COPT DEFENSE PROPERTIES Overview
During the three months ended
•finished the period with our office and data center shell portfolio 93.8% occupied and 94.7% leased; •placed into service 46,000 square feet in one newly-developed office property that was 100.0% leased as ofMarch 31, 2021 ; and •refinanced certain unsecured senior notes issuances with a new unsecured senior note issuance effectiveMarch 11, 2021 by: •issuing$600.0 million of 2.75% Notes at an initial offering price of 98.95% of their face value. The proceeds from this issuance, after deducting underwriting discounts but before other offering expenses, were$589.8 million ; •purchasing pursuant to tender offers$184.4 million of 3.60% Notes for$196.7 million and$145.6 million of 5.25% Notes for$164.7 million , plus accrued interest. In connection with these purchases, we recognized a loss on early extinguishment of debt of$33.2 million in the three months endedMarch 31, 2021 ; and •initiating the redemption of the remaining$165.6 million of 3.60% Notes and$104.4 million of 5.25% Notes, which was completed onApril 12, 2021 for$294.0 million , plus accrued interest, resulting in recognition of an additional loss on early extinguishment of debt of approximately$25 million . We initially used the remaining proceeds from the 2.75% Notes issuance onMarch 11, 2021 to repay borrowings under our Revolving Credit Facility and for general corporate purposes. We subsequently used primarily borrowings under our Revolving Credit Facility to fund the redemption of the remaining 3.60% Notes and 5.25% Notes onApril 12, 2021 . With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Quarterly Report on Form 10-Q, amounts disclosed include information pertaining to properties owned through unconsolidated real estate joint ventures. We discuss significant factors contributing to changes in our net income in the section below entitled "Results of Operations." In addition, the section below entitled "Liquidity and Capital Resources" includes discussions of, among other things:
•how we expect to generate cash for short and long-term capital needs; and •our commitments and contingencies.
You should refer to our consolidated financial statements and the notes thereto as you read this section.
This section contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on our current
expectations, estimates and projections about future events and financial trends
affecting the financial condition and operations of our business.
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 we cannot predict with
accuracy and some of which we might not even anticipate. Although we believe
that the expectations, estimates and projections reflected in such
forward-looking statements are based on reasonable assumptions at the time made,
we 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;
•risks and uncertainties regarding the impact of the COVID-19 pandemic, and
similar pandemics, along with restrictive measures instituted to prevent spread,
on our business, the real estate industry and national, regional and local
economic conditions;
•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 reduced or
delayed demand for additional space by our strategic customers;
•our ability to borrow on favorable terms;
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•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 our
joint venture partners may not fulfill their financial obligations as investors
or may take actions that are inconsistent with our objectives;
•changes in our 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;
•our 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 dilutive effects of issuing additional common shares;
•our ability to achieve projected results;
•security breaches relating to cyber attacks, cyber intrusions or other factors;
and
•environmental requirements.
We undertake no obligation to publicly update or supplement forward-looking statements.
Effects of COVID-19
As of the date of this filing, spread of the coronavirus, or COVID-19, continues world- and nation-wide, and is expected to continue at least until vaccinations have been administered to most of the population. Some businesses continue to be hindered to varying extents by the effects of restrictive measures instituted to control spread, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. In addition, there continues to be significant uncertainty regarding the duration and extent of the pandemic due to such factors such as the resurgence of the virus, emergence of variants in some areas and pace of vaccination efforts. While the pandemic has impacted the operations of much of the commercial real estate industry, we believe that we have been less susceptible to such impact due to our portfolio's significant concentration in Defense/IT Locations. As a result, we believe that our results of operations have not been significantly affected by the pandemic. For the three months endedMarch 31, 2021 , our: •Same Properties NOI from real estate operations decreased$922,000 relative to the three months endedMarch 31, 2020 . This decrease included the effect of a$542,000 decrease in parking revenue attributable primarily to the pandemic; and •lease revenue collections were not significantly affected by the pandemic. After agreeing to deferred payment arrangements for approximately$2.6 million in lease receivables last year, we did not agree to significant additional arrangements in the current period. While we do not currently expect that the pandemic will significantly affect our future results of operations, financial condition or cash flows, we believe that the impact will be dependent on future developments, including the duration of the pandemic, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict. Nevertheless, we believe at this time that there is more inherent risk associated with the operations of our Regional Office properties than our Defense/IT Locations. While we do not believe that our development leasing and ability to renew leases scheduled to expire have been significantly affected by the pandemic, we do believe that the impact of the restrictive measures and the economic uncertainty caused by the pandemic has impacted our timing and volume of vacant space leasing, and may continue to do so in the future. The pandemic enhances the risk of us being able to stay on pace to complete development and begin operations on schedule due to the potential for delays from: jurisdictional permitting and inspections; factories' ability to provide materials; and possible labor quarantines. These types of issues have not significantly affected us to date but could in the future, depending on pandemic related developments.
