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

Annual report pursuant to Section 13 and 15(d)

Information by Business Segment

Information by Business Segment

12 Months Ended

Dec. 31, 2019

We have the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. We also report on Defense/IT Locations sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville); and data center shells (properties leased to tenants to be operated as data centers in which the tenants generally fund the costs for the power, fiber connectivity and data center infrastructure). As of December 31, 2019, 2018 and 2017, our Regional Office segment included properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics; during 2017, this segment also included suburban properties not meeting these characteristics that were since disposed.

We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”). Amounts reported for segment assets represent long-lived

assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.

The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):



	For the Years Ended December 31,
	2019		2018		2017
Segment revenues from real estate operations	$	527,463	$	517,253	$	509,980
Construction contract and other service revenues	113,763		60,859		102,840
Total revenues	$	641,226	$	578,112	$	612,820

The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):



	For the Years Ended December 31,
	2019			2018			2017
UJV NOI allocable to COPT	$	5,705		$	4,818		$	4,805
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense	(4,065		)	(3,314		)	(3,310		)
Add: Equity in (loss) income of unconsolidated non-real estate entities	(7		)	1,193			(5		)
Equity in income of unconsolidated entities	$	1,633		$	2,697		$	1,490

As previously discussed, we provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):



	For the Years Ended December 31,
	2019			2018			2017
Construction contract and other service revenues	$	113,763		$	60,859		$	102,840
Construction contract and other service expenses	(109,962		)	(58,326		)	(99,618		)
NOI from service operations	$	3,801		$	2,533		$	3,222

The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income as reported on our consolidated statements of operations (in thousands):



	For the Years Ended December 31,
	2019			2018			2017
NOI from real estate operations	$	335,025		$	321,036		$	323,821
NOI from service operations	3,801			2,533			3,222
Interest and other income	7,894			4,358			6,318
Gain on sales of real estate	105,230			2,340			9,890
Equity in income of unconsolidated entities	1,633			2,697			1,490
Income tax benefit (expense)	217			363			(1,098		)
Depreciation and other amortization associated with real estate operations	(137,069		)	(137,116		)	(134,228		)
Impairment losses	(329		)	(2,367		)	(15,123		)
General, administrative and leasing expenses	(35,402		)	(28,900		)	(30,837		)
Business development expenses and land carry costs	(4,239		)	(5,840		)	(6,213		)
Interest expense	(71,052		)	(75,385		)	(76,983		)
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities	(5,705		)	(4,818		)	(4,805		)
Loss on early extinguishment of debt	—			(258		)	(513		)
Net income	$	200,004		$	78,643		$	74,941

The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):



	As of December 31,
	2019		2018
Segment assets	$	3,024,958	$	3,084,862
Operating properties lease liabilities included in segment assets	17,317		—
Non-operating property assets	621,630		410,671
Other assets	190,548		160,472
Total COPT consolidated assets	$	3,854,453	$	3,656,005

The accounting policies of the segments are the same as those used to prepare our consolidated financial statements. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, impairment losses, gain on sales of real estate, loss on early extinguishment of debt and equity in income of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate general, administrative and leasing expenses, business development expenses and land carry costs, interest and other income, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.