COPT DEFENSE PROPERTIES 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; •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 property 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; •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; •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.
Overview
Our 2021 was highlighted by:
•strong leasing results, including our: •fourth consecutive year with development leasing in excess of one million square feet; and •seventh consecutive year with a portfolio-wide tenant retention rate in excess of 70%; •the refinancing of most of our debt, resulting in new unsecured debt issuances with lengthened and staggered future maturity timing and lower interest rates; •capital raised from selling interests in data center shells through a newly-formed joint venture; •our entry into a contract to sell our largest real estate investment and enable us to exit the wholesale data center business; and •operating results that were not significantly affected by the COVID-19 pandemic.
We leased 3.9 million square feet in 2021, representing our fifth consecutive year with leasing in excess of 3.0 million. This leasing included:
•1.2 million square feet of development leasing in Defense/IT Locations,
including 727,000 square feet in our
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•2.1 million square feet of renewal leasing, resulting in a portfolio-wide
tenant retention rate of 74.2%. Strong tenant retention is key to our asset
management strategy in order to maximize revenue (by avoiding downtime) and
minimize leasing capital; and
•616,000 square feet of vacant space leasing, most of which was concentrated in
the Fort Meade /BW Corridor sub-segment.
We believe that our 2021 leasing benefited from a continued:
•healthy defense spending environment, with bipartisan support for funding our national defense. We believe that successive increases in defense spending since 2016, including, most recently, in the National Defense Authorization Act for Fiscal Year 2022, have enhanced the USG and defense contractor tenants' ability to invest in facility planning. This environment has helped fuel leasing demand, as has continued prioritization of spending allocations towards technology and innovation programs benefiting our Defense/IT Locations, including cyber, space, unmanned systems and artificial intelligence; and •demand for data center shells. Our leasing included two new data center shells inNorthern Virginia , the largest data center market in the world, and represented further expansion of our relationship with an existing customer. As of year end, we held land that would accommodate an additional 913,000 square feet in future data center shell development. We believe these conditions bolstered tenant confidence levels for entering into long-term lease commitments, as evidenced by weighted average lease terms on our 2021 leasing of: 13.4 years on development leasing; 5.4 years on renewal leasing; and 8.2 years on vacant space leasing. Future leasing demand for our Defense/IT Locations could be delayed or diminish if this bipartisan support for funding national defense does not continue or if appropriations legislation to fund approved defense budgets face extended delays (including the USG's 2022 fiscal year defense budget, which was authorized but was awaiting appropriations as of the date of this filing). In 2021, we placed into service 766,000 square feet in eight newly-developed properties that were 87% leased as ofDecember 31, 2021 . These properties were predominantly Defense/IT Locations, the largest of which was a 348,000 square foot, 100% leased property in our NoVA Defense/IT sub-segment. We ended the year with 1.7 million square feet in properties under development that were 96% leased in aggregate, most of which were in ourRedstone Arsenal and Data Center Shells sub-segments. Most of these properties were 100% leased and all but two were more than 80% leased. For further disclosure regarding our development underway as of year end, please refer to Item 2 of this Annual Report on Form 10-K. We ended 2021 with lower leased and occupied percentages for our office and data center shell portfolio relative toDecember 31, 2020 (which was our highest year end portfolio-wide occupancy since 2001) due primarily to a property in ourRedstone Arsenal sub-segment vacated by its tenant in late 2021 and newly-developed vacant space placed in service (most of which was in a Regional Office property). We ended 2021 with our office and data center shell portfolio 94.2% leased (compared to 94.8% as ofDecember 31, 2020 ) while ourSame Properties were 93.4% leased (compared to 93.8% as ofDecember 31, 2020 ). Our year end portfolio-wide office and data center shell occupancy was 92.4% (compared to 94.1% as ofDecember 31, 2020 ) andSame Properties occupancy was 91.3% (compared to 92.9% as ofDecember 31, 2020 ). As ofDecember 31, 2021 , we had scheduled lease expirations for 1.6 million square feet in 2022, representing 8.2% of our total occupied square feet and 9.4% of our total annualized rental revenue from office and data center shells, including: •1.3 million square feet in our Defense/IT Locations segment, most of which we believe is mission-critical space to the tenants and therefore expect most of this space to be renewed; and •327,000 square feet in our Regional Office segment, which included a 140,000 square foot known non-renewal for 2022, and which we believe otherwise carries significantly higher risk of non-renewal than our Defense/IT Locations space.
Please refer to the section below entitled "Occupancy and Leasing" for additional related disclosure.
