan in May 2017, provided for the award 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.

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,
	2017		2016		2015
General, administrative and leasing expenses	$	4,649	$	5,816	$	5,574
Property operating expenses	966		1,027		1,000
Capitalized to development activities	480		610		824
Share-based compensation cost	$	6,095	$	7,453	$	7,398

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, 2017, unrecognized compensation costs related to unvested awards included:


•	$8.1 million on restricted shares expected to be recognized over a weighted average period of approximately three years;


•	$1.3 million on PSUs expected to be recognized over a weighted average performance period of approximately two years and


•	$120,000 on deferred share awards expected to be recognized through May 2018.

Our TRS is subject to Federal and state income taxes. We realized a windfall tax loss of $13,000 in 2017, $331,000 in 2016 and $513,000 in 2015 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 2015, 2016 and 2017:



	Shares		Weighted Average Grant Date Fair Value
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
Granted	239,479		33.84
Forfeited	(27,056	)	27.80
Vested	(158,044	)	26.27
Unvested as of December 31, 2017	425,626		$	30.37
Unvested shares as of December 31, 2017 that are expected to vest	402,870		$	30.31

The aggregate intrinsic value of restricted shares that vested was $5.3 million in 2017, $5.4 million in 2016 and $4.9 million in 2015.

PSUs

We made the following grants of PSUs to executives from 2013 through 2017 (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, 2017
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	—
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
1/1/2017	39,351	1/1/2017	12/31/2019	$	1,400	39,351

In 2017, we modified certain provisions of the PSUs granted in 2015, 2016 and 2017, resulting in incremental compensation cost totaling $236,000 based on the difference between the pre-modification and post-modification award fair values on the date of modification.

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 2013 and 2014 PSUs issued to 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 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 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;


•	for the 2014, 2015 and 2016 PSUs issued to 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; and


•	for the 2014 PSUs issued to Steven E. Budorick, our Chief Executive Officer, that vested on December 31, 2016, we issued 9,763 common shares in settlement of the PSUs on February 7, 2017.

We computed grant date fair values for PSUs using Monte Carlo models and are recognizing these values over the performance periods. The grant date fair value and certain of the assumptions used in the Monte Carlo models for the PSUs granted in 2015, 2016 and 2017 are set forth below:



Grant Date	Grant Date Fair Value		Baseline Common Share Value		Expected Volatility of Common Shares		Risk-free Interest Rate
3/5/2015	$	36.76	$	29.28	19.9	%	0.99	%
3/1/2016	$	38.21	$	23.90	20.4	%	0.96	%
1/1/2017	$	38.43	$	31.22	19.0	%	1.47	%

Deferred Share Awards

We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2015, 2016 and 2017 (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
2017	10,032	$	326	$	32.47

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). We issued the following common shares in settlement of deferred shares in 2015, 2016 and 2017 (dollars in thousands, except per share amounts):



	For the Years Ended December 31,
	2017		2016		2015
Number of common shares issued	15,590		12,028		15,485
Grant date fair value	$	26.89	$	26.70	$	26.77
Aggregate intrinsic value	$	508	$	322	$	413

Options

We have not issued options since 2009, and all of our options were vested and fully expensed prior to 2017. The table below sets forth information regarding our outstanding options as of the following dates (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, 2014	559,736	$39.60	2	$	167
December 31, 2015	425,347	$42.75	1	$	—
December 31, 2016	201,100	$43.35	1	$	31
December 31, 2017	60,000	$35.17	1	$	—

The aggregate intrinsic value of options exercised was $18,000 in 2017 and $300,000 in 2015. 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 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.