We do not expect that we will be required to incur significant additional capital expenditures on existing properties as a result of the pandemic.
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--------------------------------------------------------------------------------Occupancy and Leasing
Office and Data Center
The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:
March 31, 2021 December 31, 2020
Occupancy rates at period end
Total 93.8 % 94.1 %
Defense/IT Locations:
Fort Meade/BW Corridor 90.4 % 91.0 %
Northern Virginia Defense/IT 87.6 % 88.1 %
Lackland Air Force Base 100.0 % 100.0 %
Navy Support Locations 96.9 % 97.2 %
Redstone Arsenal 99.6 % 99.4 %
Data Center Shells 100.0 % 100.0 %
Total Defense/IT Locations 94.2 % 94.5 %
Regional Office 92.9 % 92.5 %
Other 68.4 % 68.4 %
Average contractual annual rental rate per square foot at
period end (1) $ 31.50 $ 31.50
(1)Includes estimated expense reimbursements.
Rentable Occupied
Square Feet Square Feet
(in thousands)
December 31, 2020 20,959 19,722
Vacated upon lease expiration (1) - (169)
Occupancy for new leases - 114
Developed or redeveloped 46 46
Other changes 1 -
March 31, 2021 21,006 19,713
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
During the three months endedMarch 31, 2021 , we completed 258,000 square feet of leasing, including: renewed leases on 154,000 square feet, representing 51.8% of the square footage of our lease expirations (including the effect of early renewals); 93,000 square feet of vacant space; and 11,000 square feet of development space.
Our 19.25 megawatt wholesale data center was 86.7% leased as of
Results of Operations
We evaluate the operating performance of our properties using NOI from real
estate operations, our segment performance measure, 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 our ownership interest ("UJV
NOI allocable to COPT"). We view our NOI from real estate operations as
comprising the following primary categories:
•office and data center shell properties:
•stably owned and 100% operational throughout the current and prior year
reporting periods being compared. We define these as changes from "Same
Properties";
•developed or redeveloped and placed into service that were not 100% operational
throughout the current and prior year reporting periods; and
•disposed; and
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--------------------------------------------------------------------------------•our wholesale data center.
In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers 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. Since both of the measures discussed above exclude certain items includable in net income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to net income reported on our consolidated statements of operations is provided in Note 14 to our consolidated financial statements.