In 2021, we refinanced most of our debt by issuing
•$600.0 million of 2.75% Notes due 2031 issued at an initial offering price of 98.95% of their face value onMarch 11, 2021 for proceeds, after deducting underwriting discounts but before other offering expenses, of$589.8 million . We applied the proceeds from this issuance to purchase or redeem$350.0 million of 3.60% Senior Notes due 2023 and$250.0 million of 5.25% Senior Notes due 2024 for$373.1 million and$282.4 million , respectively, plus accrued interest. In connection with these purchases and redemptions, we recognized a loss on early extinguishment of debt in 2021 of$58.4 million . We used borrowings under our Revolving Credit Facility to fund the net cash outlay resulting from this refinancing; •$400.0 million of 2.00% Notes due 2029 at an initial offering price of 99.97% of their face value onAugust 11, 2021 for proceeds, after deducting underwriting discounts but before other offering expenses, of$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 •$400.0 million of 2.90% Notes due 2033 at an initial offering price of 99.53% of their face value onNovember 17, 2021 for proceeds, after deducting underwriting discounts but before other offering expenses, of$395.4 million . We used$336.4 million of the proceeds from this issuance to redeem$300.0 million of 5.00% Senior Notes due 2025 and$52.4 million to 24 --------------------------------------------------------------------------------
pay off a fixed rate mortgage loan. In connection with these debt repayments, we
recognized a loss on early extinguishment of debt in 2021 of
As a result, fromSeptember 2020 (when we issued$400 million unsecured senior notes) to year end 2021, we issued$1.8 billion in unsecured senior notes, which enabled us to refinance$1.6 billion in debt, or 81% of our outstanding debt as ofJune 30, 2020 , at weighted average interest rates on the newly-issued debt that were 1.1% lower than the weighted average interest rates on the debt we repaid. This also enabled us to lengthen and stagger the timing of our future debt maturities. As in recent years, we raised equity in 2021 through the sale of interests in single tenant data center shell properties with the sale of a 90% interest in two such properties 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 , the proceeds from which we used to repay borrowings under our Revolving Credit Facility. We recognized a gain of$40.2 million on this sale. Since 2019, we raised$558 million from the sale of interests in single tenant data center shell properties. We also in 2021 sold a property that was previously removed from service from our data center shells sub-segment for$30.0 million , the proceeds from which we used to repay borrowings under our Revolving Credit Facility. We recognized a gain of$25.9 million on this sale. In addition, we entered into a contract inDecember 2021 to sell9651 Hornbaker Road inManassas, Virginia , our largest real estate investment (in terms of book value) and only property in ourWholesale Data Center reportable segment, for$222.5 million . Our entry into this contract positioned us to exit the wholesale data center business and redeploy the resulting proceeds towards funding our Defense/IT Locations development pipeline. We completed this sale onJanuary 25, 2022 , resulting in a gain on sale of approximately$29 million , and used substantially all of the proceeds to pay down debt in order to free up borrowing capacity to fund future development.
Due to the collective effect of our 2021 activity, we ended the year with:
•approximately$190 million more debt relative to the end of 2020 that we were positioned to pay down by$216 million inJanuary 2022 using the proceeds from our wholesale data center sale; and •$724 million in borrowing capacity available under our Revolving Credit Facility to fund our investing and financing activities (which capacity was subsequently increased to$800 million inJanuary 2022 following our pay down of the facility from our wholesale data center sale proceeds).
Net income in 2021 was
•lower income due to a$93.3 million increase in loss on early extinguishment of debt due to the extinguishments discussed above and$29.4 million gain on sale of investment in an unconsolidated joint venture that occurred in 2020; offset in part by •higher income due to a$53.2 million loss on interest rate derivatives recognized in 2020 and$35.4 million increase in gain from sales of real estate due to the gains from the sales discussed above exceeding our gains in 2020.
Net operating income ("NOI") from real estate operations, our segment
performance measure discussed further below, increased
•a$27.6 million increase from developed and redeveloped properties placed into service; offset in part by •a net decrease of$10.5 million from dispositions due to our sales of property interests in 2020 and 2021. NOI from ourSame Properties only changed marginally, increasing$1.8 million , or 0.6%, from 2020 to 2021. Our results of operations for these periods were not significantly affected by the COVID-19 pandemic. Additional disclosure comparing our 2021 and 2020 results of operations is provided below. We discuss significant factors contributing to changes in our net income between 2021 and 2020 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.
We refer to the measures "annualized rental revenue" and "tenant retention rate"
in various sections of the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of this Annual Report on Form 10-K.
Annualized rental revenue is a measure that we use to evaluate the source of our
rental revenue as of a point in time. It is
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computed by multiplying by 12 the sum of monthly contractual base rents and
estimated monthly expense reimbursements under active leases as of a point in
time (ignoring free rent then in effect and rent associated with tenant funded
landlord assets). Our computation of annualized rental revenue excludes the
effect of lease incentives. We consider annualized rental revenue to be a useful
measure for analyzing revenue sources because, since it is point-in-time based,
it does not contain increases and decreases in revenue associated with periods
in which lease terms were not in effect; historical revenue under generally
accepted accounting principles in the United States of America ("GAAP") does
contain such fluctuations. We find the measure particularly useful for leasing,
tenant, segment and industry analysis. Tenant retention rate is a measure we use
that represents the percentage of square feet renewed in a period relative to
the total square feet scheduled to expire in that period; we include the effect
of early renewals in this measure.
