Overview
During the nine months ended
•finished the period with our office and data center shell portfolio 93.3% occupied and 94.6% leased; •placed into service 709,000 square feet in six newly-developed office properties that were 90.4% leased as ofSeptember 30, 2021 ; •refinanced certain unsecured senior notes issuances with a new unsecured senior note issuance by: •issuing$600.0 million of 2.75% Notes at an initial offering price of 98.95% of their face value onMarch 11, 2021 . The proceeds from this issuance, after deducting underwriting discounts but before other offering expenses, were$589.8 million ; and •purchasing or redeeming$350.0 million of 3.60% Notes (52.7% of such notes effectiveMarch 11, 2021 and the remaining notes onApril 12, 2021 ) and$250.0 million of 5.25% Notes (58.2% of such notes effectiveMarch 11, 2021 and the remaining notes onApril 12, 2021 ) for$373.1 million and$282.4 million , respectively, plus accrued interest. In connection with these purchases, we recognized a loss on early extinguishment of debt in the nine months endedSeptember 30, 2021 of$58.4 million . We used borrowings under our Revolving Credit Facility to fund the net cash outlay resulting from this refinancing; •issued$400.0 million of 2.00% Notes at an initial offering price of 99.97% of their face value onAugust 11, 2021 . The proceeds from this issuance, after deducting underwriting discounts but before other offering expenses, were$397.4 million . We used$100.0 million of the proceeds from this issuance to repay a portion of our term loan facility,$89.0 million to pay off a construction loan and most of the remaining proceeds to repay borrowings under our Revolving Credit Facility; and •sold a 90% interest in two data center shell properties inNorthern Virginia onJune 2, 2021 based on an aggregate property value of$118.8 million and retained a 10% interest in the properties through B RE COPT DC JV III LLC, a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for$106.9 million , which was used by us to repay borrowings under our Revolving Credit Facility. 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, construction costs and property values; •adverse changes in the real estate markets, including, among other things, increased competition with other companies; 30 -------------------------------------------------------------------------------- •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; •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 COVID-19 continues world- and nation-wide. Since the beginning of the year,the United States has significantly increased the proportion of the population that has received COVID-19 vaccines, and there is increased confidence that spread of COVID-19 can, to a large extent, be contained through vaccinations and wearing masks indoors in public. As a result, most restrictive measures previously instituted to control spread have been gradually lifted and an increased proportion of the population has resumed a return to normal activities. However, there continues to be significant uncertainty regarding the duration and extent of the pandemic due to factors such as the continuing spread of the virus, the pace of world- and nation-wide vaccination efforts, the emergence of new variants of the virus and the efficacy of vaccines against such variants. 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, our results of operations were not significantly affected by the pandemic. For the three and nine months endedSeptember 30, 2021 , our: •Same Properties NOI from real estate operations increased relative to the comparable 2020 periods by$2.7 million and$3.7 million , respectively, and was only minimally affected by the pandemic-related effect of lower provisions for collectability losses in the 2021 periods relative to the 2020 periods; 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 (most of which was repaid byJune 30, 2021 ), we did not agree to significant additional arrangements to date in 2021. 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 and extent 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, particularly for our Regional Office properties. 31 -------------------------------------------------------------------------------- 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 shortages. 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.
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:
September 30, 2021 December 31, 2020 Occupancy rates at period end Total 93.3 % 94.1 % Defense/IT Locations: Fort Meade/BW Corridor 90.4 % 91.0 % Northern Virginia Defense/IT 88.8 % 88.1 % Lackland Air Force Base 100.0 % 100.0 % Navy Support Locations 96.5 % 97.2 % Redstone Arsenal 99.3 % 99.4 % Data Center Shells 100.0 % 100.0 % Total Defense/IT Locations 94.1 % 94.5 % Regional Office 87.8 % 92.5 % Other 66.2 % 68.4 % Average contractual annual rental rate per square foot at period end (1) $ 32.38 $ 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) - (524) Occupancy for new leases - 387 Developed or redeveloped 709 628 Other changes (8) - September 30, 2021 21,660 20,213
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
During the nine months endedSeptember 30, 2021 , we completed 2.7 million square feet of leasing, including: renewed leases on 1.4 million square feet, representing 74.6% of the square footage of our lease expirations (including the effect of early renewals); 420,000 square feet of vacant space; and 915,000 square feet of development space.