Comparison of Statements of Operations for the Three Months Ended
For the Three Months Ended
2021 2020 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 145,164 $ 132,116 $ 13,048
Construction contract and other service revenues 16,558 13,681 2,877
Total revenues 161,722 145,797 15,925
Operating expenses
Property operating expenses 56,974 49,999 6,975Depreciation and amortization associated with real estate operations
37,321 32,596 4,725
Construction contract and other service expenses 15,793 13,121 2,672
General, administrative and leasing expenses 8,406 7,486 920
Business development expenses and land carry costs 1,094 1,118 (24)
Total operating expenses 119,588 104,320 15,268
Interest expense (17,519) (16,840) (679)
Interest and other income 1,865 1,205 660
Credit loss recoveries (expense) 907 (689) 1,596
Gain on sales of real estate (490) 5 (495)
Loss on early extinguishment of debt (33,166) - (33,166)
Equity in income of unconsolidated entities 222 441 (219)
Income tax expense (32) (49) 17
Net (loss) income $ (6,079) $ 25,550 $ (31,629)
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NOI from Real Estate Operations
For the Three Months Ended
2021 2020 Variance
(Dollars in thousands, except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding net lease termination revenue
and provision for collectability losses $ 124,010 $ 121,617 $ 2,393
Lease termination revenue, net 1,362 38 1,324
Provision for collectability losses included in lease revenue
(124) (108) (16)
Other property revenue 507 1,098 (591)
Same Properties total revenues 125,755 122,645 3,110
Developed and redeveloped properties placed in service 11,318 996 10,322
Wholesale data center 8,090 7,172 918
Dispositions (81) 1,299 (1,380)
Other 82 4 78
145,164 132,116 13,048
Property operating expenses
Same Properties (50,421) (46,395) (4,026)
Developed and redeveloped properties placed in service (2,089) (231) (1,858)
Wholesale data center (4,421) (3,233) (1,188)
Dispositions - (135) 135
Other (43) (5) (38)
(56,974) (49,999) (6,975)
UJV NOI allocable to COPT
Same Properties 499 505 (6)
Dispositions - 1,208 (1,208)
Retained interest in newly-formed UJV 418 - 418
917 1,713 (796)
NOI from real estate operations
Same Properties 75,833 76,755 (922)
Developed and redeveloped properties placed in service 9,229 765 8,464
Wholesale data center 3,669 3,939 (270)
Dispositions, net of retained interest in newly-formed
UJV 337 2,372 (2,035)
Other 39 (1) 40
$ 89,107 $ 83,830 $ 5,277
Same Properties NOI from real estate operations by
segment
Defense/IT Locations $ 67,814 $ 68,371 $ (557)
Regional Office 7,715 7,923 (208)
Other 304 461 (157)
$ 75,833 $ 76,755 $ (922)
Same Properties rent statistics
Average occupancy rate 92.7 % 92.8 % (0.1 %)
Average straight-line rent per occupied square foot (1) $ 6.40 $ 6.41 $ (0.01) (1)Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.
OurSame Properties pool consisted of 161 properties, comprising 84.7% of our office and data center shell portfolio's square footage as ofMarch 31, 2021 . This pool of properties changed from the pool used for purposes of comparing 2020 and 2019 in our 2020 Annual Report on Form 10-K due to the addition of eight properties placed in service and 100% operational 31 --------------------------------------------------------------------------------
on or before
Regarding the changes in NOI from real estate operations reported above:
•ourSame Properties pool reflects a net decrease due primarily to increased operating expenses (net of related recoveries) due mostly to higher snow removal costs, as well as lower parking revenue attributable primarily to the pandemic, partially offset by higher lease termination fees; •developed and redeveloped properties placed in service reflects the effect of 13 properties placed in service in 2020 and 2021; and •dispositions, net of retained interest in newly-formed UJV reflects the effect of our decrease in ownership of eight data center shells occurring in 2020.
NOI from Service Operations
For the
Three Months Ended
2021 2020 Variance
(in thousands)
Construction contract and other service revenues $ 16,558 $ 13,681 $ 2,877
Construction contract and other service expenses (15,793) (13,121) (2,672)
NOI from service operations $ 765 $ 560 $ 205 Construction contract and other service revenue and expenses increased due primarily to a higher volume of construction activity in connection with several of our tenants. Construction contract activity is inherently subject to significant variability depending on the volume and nature of projects undertaken by us primarily on behalf of tenants. Service operations are an ancillary component of our overall operations that typically contribute an insignificant amount of income relative to our real estate operations.
Loss on extinguishment of debt
The loss on early extinguishment of debt recognized in the current period was
attributable to our purchase of 3.60% Notes and 5.25% Notes pursuant to tender
offers.