We also refer to the measures "cash rents", "straight-line rents", and
"committed costs" in the "Occupancy and Leasing" section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
of this Annual Report on Form 10-K. Cash rents include monthly contractual base
rent (ignoring rent abatements and rent associated with tenant funded landlord
assets) multiplied by 12, plus estimated annualized expense reimbursements (as
of lease commencement for new or renewed leases or as of lease expiration for
expiring leases). Straight-line rents includes annual minimum rents, net of
abatements and lease incentives and excluding rent associated with tenant funded
landlord assets, on a straight-line basis over the term of the lease, and
estimated annual expense reimbursements (as of lease commencement for new or
renewed leases or as of lease expiration for expiring leases). We believe that
cash rents and straight-line rents are useful measures for evaluating the rental
rates of our leasing activity, including changes in such rates relative to rates
that may have been previously in place, with cash rents serving as a measure to
evaluate rents at the time rent payments commence, and straight-line rents
serving as a measure to evaluate rents over lease terms. Committed costs
includes tenant improvement allowances (excluding tenant funded landlord
assets), leasing commissions and estimated turn key costs and excludes lease
incentives; we believe this is a useful measure for evaluating our costs
associated with obtaining new leases.
With regard to our operating portfolio square footage, occupancy and leasing
statistics included below and elsewhere in this Annual Report on Form 10-K,
amounts disclosed include total information pertaining to properties owned
through unconsolidated real estate joint ventures except for amounts reported
for annualized rental revenue, which represent the portion attributable to our
ownership interest.
Effects of COVID-19
As of the date of this filing, spread of COVID-19 continues world- and
nation-wide. Since the beginning of 2021, 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 continued emergence of new variants of the
virus and the efficacy of vaccines against such variants.
While the pandemic has adversely 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. These properties are primarily occupied by the USG and contractor
tenants engaged in what we believe are high-priority security, defense and IT
missions. As a result, most of these properties were designated as "essential
businesses," and therefore exempt from many of the restrictions that otherwise
have affected much of the commercial real estate industry. Furthermore, since
the tenants in these properties are mostly the USG, or contractors of the USG
who continue to be compensated by the USG for their services, we believe that
their ability, and willingness, to fulfill their lease obligations have not been
disrupted. Our Defense/IT Locations do include tenants serving as amenities to
business parks housing our properties (such as restaurant, retail and personal
service providers); while these tenants' operations have been significantly
disrupted by COVID-19, our annualized rental revenue from these tenants is not
significant. As a result, our results of operations were not significantly
affected by the pandemic. For the year ended December 31, 2021 , our:
•Same Properties NOI from real estate operations increased marginally relative
to 2020, and was only minimally affected by the pandemic-related effect of lower
provisions for collectability losses in 2021 relative to 2020; 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 by June 30, 2021 ), we
did not agree to significant additional arrangements 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.
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While our development leasing and ability to renew leases scheduled to expire
have not been significantly affected by the pandemic, we do believe that the
impact of the restrictive measures and the economic uncertainty caused by the
pandemic impacted our timing and volume of vacant space leasing, and may
continue to do so in the future, particularly for our Regional Office
properties.
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.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP,
which require us to make certain estimates and assumptions. A summary of our
significant accounting policies is provided in Note 2 to our consolidated
financial statements. The following section is a summary of certain aspects of
those accounting policies involving estimates or assumptions that (1) involve a
significant level of estimation uncertainty and (2) have had or are reasonably
likely to have a material impact on our financial condition or results of
operations. It is possible that the use of different reasonable estimates or
assumptions could result in materially different amounts being reported in our
consolidated financial statements. While reviewing this section, refer to Note 2
to our consolidated financial statements, including terms defined therein.
Assessment of Lease Term as Lessor
As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases consist of a series of one-year renewal options (with defined rent escalations upon renewal), and/or provide for early termination rights. Applicable accounting guidance requires us to recognize minimum rental payments on operating leases, net of rent abatements, on a straight-line basis over the term of each lease. We estimate a tenant's lease term at the lease commencement date and do not subsequently reassess such term unless the lease is modified. When estimating a tenant's lease term, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives to the tenant based on any existing contract, asset, entity or market-based factors associated with the lease. Factors we consider in making this assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee's line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the tenant vacating or discontinuing use of the leased property. For most of our leases with the USG, our estimates of lease term conclude that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. As a result, our recognition of minimum rents on these leases includes the effect of annual rent escalations over our estimate of the lease term (including on one-year renewal options) and our depreciation and amortization of costs incurred on these leases is recognized over the lease term. An over-estimate of the term of these leases by us could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases. We had no significant USG leases with lease terms determined to have been over-estimated during the reporting periods included herein.
Impairment of Long-Lived Assets
We assess the asset groups associated with each of our properties for indicators
of impairment quarterly or when circumstances indicate that an asset group may
be impaired. If our analyses indicate that the carrying values of certain
properties' asset groups may be impaired, we perform a recoverability analysis
for such asset groups. If and when our plans change for a property, we revise
our recoverability analyses to use the cash flows expected from the operations
and eventual disposition of such property using holding periods that are
consistent with our revised plans. In our accounting for impairment of
long-lived assets, we estimate property fair values based on contract prices,
indicative bids, discounted cash flow analyses or comparable sales analyses. We
estimate cash flows used in performing impairment analyses based on our plans
for the property and our views of market and economic conditions. Our estimates
consider items such as current and future market rental and occupancy rates,
estimated operating and capital expenditures and recent sales data for
comparable properties; most of these items are influenced by market data
obtained from real estate leasing and brokerage firms and our direct experience
with the properties and their markets. Our determination of appropriate
capitalization or discount rates for use in estimating property fair values also
requires significant judgment and is typically based on many factors, including
the prevailing rate for the market or submarket, as well as the quality and
location of the property.
