COPT Reports Third Quarter 2018 Results

COLUMBIA, Md.--(BUSINESS WIRE)-- Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC) announced financial and operating results for the third quarter and nine months ended September 30, 2018.

Management Comments

“We had a solid third quarter during which results met or modestly exceeded our quarterly guidance,” stated Stephen E. Budorick, COPT’s President & Chief Executive Officer. “Momentum from the fiscal year 2017 Defense budget continues to drive leasing, as defense contractors and U.S. Government agencies advance plans for new, strategically located facilities to accommodate mission growth and to comply with security mandates. We completed 2.9 million square feet of leasing in the first nine months of the year, including 694,000 square feet of development leasing. With the two build to suit projects announced earlier today, we have completed over one million square feet of development leasing to-date. We also completed 348,000 square feet of new leasing in the first nine months, which is 50% more volume than leasing achieved in the prior year period.” He continued, “We expect to see new demand related to the 2018 budget emerge and to broaden the scope of leasing opportunities next year.”

Financial Highlights

3^rd Quarter Financial Results:

• Diluted earnings per share (“EPS”) was $0.18 for the quarter ended September 30, 2018 as compared to $0.21 for the third quarter of 2017.
• Diluted funds from operations per share (“FFOPS”), as calculated in accordance with NAREIT’s definition, was $0.50 for the third quarter of 2018 as compared to $0.54 for the third quarter of 2017.
• FFOPS, as adjusted for comparability, was $0.50 for the quarter ended September 30, 2018 as compared to $0.53 for the third quarter of 2017.

Adjustments for comparability encompass items such as gains and impairment losses on non-operating properties, derivative gains (losses), demolition costs of redevelopment and nonrecurring improvements, and executive transition costs.

Operating Performance Highlights

Operating Portfolio Summary:

• At September 30, 2018, the Company’s core portfolio of 159 operating office properties was 92.2% occupied and 94.0% leased.
• During the quarter, the Company placed 214,000 square feet of development into service that were 100% leased. During the nine months ended September 30, 2018, the Company placed 450,000 square feet into service in properties that were 86% leased.

Same-Property Performance:

• At September 30, 2018, COPT’s same-property portfolio of 147 buildings was 92.1% occupied and 93.8% leased.
• For the quarter and nine months ended September 30, 2018, the Company’s same-property cash NOI from Defense/IT locations increased 2.9% and 2.6%, respectively, over the prior year’s comparable periods. For the same time periods, the Company’s total same-property cash NOI increased 0.3% and decreased 0.1%, respectively, over the prior year’s comparable periods.

Leasing:

• Square Feet Leased―For the quarter ended September 30, 2018, the Company leased 798,000 total square feet, including 618,000 square feet of renewing leases, 161,000 square feet of new leases on vacant space, and 19,000 square feet in development projects.
  
  For the nine months ended September 30, 2018, the Company leased 2.9 million total square feet, including 1.8 million square feet of renewing leases, 348,000 square feet of new leases on vacant space, and 694,000 square feet in development projects.
• Renewal Rates―During the third quarter and for the nine months ended September 30, 2018, the Company renewed 77% of total expiring leases.
• Rent Spreads & Average Escalations on Renewing Leases―For the quarter ended September 30, 2018, rents on renewed space increased 6.9% on a GAAP basis and decreased 1.6% on a cash basis; average annual escalations on renewing leases in the third quarter were 2.4%. For the nine months ended September 30, 2018, rents on renewed space increased 8.4% on a GAAP basis and 0.2% on a cash basis; average annual escalations on renewing leases for the nine months were 2.5%.
• Lease Terms―In the third quarter, lease terms averaged 3.8 years on renewing leases, 6.7 years on new leasing of vacant space, and 7.8 years on development leasing. For the nine months, lease terms averaged 3.4 years on renewing leases, 6.7 years on new leasing of vacant space, and 11.1 years on development leasing.