Funds from Operations
Funds from operations ("FFO") is defined as net income computed using GAAP,
excluding gains on sales and impairment losses of real estate (net of associated
income tax) and real estate-related depreciation and amortization. FFO also
includes adjustments to net income for the effects of the items noted above
pertaining to UJVs that were allocable to our ownership interest in the UJVs. We
believe that we use the National Association of Real Estate Investment Trusts
("Nareit") definition of FFO, although others may interpret the definition
differently and, accordingly, our presentation of FFO may differ from those of
other REITs. We believe that FFO is useful to management and investors as a
supplemental measure of operating performance because, by excluding gains on
sales and impairment losses of real estate and investments in unconsolidated
real estate joint ventures (net of associated income tax), and real
estate-related depreciation and amortization, FFO can help one compare our
operating performance between periods. In addition, since most equity REITs
provide FFO information to the investment community, we believe that FFO is
useful to investors as a supplemental measure for comparing our results to those
of other equity REITs. We believe that net income is the most directly
comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income, reliance on the
measure has limitations; management compensates for these limitations by using
the measure simply as a supplemental measure that is weighed in balance with
other GAAP and non-GAAP measures. FFO is not necessarily an indication of our
cash flow available to fund cash needs. Additionally, it should not be used as
an alternative to net income when evaluating our financial performance or to
cash flow from operating, investing and financing activities when evaluating our
liquidity or ability to make cash distributions or pay debt service.
Basic FFO available to common share and common unit holders ("Basic FFO") is FFO
adjusted to subtract (1) preferred share dividends, (2) income attributable to
noncontrolling interests through ownership of preferred units in the Operating
Partnership or interests in other consolidated entities not owned by us,
(3) depreciation and amortization allocable to noncontrolling interests in other
consolidated entities and (4) Basic FFO allocable to share-based compensation
awards. With these adjustments, Basic FFO represents FFO available to common
shareholders and common unitholders. Common units in
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the Operating Partnership are substantially similar to our common shares and are
exchangeable into common shares, subject to certain conditions. We believe that
Basic FFO is useful to investors due to the close correlation of common units to
common shares. We believe that net income is the most directly comparable GAAP
measure to Basic FFO. Basic FFO has essentially the same limitations as FFO;
management compensates for these limitations in essentially the same manner as
described above for FFO.
Diluted FFO available to common share and common unit holders ("Diluted FFO") is
Basic FFO adjusted to add back any changes in Basic FFO that would result from
the assumed conversion of securities that are convertible or exchangeable into
common shares. We believe that Diluted FFO is useful to investors because it is
the numerator used to compute Diluted FFO per share, discussed below. We
believe that net income is the most directly comparable GAAP measure to Diluted
FFO. Since Diluted FFO excludes certain items includable in the numerator to
diluted EPS, reliance on the measure has limitations; management compensates for
these limitations by using the measure simply as a supplemental measure that is
weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is
not necessarily an indication of our cash flow available to fund cash needs.
Additionally, it should not be used as an alternative to net income when
evaluating our financial performance or to cash flow from operating, investing
and financing activities when evaluating our liquidity or ability to make cash
distributions or pay debt service.