Since asset groups associated with properties held for sale are carried at the
lower of their carrying values (i.e., cost less accumulated depreciation and any
impairment loss recognized, where applicable) or estimated fair values less
costs to sell, decisions by us to sell certain properties will result in
impairment losses if the carrying values of the specific properties' asset
groups classified as held for sale exceed such properties' estimated fair values
less costs to sell. Our estimates of fair value
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consider matters such as recent sales data for comparable properties and, where
applicable, contracts or the results of negotiations with prospective
purchasers. These estimates are subject to revision as market conditions, and
our assessment of such conditions, change.
Historically, future market rental and occupancy rates have tended to be the
most variable assumption in our impairment analyses of properties to be held and
used; while changes in these assumptions can significantly affect our estimates
of property undiscounted future cash flows in our recoverability analyses, such
changes historically have not usually resulted in impairment losses since the
resulting recoverability analyses still have tended to exceed the carrying value
of the property asset groups. Historically, our recognition of impairment losses
has most often occurred due to changes in our estimates of future cash flows
resulting from a change in our plans for a property, such as a decision by us to
sell or shorten our expected holding period for a property or to not develop a
property. Changes in the estimated future cash flows due to changes in our plans
for a property or significant changes in our views regarding property market and
economic conditions and/or our ability to obtain development rights could result
in recognition of impairment losses that could be substantial.
Concentration of Operations
Customer Concentration of Property Operations
The table below sets forth the 20 largest tenants in our portfolio of operating
properties (including our office and data center shell properties and wholesale
data center) based on percentage of annualized rental revenue:
Percentage of Annualized Rental
Revenue
of
for 20 Largest Tenants as of December 31,
Tenant 2021 2020 2019
USG 35.6 % 34.1 % 34.6 %
Fortune 100 Company (1) 9.2 % 9.1 % 7.9 %
General Dynamics Corporation (1) 5.6 % 5.6 % 4.9 %
The Boeing Company (1) 2.5 % 3.0 % 3.2 %
CACI International Inc (1) 2.4 % 2.4 % 2.5 %
Peraton Corp. (1) 2.1 % N/A 0.9 %
Booz Allen Hamilton, Inc. 1.9 % 2.0 % 2.1 %
CareFirst Inc. (1) 1.7 % 2.0 % 2.1 %
Northrop Grumman Corporation 1.4 % 2.3 % 2.2 %
Raytheon Technologies Corporation (1) 1.1 % 1.0 % 1.0 %
Wells Fargo & Company (1) 1.1 % 1.2 % 1.3 %
Yulista Holding, LLC 1.1 % 1.0 % N/A
AT&T Corporation (1) 1.1 % 1.1 % 1.3 %
Miles and Stockbridge, PC 1.0 % 1.0 % 1.1 %
Mantech International Corp. 1.0 % 0.8 % 0.7 %
Morrison & Foerster, LLP 1.0 % 1.0 % N/A
Jacobs Engineering Group Inc. (1) 1.0 % 0.9 % 1.0 %
Transamerica Life Insurance Company 0.9 % 0.9 % 0.9 %
The MITRE Corporation 0.8 % 0.8 % 0.7 %
University System of Maryland (1) 0.8 % 0.9 % 1.2 %
Science Applications International Corporation N/A 0.9 % 1.0 %
Kratos Defense and Security Solutions (1) N/A N/A 1.0 %
Subtotal of 20 largest tenants 73.3 % 72.0 % 71.6 %
All remaining tenants 26.7 % 28.0 % 28.4 %
Total 100.0 % 100.0 % 100.0 %
Total annualized rental revenue $ 589,425 (1)Includes affiliated organizations.
The USG's concentration increased from 2020 to 2021 due primarily to new properties placed in service in which it is a tenant.
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Concentration of Office and
The table below sets forth the segment allocation of our annualized rental
revenue of office and data center shell properties as of the end of the last
three calendar years:
Percentage of Annualized Rental Revenue of Office and Number of Properties as of
Data Center Shell Properties as of December 31, December 31,
Region 2021 2020 2019 2021 2020 2019
Defense/IT Locations:
Fort Meade/BW Corridor 47.0 % 47.5 % 51.3 % 90 89 88
NoVA Defense/IT 13.3 % 11.2 % 10.9 % 14 13 13
Lackland Air Force Base 10.6 % 9.8 % 10.5 % 8 7 7
Navy Support 5.9 % 6.3 % 6.5 % 21 21 21
Redstone Arsenal 5.4 % 5.6 % 3.5 % 17 15 10
Data Center Shells 5.3 % 6.6 % 5.3 % 26 26 22
Total Defense/IT Locations 87.5 % 87.0 % 87.9 % 176 171 161
Regional Office 11.6 % 12.5 % 11.5 % 8 8 7
Other 0.9 % 0.5 % 0.6 % 2 2 2
100.0 % 100.0 % 100.0 % 186 181 170
The changes in revenue concentration reflected above between year end 2020 and
2021 were attributable primarily to the effect of occupied properties placed in
service in 2021 except for the decreases for Data Center Shells, which were
attributable to our sale in 2021 of a 90% interest in two properties, and for
Navy Support and Regional Office, which were due to lower occupancy.