Our 19.25 megawatt wholesale data center was 86.7% leased as ofSeptember 30, 2021 andDecember 31, 2020 . An 11.25 megawatt lease that expired inAugust 2020 remains in place until renewed by both parties or terminated by either party. 32 --------------------------------------------------------------------------------
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 •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$ 146,590 $ 134,443 $ 12,147 Construction contract and other service revenues 28,046 20,323 7,723 Total revenues 174,636 154,766 19,870 Operating expenses Property operating expenses 57,190 51,552 5,638
Depreciation and amortization associated with real estate operations
36,611 35,332 1,279 Construction contract and other service expenses 27,089 19,220 7,869 Impairment losses - 1,530 (1,530) General, administrative and leasing expenses 9,342 7,467 1,875 Business development expenses and land carry costs 1,093 1,094 (1) Total operating expenses 131,325 116,195 15,130 Interest expense (15,720) (17,152) 1,432 Interest and other income 1,818 1,746 72 Credit loss recoveries 326 1,465 (1,139) Gain on sales of real estate (32) - (32) Loss on early extinguishment of debt (1,159) (3,237) 2,078 Loss on interest rate derivatives - (53,196) 53,196 Equity in income of unconsolidated entities 297 477 (180) Income tax expense (47) (16) (31) Net income (loss)$ 28,794 $ (31,342) $ 60,136 33
--------------------------------------------------------------------------------
NOI from Real Estate Operations
For the Three Months Ended
2021 2020 Variance (Dollars in thousands, except per square foot data) RevenuesSame Properties revenues Lease revenue, excluding net lease termination revenue and provision for collectability losses $ 123,331$ 119,782 $ 3,549 Lease termination revenue, net 853 455 398
Provision for collectability losses included in lease revenue
1 (412) 413 Other property revenue 808 573 235 Same Properties total revenues 124,993 120,398 4,595 Developed and redeveloped properties placed in service 12,937 4,930 8,007 Wholesale data center 8,637 6,068 2,569 Dispositions (154) 3,047 (3,201) Other 177 - 177 146,590 134,443 12,147 Property operating expenses Same Properties (48,769) (46,856) (1,913) Developed and redeveloped properties placed in service (2,945) (726) (2,219) Wholesale data center (5,345) (3,642) (1,703) Dispositions (44) (326) 282 Other (87) (2) (85) (57,190) (51,552) (5,638) UJV NOI allocable to COPT Same Properties 504 504 - Retained interest in newly-formed UJVs 575 - 575 Dispositions (19) 1,248 (1,267) 1,060 1,752 (692) NOI from real estate operations Same Properties 76,728 74,046 2,682 Developed and redeveloped properties placed in service 9,992 4,204 5,788 Wholesale data center 3,292 2,426 866 Dispositions, net of retained interest in newly-formed UJVs 358 3,969 (3,611) Other 90 (2) 92 $ 90,460$ 84,643 $ 5,817
Same Properties NOI from real estate operations by segment Defense/IT Locations
$ 68,664$ 66,459 $ 2,205 Regional Office 7,739 7,131 608 Other 325 456 (131) $ 76,728$ 74,046 $ 2,682 Same Properties rent statistics Average occupancy rate 92.0 % 92.8 % (0.8 %) Average straight-line rent per occupied square foot (1) $ 6.59$ 6.49 $ 0.10
(1)Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.
Our
34 -------------------------------------------------------------------------------- operational on or beforeJanuary 1, 2020 and nine properties owned through an unconsolidated real estate joint venture that was formed in 2019; and removal of two properties in which we sold a 90% interest.