Diluted FFO available to common share and common unit holders, as adjusted for
comparability is defined as Diluted FFO adjusted to exclude: operating property
acquisition costs; gain or loss on early extinguishment of debt; FFO associated
with properties securing non-recourse debt on which we have defaulted and which
we have extinguished, or expect to extinguish, via conveyance of such
properties, including property NOI, interest expense and gains on debt
extinguishment (discussed further below); loss on interest rate derivatives;
demolition costs on redevelopment and nonrecurring improvements; executive
transition costs; issuance costs associated with redeemed preferred shares;
allocations of FFO to holders on noncontrolling interests resulting from capital
events; and certain other expenses that we believe are not closely correlated
with our operating performance. This measure also includes adjustments for the
effects of the items noted above pertaining to UJVs that were allocable to our
ownership interest in the UJVs. We believe this to be a useful supplemental
measure alongside Diluted FFO as it excludes gains and losses from certain
investing and financing activities and certain other items that we believe are
not closely correlated to (or associated with) our operating performance. We
believe that net income is the most directly comparable GAAP measure to this
non-GAAP measure. This measure has essentially the same limitations as Diluted
FFO, as well as the further limitation of not reflecting the effects of the
excluded items; we compensate for these limitations in essentially the same
manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the
(a) weighted average common shares outstanding during a period, (b) weighted
average common units outstanding during a period and (c) weighted average number
of potential additional common shares that would have been outstanding during a
period if other securities that are convertible or exchangeable into common
shares were converted or exchanged. We believe that Diluted FFO per share is
useful to investors because it provides investors with a further context for
evaluating our FFO results in the same manner that investors use earnings per
share ("EPS") in evaluating net income available to common shareholders. In
addition, since most equity REITs provide Diluted FFO per share information to
the investment community, we believe that Diluted FFO per share is a useful
supplemental measure for comparing us to other equity REITs. We believe that
diluted EPS is the most directly comparable GAAP measure to Diluted FFO per
share. Diluted FFO per share has most of the same limitations as Diluted FFO
(described above); management compensates for these limitations in essentially
the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as
adjusted for comparability divided by (2) the sum of the (a) weighted average
common shares outstanding during a period, (b) weighted average common units
outstanding during a period and (c) weighted average number of potential
additional common shares that would have been outstanding during a period if
other securities that are convertible or exchangeable into common shares were
converted or exchanged. We believe that this measure is useful to investors
because it provides investors with a further context for evaluating our FFO
results. We believe this to be a useful supplemental measure alongside Diluted
FFO per share as it excludes gains and losses from certain investing and
financing activities and certain other items that we believe are not closely
correlated to (or associated with) our operating performance. We believe that
diluted EPS is the most directly comparable GAAP measure to this per share
measure. This measure has most of the same limitations as Diluted FFO
(described above) as well as the further limitation of not reflecting the
effects of the excluded items; we compensate for these limitations in
essentially the same manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the
conversion of common units in COPLP but do not assume the conversion of other
securities that are convertible into common shares if the conversion of those
securities would increase per share measures in a given period.
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--------------------------------------------------------------------------------The table below sets forth the computation of the above stated measures, and provides reconciliations to our GAAP measures associated with such measures:
For the Three Months Ended March 31,
2021 2020
(Dollars and shares in thousands,
except per share data)
Net (loss) income $ (6,079) $ 25,550
Real estate-related depreciation and amortization 37,321 32,596
Depreciation and amortization on UJV allocable to COPT 454 818
Gain on sales of real estate 490 (5)
FFO 32,186 58,959
FFO allocable to other noncontrolling interests (1,027) (12,015)
Basic FFO allocable to share-based compensation awards (162) (193)
Noncontrolling interests-preferred units in the
- (77) Basic FFO available to common share and common unit holders 30,997 46,674 Redeemable noncontrolling interests - 32 Diluted FFO available to common share and common unit holders 30,997 46,706
Diluted FFO comparability adjustments for redeemable noncontrolling interests
458 -
Diluted FFO comparability adjustments allocable to share-based compensation awards
(167) (50)
Loss on early extinguishment of debt 33,166 -
Demolition costs on redevelopment and nonrecurring improvements - 43
Dilutive preferred units in the Operating Partnership - 77
FFO allocation to other noncontrolling interests resulting from capital event
- 11,090
Diluted FFO available to common share and common unit holders, as adjusted for comparability
$ 64,454 $ 57,866 Weighted average common shares 111,888 111,724 Conversion of weighted average common units 1,246 1,226 Weighted average common shares/units - Basic FFO per share 113,134 112,950 Dilutive effect of share-based compensation awards 261 239 Redeemable noncontrolling interests - 110 Weighted average common shares/units - Diluted FFO per share 113,395 113,299 Redeemable noncontrolling interests 940 - Dilutive convertible preferred units - 176 Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability 114,335 113,475 Diluted FFO per share$ 0.27 $ 0.41 Diluted FFO per share, as adjusted for comparability$ 0.56 $ 0.51 Denominator for diluted EPS 111,888 111,963 Weighted average common units 1,246 1,226 Redeemable noncontrolling interests - 110 Anti-dilutive EPS effect of share-based compensation awards 261 - Denominator for diluted FFO per share 113,395 113,299 Redeemable noncontrolling interests 940 - Dilutive convertible preferred units - 176
Denominator for diluted FFO per share, as adjusted for comparability
114,335 113,475
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Property Additions
The table below sets forth the major components of our additions to properties
for the three months ended
$ 40,041
Tenant improvements on operating properties (1) 5,843 Capital improvements on operating properties 3,627
$ 49,511
(1)Tenant improvement costs incurred on newly-developed properties are classified in this table as development and redevelopment.
