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, 2019

Share-based Payment Arrangement [Abstract]

Share-Based Compensation and Other Compensation Matters

Share-Based Compensation Plans

In May 2017, COPT adopted the 2017 Omnibus Equity and Incentive Plan (the “2017 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. In November 2018, we amended the 2017 Plan to provide for the future grant of awards in the form of PIUs; PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes which are similar to restricted shares and PSUs, except that upon vesting recipients will receive common units in COPLP. 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, 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.

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,
	2019		2018		2017
General, administrative and leasing expenses	$	5,748	$	5,415	$	4,649
Property operating expenses	966		961		966
Capitalized to development activities	742		587		480
Share-based compensation cost	$	7,456	$	6,963	$	6,095

The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of 0% for PSUs, PIUs and deferred share awards and 0% to 7% for restricted shares.

As of December 31, 2019, unrecognized compensation costs related to unvested awards included:


•	$6.5 million on restricted shares expected to be recognized over a weighted average period of approximately two years;


•	$1.6 million on performance-based PIUs (“PB-PIUs”) expected to be recognized over a weighted average performance period of approximately two years;


•	$1.1 million on time-based PIUs (“TB-PIUs”) expected to be recognized over a weighted average performance period of approximately two years;


•	$630,000 on PSUs expected to be recognized over a weighted average performance period of approximately one year; and


•	$33,000 on deferred share awards expected to be recognized through May 2020.

Our TRS is subject to Federal and state income taxes. We realized a windfall tax loss of $13,000 in 2017 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 2017, 2018 and 2019:



	Shares		Weighted Average Grant Date Fair Value
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
Granted	219,716		25.62
Forfeited	(25,419	)	30.02
Vested	(181,238	)	29.49
Unvested as of December 31, 2018	438,685		28.38
Granted	195,520		26.56
Forfeited	(56,341	)	29.44
Vested	(185,001	)	28.01
Unvested as of December 31, 2019	392,863		$	27.49
Unvested shares as of December 31, 2019 that are expected to vest	363,773		$	27.50

The aggregate intrinsic value of restricted shares that vested was $4.9 million in 2019, $4.6 million in 2018 and $5.3 million in 2017.

PIUs

Commencing in 2019, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred share awards and PSUs). Our executives and certain of our Trustees selected PIUs as their form of share-based compensation for their 2019 grants. We granted two forms of PIUs: TB-PIUs; and PB-PIUs. TB-PIUs are subject to forfeiture restrictions until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are subject to a market condition in that the number of earned awards are determined at the end of the performance period (as described further below) and then settled in vested PIUs. Vested PIUs carry substantially the same rights to redemption and distributions as non-PIU common units.

TB-PIUs

In 2019, our executives and certain non-employee Trustees were granted a total of 61,820 TB-PIUs with an aggregate grant date fair value of $1.6 million (weighted average of $26.01 per TB-PIU). TB-PIUs granted to executives vest in equal one-third increments over a three-year period beginning on the date of grant. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights.

PB-PIUs

On January 1, 2019, we granted our executives 193,682 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 2021 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 earned awards 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 Awards Payout %
75th or greater		100% of PB-PIUs granted
50th (target)		50% of PB-PIUs granted
25th		25% of PB-PIUs granted
Below 25th		0% of PB-PIUs 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 awards will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. During the performance period, PB-PIUs carry rights to distributions equal to 10% of the distribution rights of non-PIU common units but carry no redemption rights.

At the end of the performance period, we will settle the award by issuing vested PIUs equal to the number of earned awards in settlement of the award plan and paying cash equal to the excess, if any, of: the aggregate distributions that would have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such vested PIUs been issued on the grant date; over the aggregate distributions made on the PB-PIUs during the performance period. If a performance period ends due to a sale event or qualified termination, the number of earned awards 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 PB-PIUs are forfeited.

These PB-PIUs had an aggregate grant date fair value of $2.4 million ($12.47 per PB-PIU) which is being recognized over the performance period. The grant date fair value was computed using a Monte Carlo model that included the following assumptions: baseline common share value of $21.03; expected volatility for common shares of 21.0%; and a risk-free interest rate of 2.51%.

PSUs

We made the following grants of PSUs to executives from 2015 through 2018 (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, 2019
3/5/2015	45,656	1/1/2015	12/31/2017	$	1,678	—
3/1/2016	26,299	1/1/2016	12/31/2018	$	1,005	—
1/1/2017	39,351	1/1/2017	12/31/2019	$	1,415	39,351
1/1/2018	59,110	1/1/2018	12/31/2020	$	1,890	59,110

In 2017, we also 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 (target)		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 will settle the award by issuing fully-vested COPT shares equal to the number of earned PSUs in settlement of the award plan and either:


•	for awards granted January 1, 2017 and prior thereto, issuing fully-vested COPT shares equal to 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; or


•	for awards issued subsequent to January 1, 2017, paying cash equal to 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.

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 2015 PSUs issued to executives that vested on December 31, 2017, we issued 13,328 common shares in settlement of the PSUs on February 22, 2018; and


•	for the 2016 PSUs issued to executives that vested on December 31, 2018, we issued 44,757 common shares in settlement of the PSUs on January 18, 2019.

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 2017 and 2018 are set forth below:



Grant Date	Grant Date Fair Value Per Share		Baseline Common Share Value		Expected Volatility of Common Shares		Risk-free Interest Rate
1/1/2017	$	38.43	$	31.22	19.0	%	1.47	%
1/1/2018	$	31.97	$	29.20	17.0	%	2.04	%

Deferred Share Awards

We made the following grants of deferred share awards to nonemployee members of our Board of Trustees in 2017, 2018 and 2019 (dollars in thousands, except per share data):



Year of Grant	Number of Deferred Share Awards Granted	Aggregate Grant Date Fair Value		Grant Date Fair Value Per Share
2017	10,032	$	326	$	32.47
2018	13,832	$	388	$	28.08
2019	3,432	$	95	$	27.60

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 2017, 2018 and 2019 (dollars in thousands, except per share data):



	For the Years Ended December 31,
	2019		2018		2017
Number of common shares issued	3,097		5,515		15,590
Grant date fair value per share	$	26.77	$	29.32	$	26.89
Aggregate intrinsic value	$	86	$	154	$	508

Options

We have not issued options since 2009, and all of our options were vested and fully expensed prior to 2018. 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, 2016	201,100	$	43.35	1	$	31
December 31, 2017	60,000	$	35.17	1	$	—
December 31, 2018	30,000	$	32.52	0.4	$	—
December 31, 2019	—	N/A		N/A	N/A

The aggregate intrinsic value of options exercised was $18,000 in 2017. No options were exercised in 2019 or 2018.