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:
2021 2020 2019
Occupancy rates at period end
Total 92.4 % 94.1 % 92.9 %
Defense/IT Locations:
Fort Meade/BW Corridor 90.0 % 91.0 % 92.4 %
NoVA Defense/IT 89.5 % 88.1 % 82.4 %
Lackland Air Force Base 100.0 % 100.0 % 100.0 %
Navy Support 93.9 % 97.2 % 92.5 %
Redstone Arsenal 90.8 % 99.4 % 99.3 %
Data Center Shells 100.0 % 100.0 % 100.0 %
Total Defense/IT Locations 93.2 % 94.5 % 93.7 %
Regional Office 87.3 % 92.5 % 88.1 %
Other 66.2 % 68.4 % 73.0 %
Annualized rental revenue per occupied square foot at
year end $ 32.47 $ 31.50 $ 31.28
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Rentable Occupied
Square Feet Square Feet
(in thousands)
December 31, 2020 20,959 19,722
Vacated upon lease expiration (1) - (773)
Occupancy for new leases - 493
Developed or redeveloped 766 628
Other changes (15) -
December 31, 2021 21,710 20,070
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
With regard to changes in occupancy from
•Total: Decrease was due primarily to a 121,000 square foot property in ourRedstone Arsenal sub-segment vacated by its tenant in late 2021 and 137,000 square feet in newly-developed vacant space placed in service (most of which was in a Regional Office property); •Fort Meade/BW Corridor: Decrease was due primarily to a 63,000 square foot property vacated by its tenant (which was subsequently leased to a new tenant that will take occupancy in 2022) and 46,000 square feet in newly-developed space in a property placed in service; •NoVA Defense/IT: Increase was due primarily to a 348,000 square foot fully-occupied property placed in service; •Navy Support: Decreased despite its 76.1% tenant retention rate in 2021 due to minimal leasing of vacant space; •Redstone Arsenal: Decreased due primarily to a 121,000 square foot property vacated by its tenant in late 2021; •Regional Office: Decreased due to 81,000 square feet in newly-developed vacant space in a property placed in service, space vacated with its 63.2% tenant retention rate and minimal leasing of vacant space. This segment included properties inBaltimore City , two sub-markets inNorthern Virginia andWashington, D.C. We believe that the restrictive measures and economic uncertainty caused by the pandemic impacted leasing demand for this segment, and may continue to do so in the future. As ofDecember 31, 2021 , we had scheduled lease expirations in 2022 for 327,000 square feet, or 17.5%, of this segment's occupied square feet (including a 140,000 square foot space that we know is not renewing in 2022); and •Other: Included two properties totaling 157,000 square feet inAberdeen, Maryland . In 2021, we leased 3.9 million square feet, including 1.2 million square feet of development space in Defense/IT Locations, with weighted average lease terms of 13.4 years. In 2021, we renewed leases on 2.1 million square feet, representing a tenant retention rate of 74.2%. The cash rents of these renewals (totaling$33.34 per square foot) decreased on average by approximately 2.2% and the straight-line rents (totaling$33.87 per square foot) increased on average by approximately 5.2% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 5.4 years, with average escalations per year of 2.3%, and the per annum average committed costs associated with completing the leasing was approximately$2.99 per square foot. The decrease in cash rents on renewals was attributable primarily to per annum rent escalation terms of the previous leases that increased rents over the lease terms by amounts exceeding the increases in the applicable market rental rates. In 2021, we also completed leasing on 616,000 square feet of vacant space. The cash rents of this leasing totaled$26.95 per square foot and the straight-line rents totaled$27.56 per square foot; these leases had a weighted average lease term of approximately 8.2 years, with average escalations per year of 2.9%, and the per annum average committed costs associated with completing this leasing was approximately$8.60 per square foot. 30 --------------------------------------------------------------------------------
Lease Expirations
The table below sets forth as of
Expiration of Annualized Rental Revenue of
2022 2023 2024 2025 2026 Thereafter Total
Defense/IT Locations
Fort Meade/BW Corridor 5.8 % 8.9 % 7.4 % 10.8 % 4.7 % 9.5 % 47.0 %
NoVA Defense/IT 0.2 % 0.6 % 3.0 % 2.1 % 0.2 % 7.1 % 13.3 %
Lackland Air Force Base 0.0 % 0.0 % 0.0 % 7.0 % 2.1 % 1.5 % 10.6 %
Navy Support 1.0 % 1.3 % 1.3 % 0.3 % 0.7 % 1.3 % 5.9 %
Redstone Arsenal 0.4 % 0.8 % 0.3 % 0.9 % 0.1 % 2.8 % 5.4 %
Data Center Shells 0.0 % 0.0 % 0.1 % 0.0 % 0.1 % 5.0 % 5.3 %
Regional Office 2.0 % 0.8 % 0.4 % 0.7 % 1.4 % 6.3 % 11.6 %
Other 0.0 % 0.0 % 0.2 % 0.7 % 0.0 % 0.0 % 0.9 %
Total 9.4 % 12.5 % 12.7 % 22.6 % 9.3 % 33.5 % 100.0 %
This portfolio's weighted average lease term as of December 31, 2021 was
approximately five years. We believe that the weighted average annualized rental
revenue per occupied square foot for the portfolio's leases expiring in 2022
was, on average, approximately 1.0% to 3.0% higher than estimated current market
rents for the related space, with specific results varying by segment.