Cash Flows
Net cash flow from operating activities decreased$21.5 million when comparing the three months endedMarch 31, 2021 and 2020 due primarily to: increased cash paid for interest expense due to the timing of our purchase of 3.60% Notes and 5.25% Notes, at which time accrued interest was paid; increased cash paid for property operating expenses resulting primarily from higher snow removal costs in the current period and the growth of our property portfolio; and the timing of cash flow from third-party construction projects. While our property portfolio was larger in the current period, our revenues received from real estate operations did not change significantly due primarily to delayed lease payments (most of which were subsequently received) from the USG at several properties and scheduled free rent periods for certain leases on newly-developed properties and renewals of existing space.
Net cash flow used in investing activities decreased
Net cash flow provided by financing activities in the three months ended
•net proceeds from debt borrowings of$87.9 million , which included the net increase from our issuance of the 2.75% Notes and the purchase of the 3.60% Notes and 5.25% Notes (and related early extinguishment costs); offset in part by •dividends to common shareholders of$30.9 million .
Net cash flow provided by financing activities in the three months ended
•net proceeds from debt borrowings of
Supplemental Guarantor Information
As ofMarch 31, 2021 , COPLP had several series of unsecured senior notes outstanding that were issued in transactions registered with theSEC under the Securities Act of 1933, as amended. These notes are COPLP's direct, senior unsecured and unsubordinated obligations and rank equally in right of payment with all of COPLP's existing and future senior unsecured and unsubordinated indebtedness. However, these notes are effectively subordinated in right of payment to COPLP's existing and future secured indebtedness. The notes are also effectively subordinated in right of payment to all existing and future liabilities and other indebtedness, whether secured or unsecured, of COPLP's subsidiaries. COPT fully and unconditionally guarantees COPLP's obligations under these notes. COPT's guarantees of these notes are senior unsecured obligations that rank equally in right of payment with other senior unsecured obligations of, or guarantees by, COPT. COPT itself does not hold any indebtedness, and its only material asset is its investment in COPLP. InMarch 2020 , theSEC adopted amendments to Rule 3-10 of Regulation S-X and adopted Rule 13-01 of Regulation S-X to simplify disclosure requirements related to certain registered securities that became effective onJanuary 4, 2021 . As a result of these amendments, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company's consolidated financial statements, the parent guarantee is "full and unconditional" and the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and, subject to certain exceptions, summarized financial information. Accordingly, we no longer present separate consolidated financial statements for theOperating Partnership . Furthermore, as permitted under Rule 13-01(a)(4)(vi), 35 -------------------------------------------------------------------------------- we have excluded summarized financial information for theOperating Partnership since: the assets, liabilities, and results of operations of the Company and theOperating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company; and we believe that inclusion of such summarized financial information would be repetitive and not provide incremental value to investors.
