Fitch Ratings has affirmed the ratings for
The Rating Outlook remains Stable.
COPT's ratings consider its cash flows to be less volatile relative to peers, driven by its niche defense/IT office strategy that results in above-average tenant credit quality and retention rates. The company's public commitment to maintaining leverage around 6.0x is appropriate for a 'BBB' category
The company's high exposure to secondary and tertiary office markets resulting from its key defense initiatives balances the ratings. These markets generally have less robust non-defense-related office demand and weaker access to institutional equity and secured mortgage debt capital.
Key Rating Drivers
Defense Niche Reduces Volatility: COPT generates approximately 90% of annualized rental revenues from its core defense/IT tenant niche, which includes properties occupied primarily by government agencies or defense contractors. As a result, COPT's assets are generally located near strategic defense locations (e.g.
Tenant directives also focus on R&D and high-tech areas that are critical to national cyber security in
Resilient Portfolio: The majority of OFC's tenants operate in the defense/IT sectors, making them unable to work from home (WFH) because of the sensitive nature of the work they perform. This work continued unabated through the pandemic because government and contractor tenants are considered essential businesses in every state in which they operate. Therefore, the company's operations have been resilient in the pandemic environment, collecting over 99% of rents since
Approximately 85% of OFC's portfolio house tenants whose highly secure, mission-critical work cannot be performed remotely, including 65% of space that is either located in secure government campuses that OFC leased to them or have required secured compartmented information facility environments, and another 20% have other very high security protocols, which does not permit these tenants to conduct this work from home or unsecured locations. The inability for tenants to perform their job functions remotely should provide protection against the growing sentiment for an increased WFH environment that is likely to otherwise lessen demand for office space going forward.
Stable Fundamentals: Fitch expects COPT to operate with negative low-single digit same store NOI growth in 2022, which is driven by a couple of non-renewals in its regional office portfolio and to then exhibit positive low single-digit growth through the remainder of the forecast period, supported by similar growth in
The company's outsized exposure to higher growth defense IT projects allowed the company to grow its defense revenues by 3% per annum through the five-year
Preleasing Balances Development Risk: Fitch expects pre-leasing will continue to mitigate development risk, owing to COPT's strong relationships with key
COPT's total development pipeline has grown above historical averages as a share of total assets (12.0% of gross assets at
Sound Credit Protection Metrics: Fitch expects COPT's leverage (net debt-to-recurring operating EBITDA) to sustain at around low 6x over the forecast horizon, primarily through incremental EBITDA from development and by funding new investments on a generally leverage-neutral basis, mainly through proceeds from data shell dispositions and debt issuance. Leverage was 6.5x as of
Fitch expects fixed-charge coverage will sustain around the 4.0x range over the Rating Outlook horizon, due primarily to recurring operating EBITDA growth via developments and generally consistent leverage. Fixed-charge coverage was 3.6x for the TTM ended
Mostly Unencumbered Portfolio: The company's unencumbered asset coverage of unsecured debt (using a stressed 9.0% capitalization rate) was 1.9x as of
Conservative AFFO Payout Ratio: COPT's AFFO payout ratio was 65% for 2021 and 64% and 71% in 2020 and 2019, respectively.
Derivation Summary
COPT's defense/IT office strategy provides a defensible niche that should limit rental income risk relative to similarly rated peer,
COPT's markets generally have less robust non-defense related office using demand and weaker access to institutional equity and secured mortgage debt capital. The company's financial policies are appropriate to moderately strong for the 'BBB' category for a REIT with the company's portfolio quality. COPT is an established unsecured borrower with demonstrated public bond issuance.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
SSNOI growth of negative low-single digit in 2022, driven by moderately lower occupancy in 2022, followed by positive low single digit growth through the remainder of the forecast period, which reflects slightly improving occupancy thereafter, modest negative re-leasing spreads on renewals in 2022-2023 and 2% annual lease escalations;
Development spend totals approximately
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.0x;
Fitch's expectation of UA/UD maintaining above 2.5x based on a stressed 9% cap rate;
Fitch's expectation of REIT Fixed Charge Coverage (FCC) sustaining above 3.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.0x;
Fitch's expectation of FCC sustaining below 2.0x;
Fitch's expectation of UA/UD sustaining below 2.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Healthy Liquidity Position: The company has an adequate liquidity profile with total sources of liquidity covering total uses of liquidity by 1.5x for the
COPT has a
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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