Results of Operations
For a discussion of our results of operations comparison for 2020 and 2019,
refer to our Annual Report on Form 10-K for the fiscal year ended
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 from continuing and discontinued
operations; 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 two years being compared. We
define these as changes from "Same Properties ." For further discussion of the
concept of "operational," refer to the section of Note 2 of the consolidated
financial statements entitled "Properties";
•developed or redeveloped and placed into service that were not 100% operational
throughout the two years being compared; 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 income from
continuing operations reported on the consolidated statements of operations is
provided in Note 16 to our consolidated financial statements.
31
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Comparison of Statements of Operations for the Years Ended
For the Years Ended
2021 2020 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 556,570 $ 511,714 $ 44,856
Construction contract and other service revenues 107,876 70,640 37,236
Total revenues 664,446 582,354 82,092
Operating expenses
Property operating expenses 213,377 190,796 22,581Depreciation and amortization associated with real estate operations
137,543 126,503 11,040
Construction contract and other service expenses 104,053 67,615 36,438
Impairment losses - 1,530 (1,530)
General, administrative and leasing expenses 36,127 33,001 3,126
Business development expenses and land carry costs 4,647 4,473 174
Total operating expenses 495,747 423,918 71,829
Interest expense (65,398) (67,937) 2,539
Interest and other income 7,879 8,574 (695)
Credit loss recoveries 1,128 933 195
Gain on sales of real estate 65,590 30,209 35,381
Gain on sale of investment in unconsolidated real estate joint venture
- 29,416 (29,416)
Loss on early extinguishment of debt (100,626) (7,306) (93,320)
Loss on interest rate derivatives - (53,196) 53,196
Equity in income of unconsolidated entities 1,093 1,825 (732)
Income tax expense (145) (353) 208
Income from continuing operations 78,220 100,601 (22,381)
Discontinued operations 3,358 2,277 1,081
Net income $ 81,578 $ 102,878 $ (21,300)
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NOI from Real Estate Operations
For the Years Ended December 31,
2021 2020 Variance
(Dollars in thousands, except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue and
provision for collectability losses $ 491,468 $ 482,970 $ 8,498
Lease termination revenue, net 2,416 834 1,582
Provision for collectability losses included in lease revenue
(105) (2,610) 2,505
Other property revenue 2,769 2,590 179
Same Properties total revenues 496,548 483,784 12,764
Developed and redeveloped properties placed in service 53,158 15,928 37,230
Wholesale data center 30,490 27,011 3,479
Dispositions 2,844 11,225 (8,381)
Other 4,020 777 3,243
587,060 538,725 48,335
Property operating expenses
Same Properties (196,951) (185,975) (10,976)
Developed and redeveloped properties placed in service (12,124) (2,489) (9,635)
Wholesale data center (17,424) (13,543) (3,881)
Dispositions (434) (1,202) 768
Other (3,286) (631) (2,655)
(230,219) (203,840) (26,379)
UJV NOI allocable to COPT
Same Properties 2,010 2,021 (11)
Retained interests in newly-formed UJVs 2,038 112 1,926
Dispositions (19) 4,818 (4,837)
4,029 6,951 (2,922)
NOI from real estate operations
Same Properties 301,607 299,830 1,777
Developed and redeveloped properties placed in service 41,034 13,439 27,595
Wholesale data center 13,066 13,468 (402)
Dispositions, net of retained interests in newly-formed
UJVs 4,429 14,953 (10,524)
Other 734 146 588
$ 360,870 $ 341,836 $ 19,034
Same Properties NOI from real estate operations by segment
Defense/IT Locations $ 269,635 $ 266,967 $ 2,668
Regional Office 30,615 31,220 (605)
Other 1,357 1,643 (286)
$ 301,607 $ 299,830 $ 1,777
Same Properties rent statistics
Average occupancy rate 92.3 % 92.8 % (0.5 %)
Average straight-line rent per occupied square foot (1) $
26.50 $ 26.26 $ 0.24 (1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the years set forth above.
OurSame Properties pool consisted of 159 properties, comprising 79.9% of our office and data center shell portfolio's square footage as ofDecember 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% 33 -------------------------------------------------------------------------------- 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: •lower provisions for collectability losses (primarily attributable to the effect in 2020 of the pandemic on certain tenants serving as amenities to Defense/IT Location properties) and higher lease termination revenues in the current period, as well as 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 the effects of •lower occupancy and higher snow removal and repairs and maintenance expenses 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 Years Ended December 31, 2021 2020 Variance (in thousands) Construction contract and other service revenues$ 107,876 $ 70,640 $ 37,236 Construction contract and other service expenses (104,053) (67,615) (36,438) NOI from service operations$ 3,823 $ 3,025 $ 798
Construction contract and other service revenues 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.