Regarding the changes in NOI from real estate operations reported above:
•the increase for ourSame Properties pool was due primarily to higher rent per occupied square foot in the current period due to an increase in rental rates (mostly from leases of renewed or previously-vacant space), offset in part by lower occupancy in the current period; •developed and redeveloped properties placed in service reflects the effect of 17 properties placed in service in 2020 and 2021; and •dispositions, net of retained interest in newly-formed UJVs reflects the effect of our decrease in ownership of eight data center shells in 2020 and two in 2021.
NOI from Service Operations
For the
Three Months Ended
2021 2020 Variance (in thousands) Construction contract and other service revenues$ 28,046 $ 20,323 $ 7,723 Construction contract and other service expenses (27,089) (19,220) (7,869) NOI from service operations $ 957$ 1,103 $ (146)
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.
General, administrative and leasing expenses
General, administrative and leasing expenses increased in large part due to higher compensation related expenses in the current period.
Loss on extinguishment of debt
The loss on early extinguishment of debt in the current period was attributable to our repayment of$100.0 million of our term loan facility and payoff of a construction loan. The loss on early extinguishment of debt in the prior period was attributable to our purchase of 3.70% Senior Notes due 2021.
Loss on interest rate derivatives
We recognized a loss in the prior period on interest rate swaps previously designated as cash flow hedges of interest expense on forecasted future borrowings that we determined would probably not occur.
35 --------------------------------------------------------------------------------
Comparison of Statements of Operations for the Nine Months Ended
For the
Nine Months Ended
2021 2020 Variance (in thousands) Revenues Revenues from real estate operations$ 436,177 $ 399,097 $ 37,080 Construction contract and other service revenues 64,592 46,240 18,352 Total revenues 500,769 445,337 55,432 Operating expenses Property operating expenses 168,780 151,755 17,025
Depreciation and amortization associated with real estate operations
111,487 101,540 9,947 Construction contract and other service expenses 61,964 44,052 17,912 Impairment losses - 1,530 (1,530) General, administrative and leasing expenses 26,970 23,111 3,859 Business development expenses and land carry costs 3,559 3,474 85 Total operating expenses 372,760 325,462 47,298 Interest expense (49,181) (50,789) 1,608 Interest and other income 5,911 5,233 678 Credit loss recoveries 1,040 161 879 Gain on sales of real estate 39,711 5 39,706 Loss on early extinguishment of debt (59,553) (3,237) (56,316) Loss on interest rate derivatives - (53,196) 53,196 Equity in income of unconsolidated entities 779 1,372 (593) Income tax expense (103) (95) (8) Net income$ 66,613 $ 19,329 $ 47,284 36
--------------------------------------------------------------------------------
NOI from Real Estate Operations
For
the Nine Months Ended
2021 2020 Variance (Dollars in thousands, except per square foot data) RevenuesSame Properties revenues Lease revenue, excluding lease termination revenue and provision for collectability losses$ 367,002 $ 361,032 $ 5,970 Lease termination revenue, net 3,309 693 2,616
Provision for collectability losses included in lease revenue
(118) (1,894) 1,776 Other property revenue 2,047 2,060 (13) Same Properties total revenues 372,240 361,891 10,349 Developed and redeveloped properties placed in service 35,902 8,410 27,492 Wholesale data center 24,902 19,695 5,207 Dispositions 2,691 9,097 (6,406) Other 442 4 438 436,177 399,097 37,080 Property operating expenses Same Properties (145,830) (139,209) (6,621) Developed and redeveloped properties placed in service (7,795) (1,246) (6,549) Wholesale data center (14,395) (10,338) (4,057) Dispositions (477) (952) 475 Other (283) (10) (273) (168,780) (151,755) (17,025) UJV NOI allocable to COPT Same Properties 1,506 1,515 (9) Retained interest in newly-formed UJVs 1,463 - 1,463 Dispositions (19) 3,675 (3,694) 2,950 5,190 (2,240) NOI from real estate operations Same Properties 227,916 224,197 3,719 Developed and redeveloped properties placed in service 28,107 7,164 20,943 Wholesale data center 10,507 9,357 1,150 Dispositions, net of retained interest in newly-formed UJVs 3,658 11,820 (8,162) Other 159 (6) 165$ 270,347 $ 252,532 $ 17,815
Same Properties NOI from real estate operations by segment Defense/IT Locations
$ 203,232 $ 199,577 $ 3,655 Regional Office 23,674 23,328 346 Other 1,010 1,292 (282)$ 227,916 $ 224,197 $ 3,719 Same Properties rent statistics Average occupancy rate 92.4 % 92.7 % (0.3 %)
Average straight-line rent per occupied square foot (1) $ 19.62
$ 19.42 $ 0.20
(1)Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.
