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, 2023

Share-Based Payment Arrangement [Abstract]

Share-Based Compensation and Other Compensation Matters

Share-Based Compensation Plans

In May 2017, we adopted the 2017 Omnibus Equity and Incentive Plan following the approval of such plan by our common shareholders, and we amended the plan in November 2018 (as amended, the “2017 Plan”). We 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 of our common shares to be issued in the form of options, share appreciation rights, restricted share unit awards, restricted share awards, unrestricted share awards, PIUs, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards. This plan expires on May 11, 2027. Shares for the 2017 Plan are issued under a registration statement on Form S-8 that became effective upon filing with the Securities and Exchange Commission.

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


	For the Years Ended December 31,
	2023		2022		2021
General, administrative, leasing and other expenses	$	7,255	$	7,643	$	6,881
Property operating expenses	1,289		1,147		1,098
Capitalized to development activities	576		847		719
Share-based compensation cost	$	9,120	$	9,637	$	8,698

The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of 0% for awards to our executives and non-employee Trustees and 8% to 9% for awards to all other employees.

As of December 31, 2023, unrecognized compensation costs related to unvested awards included:

>$5.4 million on restricted shares expected to be recognized over a weighted average period of approximately two years;

>$3.4 million on PB-PIUs expected to be recognized over a weighted average performance period of approximately two years;

>$3.1 million on TB-PIUs expected to be recognized over a weighted average period of approximately two years; and

>$77,000 on deferred share awards expected to be recognized through May 2024.

Restricted Shares

The following table summarizes restricted shares activity under our share-based compensation plan for 2021, 2022 and 2023:


	Shares	Weighted Average Grant Date Fair Value
Unvested as of December 31, 2020	360,817	$	26.16
Granted	177,995	$	26.17
Forfeited	(39,664)	$	26.62
Vested	(164,575)	$	25.95
Unvested as of December 31, 2021	334,573	$	26.22
Granted	186,515	$	26.50
Forfeited	(43,420)	$	26.47
Vested	(152,585)	$	26.39
Unvested as of December 31, 2022	325,083	$	26.27
Granted	220,336	$	25.38
Forfeited	(39,474)	$	26.03
Vested	(152,490)	$	26.09
Unvested as of December 31, 2023	353,455	$	25.82
Unvested shares as of December 31, 2023 that are expected to vest	317,075	$	25.83

Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. Restricted shares granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position.

The aggregate intrinsic value of restricted shares that vested was $3.8 million in 2023, $4.0 million in 2022 and $4.3 million in 2021.

PIUs

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 automatically convert into common units in CDPLP if, or when, a book-up event (as defined under federal income tax regulations) has occurred and carry substantially the same rights to distributions as common units.

TB-PIUs

TB-PIUs granted to senior management team members vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. 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 common units but carry no redemption rights. The following table summarizes TB-PIUs activity under our share-based compensation plan for 2021, 2022 and 2023:


	Number of TB-PIUs	Weighted Average Grant Date Fair Value
Unvested as of December 31, 2020	114,334	$	25.57
Granted	93,983	$	26.16

Vested	(45,244)	$	25.28
Unvested as of December 31, 2021	163,073	$	25.99
Granted	101,966	$	26.39

Vested	(77,709)	$	26.04
Unvested as of December 31, 2022	187,330	$	26.19
Granted	123,900	$	25.40
Forfeited	(27,182)	$	26.46
Vested	(89,633)	$	25.95
Unvested as of December 31, 2023	194,415	$	25.76
Unvested TB-PIUs as of December 31, 2023 that are expected to vest	193,131	$	25.76

The aggregate intrinsic value of TB-PIUs that vested was $2.3 million in 2023, $2.0 million in 2022 and $1.2 million in 2021.

PB-PIUs

We made the following grants of PB-PIUs to senior management team members from 2019 through 2023 (dollars in thousands, except per share data):


Grant Date	Number of PB-PIUs Granted	Grant Date Fair Value		Number of PB-PIUs Outstanding as of December 31, 2023
1/1/2019	193,682	$	2,415	—
1/1/2020	176,758	$	2,891	—
1/1/2021	227,544	$	3,417	189,308
1/1/2022	231,838	$	3,810	192,996
1/1/2023	275,402	$	4,343	225,590

The PB-PIUs each have a three-year performance period concluding on the earlier of the respective performance period end dates, or the date of: (1) termination by us without cause, death or disability of the employee or constructive discharge of the employee (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 Defense’s total shareholder return (“TSR”) 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. If COPT Defense’s TSR during the measurement period is negative, the maximum number of earned awards will be limited to the target level payout percentage. During the performance period, PB-PIUs carry rights to

distributions equal to 10% of the distribution rights of common units but carry no redemption rights. At the end of the performance period, we settle the award by issuing vested PIUs equal to the number of earned awards and either:

>for awards granted January 1, 2019 and 2020, 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; or

>for all other awards, issuing additional vested PIUs equal to the excess, if any, of (1) 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 (2) the aggregate distributions made on the PB-PIUs during the performance period, divided by the price of our common shares over a defined period of time.

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.

Based on COPT Defense’s TSR relative to its peer group of companies:

>for the 2019 PB-PIUs issued to employees that vested on December 31, 2021, we issued 156,104 vested PIUs in settlement of the PB-PIUs on February 1, 2022;

>for the 2020 PB-PIUs issued to employees that vested on December 31, 2022, we issued 141,152 vested PIUs in settlement of the PB-PIUs on February 1, 2023; and

>for the 2021 PB-PIUs issued to employees that vested on December 31, 2023, we issued 211,845 vested PIUs in settlement of the PB-PIUs on February 1, 2024.

We computed grant date fair values for PB-PIUs using Monte Carlo models and recognize these values over the respective performance periods. The grant date fair value and certain of the assumptions used in the Monte Carlo models for the PB-PIUs granted in 2021, 2022 and 2023 are set forth below:


Grant Date	Grant Date Fair Value Per PB-PIU at Target-Level Award		Baseline Common Share Value		Expected Volatility of Common Shares		Risk-free Interest Rate
1/1/2021	$	30.03	$	26.08	34.7	%	0.18	%
1/1/2022	$	32.87	$	27.97	31.7	%	0.98	%
1/1/2023	$	31.54	$	25.94	35.0	%	4.28	%

In 2023, 126,890 PB-PIUs were forfeited due to an award recipient’s resignation.

Deferred Share Awards

We made the following grants of deferred share awards to non-employee Trustees in 2021, 2022 and 2023 (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 Award
2021	3,416	$	93	$	27.12
2022	6,771	$	166	$	24.50
2023	9,046	$	215	$	23.75

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 did not have any award settlements in 2021, 2022 or 2023.