Investment Activity Highlights

Development & Redevelopment Projects:

• Construction Pipeline. At October 24, 2018, the Company’s construction pipeline consisted of ten properties totaling 1.3 million square feet that were 89% leased. These projects have a total estimated cost of $377.7 million, of which $168.8 million has been incurred.
• Redevelopment. At the end of the quarter, two projects were under redevelopment totaling 128,000 square feet that were 17% leased. The Company has invested $15.5 million of the $30.0 million anticipated total cost.

Balance Sheet and Capital Transaction Highlights

• As of September 30, 2018, the Company’s net debt plus preferred equity to adjusted book ratio was 39.4% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.1x. For the same period, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.6x.
• As of September 30, 2018 and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.14%; additionally, 94% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 4.4 years.
• During the third quarter, the Company issued 2.75 million common shares under its forward equity sale agreement for net proceeds of $80.2 million. Also during the quarter, the Company issued 992,000 common shares through its At-the-Market (“ATM”) program at an average gross price of $30.46 per share for net proceeds of $29.8 million.
• After the quarter, the Company entered into a new $800 million credit agreement to replace its existing $800 million revolving credit facility that was scheduled to mature in May 2019. The new credit facility has a maturity date of March 2023, plus two six-month extension options. The new facility’s interest rate is calculated as LIBOR plus 77.5—145 basis points; based on the Company’s current credit ratings, the initial spread over LIBOR is 110 basis points.

2018 Guidance

Management is tightening its previously issued guidance range for full year EPS and FFOPS, as adjusted for comparability, to revised ranges of $0.65―$0.67 and $2.00―$2.02, respectively. Management is also tightening its previously issued EPS and FFOPS, as adjusted for comparability, guidance for the fourth quarter ending December 31, 2018, to ranges of $0.15―$0.17 and $0.49―$0.51, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its third quarter 2018 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Conference Call Information

Management will discuss third quarter 2018 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

The conference call will also be available via live webcast in the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Replay Information

A replay of the conference call will be immediately available via webcast on COPT’s Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Friday, October 26, through 2:00 p.m. Eastern Time on Friday, November 9. To access the replay within the United States, please call 855-859-2056; to access it from outside the United States, please call 404-537-3406. In either case, use passcode 7587659.

Definitions

For definitions of certain terms used in this press release, please refer to the information furnished in the Company’s Supplemental Information Package furnished on a Form 8-K which can be found on its website (www.copt.com). Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in the attached tables.

Company Information

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what it believes are growing, durable, priority missions (“Defense/IT Locations”). The Company also owns a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office Properties”). As of September 30, 2018, the Company derived 88% of its core portfolio annualized revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including six buildings owned through an unconsolidated joint venture, COPT’s core portfolio of 159 office and data center shell properties encompassed 17.7 million square feet and was 94.0% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts.

Forward-Looking Information

This press release may contain “forward-looking” statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on the Company’s current expectations, estimates and projections about future events and financial trends affecting the Company. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which the Company cannot predict with accuracy and some of which the Company might not even anticipate. Although the Company believes that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, the Company can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements.

Important factors that may affect these expectations, estimates, and projections include, but are not limited to:

• general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values;
• adverse changes in the real estate markets including, among other things, increased competition with other companies;
• governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases, and/or a curtailment of demand for additional space by the Company's strategic customers;
• the Company’s ability to borrow on favorable terms;
• risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
• risks of investing through joint venture structures, including risks that the Company’s joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with the Company’s objectives;
• changes in the Company’s plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
• the Company’s ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;
• possible adverse changes in tax laws;
• the Company's ability to achieve projected results;
• the dilutive effects of issuing additional common shares; and
• environmental requirements.

The Company undertakes no obligation to update or supplement any forward-looking statements. For further information, please refer to the Company’s filings with the Securities and Exchange Commission, particularly the section entitled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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Corporate Office Properties Trust
IR Contacts:
Stephanie Krewson-Kelly, 443-285-5453
stephanie.kelly@copt.com
or
Michelle Layne, 443-285-5452
michelle.layne@copt.com

Source: Corporate Office Properties Trust

Released October 25, 2018