Regarding the changes in NOI from real estate operations reported above:
•the increase for ourSame Properties pool was due primarily to: higher rent per occupied square foot in the current period due to an increase in rental rates (mostly from leases of renewed or previously-vacant space); and higher lease termination 37 -------------------------------------------------------------------------------- revenues and lower provisions for collectability losses in the current period; offset in part by higher snow removal costs in the current period; •developed and redeveloped properties placed in service reflects the effect of 17 properties placed in service in 2020 and 2021; and •dispositions, net of retained interest in newly-formed UJVs reflects the effect of our decrease in ownership of eight data center shells in 2020 and two in 2021.
NOI from Service Operations
For the
Nine Months Ended
2021 2020 Variance (in thousands) Construction contract and other service revenues$ 64,592 $ 46,240 $ 18,352 Construction contract and other service expenses (61,964) (44,052) (17,912) NOI from service operations$ 2,628 $ 2,188 $ 440
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.
Depreciation and amortization associated with real estate operations
The increase in depreciation and amortization associated with real estate operations was mostly attributable to newly-developed properties placed in service.
General, administrative and leasing expenses
General, administrative and leasing expenses increased in large part due to higher compensation related expenses in the current period.
Gain on sales of real estate
The gain on sales of real estate was due to our sale of a 90% interest in two data center shell properties in the current period.
Loss on extinguishment of debt
The loss on early extinguishment of debt in the current period was attributable to our purchase and redemption of 3.60% Notes and 5.25% Notes, repayment of$100.0 million of our term loan facility and payoff of a construction loan. The loss on early extinguishment of debt in the prior period was attributable to our purchase of 3.70% Senior Notes due 2021.
Loss on interest rate derivatives
Refer to our explanation above for the three-month periods.
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 theNational 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. 38 -------------------------------------------------------------------------------- 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 theOperating 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 theOperating 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 39 -------------------------------------------------------------------------------- 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. 40 -------------------------------------------------------------------------------- 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 For the Nine Months Ended September 30, September 30, 2021 2020 2021 2020
(Dollars and shares in thousands, except per share data) Net income (loss)
$ 28,794
36,611 35,332 111,487 101,540 Depreciation and amortization on UJVs allocable to COPT 525 819 1,455 2,455 Impairment losses on real estate - 1,530 - 1,530 Gain on sales of real estate 32 - (39,711) (5) FFO 65,962 6,339 139,844 124,849 FFO allocable to other noncontrolling interests (1,696) (1,074) (4,025) (14,614) Basic FFO allocable to share-based compensation awards (313) (119) (663) (449)
Noncontrolling interests-preferred units in the
- (77) - (231)
Basic FFO available to common share and common unit holders 63,953
5,069 135,156 109,555 Redeemable noncontrolling interests (68) - 1 103 Diluted FFO adjustments allocable to share-based compensation awards 13 - 27 -
Diluted FFO available to common share and common unit holders
63,898 5,069 135,184 109,658 Loss on interest rate derivatives - 53,196 - 53,196 Loss on early extinguishment of debt 1,159 3,237 59,553 3,237
Demolition costs on redevelopment and nonrecurring improvements
129 11 431 63
Diluted FFO comparability adjustments for redeemable noncontrolling interests
- 34 - -
Diluted FFO comparability adjustments allocable to share-based compensation awards
(7) (139) (300) (307) Dilutive preferred units in the Operating Partnership - 77 - 231
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
$ 65,179
Weighted average common shares 111,985 111,811 111,949 111,778 Conversion of weighted average common units 1,262 1,240 1,257 1,235
Weighted average common shares/units - Basic FFO per share 113,247
113,051 113,206 113,013 Dilutive effect of share-based compensation awards 375 274 311 278 Redeemable noncontrolling interests 138 - 130 125
Weighted average common shares/units - Diluted FFO per share 113,760