Depreciation and amortization associated with real estate operations
The increase in depreciation and amortization associated with real estate operations was primarily attributable to newly-developed properties placed in service.
General, administrative and leasing expenses
General, administrative and leasing expenses increased in large part due to the effect of the resignation of our Chief Operating Officer in early 2020 and hiring of his replacement in late 2020, as well as higher incentive compensation awards for 2021 in recognition of the Company's performance. We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing development or redevelopment activities. Our capitalized compensation and indirect costs totaled$11.0 million in 2021 and$9.4 million in 2020. 34
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Interest expense
The table below sets forth components of our interest expense:
For
the Years Ended
2021 2020 Variance
(in thousands)
Interest on unsecured senior notes $ 48,333 $ 53,534 $ (5,201)
Interest on mortgage and other secured debt 7,373 8,658 (1,285)
Interest on unsecured term debt 4,259 5,909 (1,650)
Interest on Revolving Credit Facility 1,631 3,239 (1,608)
Interest expense recognized on interest rate swaps 5,028 3,726 1,302
Amortization of deferred financing costs 2,980 2,538 442
Other interest 2,261 2,393 (132)
Capitalized interest (6,467) (12,060) 5,593
Interest expense $ 65,398 $ 67,937 $ (2,539)
Regarding the changes in interest expense components reported above: the
decrease in interest expense on unsecured senior notes was attributable to our
refinancing in 2020 and 2021 of all of our previous notes with new notes at
lower interest rates; and the decrease in capitalized interest was due primarily
to lower construction volume in 2021 relative to 2020.
Our average outstanding debt was $2.2 billion in 2021 and $2.1 billion in 2020,
and our weighted average effective interest rate on debt was approximately 3.0%
in 2021 and 3.6% in 2020.
Gain on sales of real estate
Gain on sales of real estate in 2021 included primarily $40.2 million from our
sale of 90% interests in two data center shell properties and $25.9 million from
our sale of a property in our data center shells sub-segment that was previously
removed from service. The gain on sales of real estate in 2020 included our sale
of 90% interests in two data center shell properties. For the sales of 90%
interests in properties in 2021 and 2020, we retained 10% interests in the
properties through unconsolidated real estate joint ventures.
Gain on sale of investment in unconsolidated real estate joint venture
The gain on sale of investment in unconsolidated real estate joint venture recognized in 2020 was attributable to our sale of a portion of our ownership interests in six data center shell properties owned through an unconsolidated real estate joint venture.
Loss on extinguishment of debt
The loss on early extinguishment of debt recognized in 2021 and 2020 was attributable primarily to our unsecured senior notes refinancings in each of those years.
Loss on interest rate derivatives
In 2020, we recognized a loss on interest rate swaps previously designated as cash flow hedges of interest expense on forecasted future borrowings following our determination that such borrowings would probably not occur.
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 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.
35
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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 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 of 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
36
--------------------------------------------------------------------------------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.
We use measures called payout ratios as supplemental measures of our ability to
make distributions to investors based on each of the following: FFO; Diluted
FFO; and Diluted FFO, adjusted for comparability. These measures are defined as
(1) the sum of (a) dividends on unrestricted common shares and (b) distributions
to holders of interests in COPLP (excluding unvested share-based compensation
awards) divided by either (2) FFO, Diluted FFO or Diluted FFO, adjusted for
comparability.
37
--------------------------------------------------------------------------------The table below sets forth the computation of the above stated measures for 2021 and 2020 and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:
For the Years Ended December 31,
2021 2020
(Dollars and shares in thousands,
except per share data)
Net income $ 81,578 $ 102,878
Real estate-related depreciation and amortization 147,833 138,193
Depreciation and amortization on UJVs allocable to COPT 1,981 3,329
Impairment losses on real estate - 1,530
Gain on sales of real estate (65,590) (30,209)
Gain on sale of investment in unconsolidated real estate JV - (29,416)
FFO 165,802 186,305
FFO allocable to other noncontrolling interests (5,483) (15,705)
Basic FFO allocable to share-based compensation awards (777) (719)
Noncontrolling interests-preferred units in the
- (300) Basic FFO available to common shares and common unit holders 159,542 169,581 Redeemable noncontrolling interests (11) 147
Diluted FFO adjustments allocable to share-based compensation awards
32 -
Diluted FFO available to common share and common unit holders 159,563 169,728
Loss on early extinguishment of debt 100,626 7,306
Loss on interest rate derivatives - 53,196
Loss on interest rate derivatives included in interest expense 221 -
Demolition costs on redevelopment and nonrecurring improvements 423 63
Diluted FFO comparability adjustments allocable to share-based compensation awards
(507) (327)
Dilutive preferred units in the Operating Partnership - 300
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
$ 260,326 $ 241,356 Weighted average common shares 111,960 111,788 Conversion of weighted average common units 1,257 1,236 Weighted average common shares/units - Basic FFO per share 113,217 113,024 Dilutive effect of share-based compensation awards 330 288 Redeemable noncontrolling interests 128 123 Weighted average common shares/units - Diluted FFO per share 113,675 113,435 Dilutive convertible preferred units - 171 Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability 113,675 113,606 Diluted FFO per share$ 1.40 $ 1.50 Diluted FFO per share, as adjusted for comparability$ 2.29 $ 2.12 Denominator for diluted EPS 112,418 112,076 Weighted average common units 1,257 1,236 Redeemable noncontrolling interests - 123 Denominator for diluted FFO per share 113,675 113,435 Dilutive convertible preferred units - 171