Liquidity and Capital Resources
Our primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and dividends to our shareholders. We expect to continue to use cash flow provided by operations as the primary source to meet our short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, dividends to our shareholders, distributions to COPLP's unitholders and improvements to existing properties. As ofMarch 31, 2021 , we had$36.1 million in cash and cash equivalents. Our senior unsecured debt is currently rated investment grade by the three major rating agencies. We aim to maintain an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. We also use secured nonrecourse debt from institutional lenders and banks primarily for joint venture financings. In addition, we periodically raise equity when we access the public equity markets by issuing common and/or preferred shares. We use our Revolving Credit Facility to initially finance much of our investing activities. We subsequently pay down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and sales of interests in properties. The lenders' aggregate commitment under the facility is$800.0 million , with the ability for us to increase the lenders' aggregate commitment to$1.25 billion , provided that there is no default under the facility and subject to the approval of the lenders. The facility matures inMarch 2023 , and may be extended by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period. As ofMarch 31, 2021 , the maximum borrowing capacity under this facility totaled$800.0 million , all of which was available. We have a program in place under which we may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to$300 million . Under this program, we may also, at our discretion, sell common shares under forward equity sales agreements. The use of a forward equity sales agreement would enable us to lock in a price on a sale of common shares when the agreement is executed but defer receiving the proceeds from the sale until a later date. We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. However, we may dispose of interests in properties opportunistically or when market conditions otherwise warrant. In addition, we believe that we have the ability to raise additional equity by selling interests in data center shells through joint ventures. 36 --------------------------------------------------------------------------------
Our contractual obligations as of
For
the Periods Ending
2021 2022 2023 2024 2025 Thereafter Total
Contractual obligations (1)
Debt (2)
Balloon payments due upon maturity $ 269,961 $ 487,022 $ 63,578 $ 27,649 $ 322,100 $ 1,045,623 $ 2,215,933
Scheduled principal payments (3) 2,993 4,498 3,552 2,334 1,617 677 15,671
Interest on debt (3)(4) 40,531 52,476 44,746 43,018 34,670 89,853 305,294
Development and redevelopment
obligations (5)(6) 114,925 6,304 356 - - - 121,585
Third-party construction cost
obligations (6)(7) 26,430 - - - - - 26,430
Tenant and other building
improvements (3)(6) 23,099 24,898 8,263 - - - 56,260
Property finance leases (principal
and interest) (3) 14 14 - - - - 28
Property operating leases (3) 2,408 3,297 3,352 3,403 1,749 123,979 138,188
Total contractual cash obligations
(1)The contractual obligations set forth in this table exclude contracts for property operations and certain other contracts entered into in the normal course of business. Also excluded are accruals and payables incurred and interest rate derivative liabilities, which are reflected in our reported liabilities (although debt and lease liabilities are included on the table). (2)Represents scheduled principal amortization payments and maturities only and therefore excludes net debt discounts and deferred financing costs of$23.7 million . Maturities included$270.0 million in 2021 pertaining to our remaining 3.60% Notes and 5.25% Notes that were redeemed onApril 12, 2021 using borrowings under our Revolving Credit Facility. (3)We expect to pay these items using cash flow from operations. (4)Represents interest costs for our outstanding debt as ofMarch 31, 2021 for the terms of such debt. For variable rate debt, the amounts reflected above usedMarch 31, 2021 interest rates on variable rate debt in computing interest costs for the terms of such debt. We expect to pay these items using cash flow from operations. (5)Represents contractual obligations pertaining to new development and redevelopment activities. (6)Due to the long-term nature of certain development and construction contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable. (7)Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients. We expect to be reimbursed in full for these costs by our clients. We expect to spend approximately$225 million on development costs and approximately$75 million on improvements and leasing costs for operating properties (including the commitments set forth in the table above) during the remainder of 2021. We expect to fund the development costs initially using primarily borrowings under our Revolving Credit Facility. We expect to fund improvements to existing operating properties using cash flow from operating activities. Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As ofMarch 31, 2021 , we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during the three months ended
Inflation Most of our tenants are obligated to pay their share of a property's operating expenses to the extent such expenses exceed amounts established in their leases, which are based on historical expense levels. Some of our tenants are obligated to pay their full share of a building's operating expenses. These arrangements somewhat reduce our exposure to increases in such costs resulting from inflation.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
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