113,325 113,647 113,416 Redeemable noncontrolling interests - 109 - - Dilutive convertible preferred units - 176 - 176
Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability
113,760 113,610 113,647 113,592 Diluted FFO per share$ 0.56
Denominator for diluted EPS 112,498 111,811 112,364 112,056 Weighted average common units 1,262 1,240 1,257 1,235 Redeemable noncontrolling interests - - - 125 Anti-dilutive EPS effect of share-based compensation awards - 274 26 - Denominator for diluted FFO per share 113,760 113,325 113,647 113,416 Redeemable noncontrolling interests - 109 - - Dilutive convertible preferred units - 176 - 176 Denominator for diluted FFO per share, as adjusted for comparability 113,760 113,610 113,647 113,592 41
--------------------------------------------------------------------------------
Property Additions
The table below sets forth the major components of our additions to properties
for the nine months ended
$ 195,825
Tenant improvements on operating properties (1) 16,665 Capital improvements on operating properties 18,191
$ 230,681
(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 increased$40.9 million when comparing the nine months endedSeptember 30, 2021 and 2020 due primarily to an increase in cash flow from real estate operations resulting from the growth of our property portfolio and an increase associated with the timing of cash flow from third-party construction projects. Net cash flow used in investing activities decreased$284.2 million when comparing the nine months endedSeptember 30, 2021 and 2020 due primarily to our receipt of$114.1 million in property disposition proceeds in 2021 mostly from our sale of a 90% interest in two data center shells, a$107.9 million decrease in cash outlays for development and redevelopment of properties and the effect of$53.1 million paid in the prior period to cash settle interest rate swaps. Net cash flow used in financing activities in the nine months endedSeptember 30, 2021 was$91.8 million , and included dividends to common shareholders of$92.6 million . Net proceeds from debt borrowings during the period totaled$11.2 million , which included the net effect of our purchase and redemption of 3.60% Notes and 5.25% Notes (and related early extinguishment costs), issuance of 2.75% Notes and 2.00% Notes and the repayment of a portion of our term loan facility and payoff of a construction loan (and related early extinguishment costs).
Net cash flow provided by financing activities in the nine months ended
•net proceeds from debt borrowings of
Supplemental Guarantor Information
As ofSeptember 30, 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), 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. 42 --------------------------------------------------------------------------------
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 ofSeptember 30, 2021 , we had$14.6 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 ofSeptember 30, 2021 , the maximum borrowing capacity under this facility totaled$800.0 million , of which$790.0 million 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. 43 --------------------------------------------------------------------------------
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 $ -$ 300,000 $
73,578
4,498 3,552 2,334 1,617 677 13,723 Interest on debt (3)(4) 14,562 57,963 52,759 51,009 42,665 114,185 333,143 Development obligations (5)(6) 77,621 161,023 46,081 - - -
284,725
Third-party construction cost obligations (6)(7) 26,773 100,000 - - - - 126,773 Tenant and other building improvements (3)(6) 13,811 22,465 33,203 - - - 69,479 Property finance leases (principal and interest) (3) - 14 - - - -
14
Property operating leases (3) 807 3,297 3,352 3,403 1,749 123,979 136,587 Total contractual cash obligations$ 134,619 $ 649,260 $ 212,525 $ 84,395 $ 368,131 $ 1,684,464 $ 3,133,394 (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$22.9 million . As ofSeptember 30, 2021 , maturities in 2023 included$10.0 million that may be extended to 2024, subject to certain conditions. (3)We expect to pay these items using cash flow from operations. (4)Represents interest costs for our outstanding debt as ofSeptember 30, 2021 for the terms of such debt. For variable rate debt, the amounts reflected above usedSeptember 30, 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 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$85 million on development costs and approximately$40 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 ofSeptember 30, 2021 , we were compliant with these covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during the nine 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.
44
--------------------------------------------------------------------------------
© Edgar Online, source