Denominator for diluted FFO per share, as adjusted for comparability
113,675 113,606
Common share dividends - unrestricted shares and deferred shares $ 123,243 $ 123,042
Common unit distributions - unrestricted units 1,387 1,362
Common unit distributions - dilutive restricted units 25 -
Dividends and distributions for FFO and diluted FFO payout ratios
124,655 124,404
Distributions on dilutive preferred units - 300
Dividends and distributions for other payout ratio $ 124,655 $ 124,704
FFO payout ratio 75.2 % 66.8 %
Diluted FFO payout ratio 78.1 % 73.3 %
Diluted FFO payout ratio, as adjusted for comparability 47.9 % 51.7 %
38
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Property Additions
The table below sets forth the major components of our additions to properties
for 2021 and 2020:
For the Years Ended December 31,
2021 2020 Variance
(in thousands)
Development and redevelopment $ 283,180
Tenant improvements on operating properties (1) 23,533 26,071 (2,538)
Capital improvements on operating properties 35,970 34,060 1,910
$ 342,683 $ 405,949 $ (63,266) (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
Net cash flow used in investing activities decreased$122.8 million from 2020 to 2021 due primarily to a$76.5 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 2021 was$50.9 million , and included dividends to common shareholders of$123.5 million . Net proceeds from debt borrowings during the period totaled$82.8 million , which included the net effect of our senior note issuances and senior note purchases and redemptions (and related early extinguishment costs), the repayment of a portion of our term loan facility, the payoff of a construction loan and mortgage loan (and related early extinguishment costs) and the net pay down of our Revolving Credit Facility.
Net cash flow provided by financing activities in 2020 was
•net proceeds from debt borrowings of$245.0 million , which included$150.0 million in borrowings under a term loan facility and the net increase from our senior notes issuance and senior notes purchase and redemption (and related early extinguishment costs); offset in part by • dividends to common shareholders of$123.4 million ; • distributions paid to redeemable noncontrolling interests of$14.4 million ; and • our redemption of COPLP Series I Preferred Units for$8.8 million .
Supplemental Guarantor Information
As ofDecember 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), 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. 39 --------------------------------------------------------------------------------
Liquidity and Capital Resources
As of
We have a Revolving Credit Facility with an aggregate commitment by the lenders of$800.0 million , with the ability for us to increase such commitment to$1.25 billion , provided that there is no default under the facility and subject to the approval of the lenders. We use this facility to initially fund much of the cash requirements from our investing activities, including property development/redevelopment costs, as well as certain debt balloon payments due upon maturity. We then 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 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 ofDecember 31, 2021 , the maximum borrowing capacity under this facility totaled$800.0 million , of which$724.0 million was available. OnJanuary 25, 2022 , the full$800.0 million in borrowing capacity under the facility was available following our repayment of the outstanding balance on that date using proceeds from our wholesale data center sale. 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 shares and, to a lesser extent, preferred shares. 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 issuing the shares and receiving the sale proceeds 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.
Our material cash requirements, including contractual and other obligations, include:
•property operating expenses, including future lease obligations from us as a lessee; •construction contract expenses; •general and administrative expenses; •debt service, including interest expense; •property development/redevelopment costs; •tenant and capital improvements and leasing costs for operating properties (expected to total approximately$90 million in 2022); •debt balloon payments due upon maturity; and •dividends to our shareholders.
We expect to use cash flow from operations in 2022 and annually thereafter for the foreseeable future to fund all of these cash requirements except for property development/redevelopment costs and debt balloon payments due upon maturity.
In 2022, we expect to spend$275 million to$300 million on development/redevelopment costs, most of which was contractually obligated as ofDecember 31, 2021 ; we expect to fund these cash requirements using, in part, any available remaining cash flow from operations, with the balance funded primarily using borrowings under our Revolving Credit Facility, at least initially. As ofDecember 31, 2021 , we had$300 million in debt balloon payments due in 2022; we repaid$75 million of this debt onJanuary 25, 2022 using proceeds from the sale of our wholesale data center and expect to repay the remaining$225 million using borrowings under our Revolving Credit Facility or proceeds from new long-term debt borrowings. As we use our Revolving Credit Facility to fund development/redevelopment costs and debt balloon payments, we intend to free up borrowing capacity by paying it down using proceeds from sales of interests in data center shells, property sales, new long-term debt borrowings and/or issuing common shares. Beyond 2022, we expect to continue to actively develop and redevelop properties and fund using, in part, any available remaining cash flow from operations, with most of the balance funded initially using borrowings under our Revolving Credit Facility. We provide disclosure in our consolidated financial statements on our future lessee obligations (expected to be funded primarily by cash flow from operations) in Note 5 and future debt obligations (expected to be refinanced by new debt borrowings or funded by future equity issuances and/or sales of interests in properties) in Note 10. 40 -------------------------------------------------------------------------------- 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 ofDecember 31, 2021 , we were compliant with these covenants.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.
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