COPT DEFENSE PROPERTIES Overview
During the six months ended
•finished the period with our portfolio 91.6% occupied and 93.6% leased; •placed into service 363,000 square feet in three newly-developed properties that were 99.0% leased as ofJune 30, 2022 ; and •sold our wholesale data center for$222.5 million , resulting in a gain on sale of$28.6 million . We used the proceeds to repay a portion of our Term Loan Facility and the remainder 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.
In 2022,
•inflationary conditions have contributed to increased costs for certain property operating expenses and building materials, which affects our development of new properties and improvements for existing properties. The effect of these increased costs has not significantly impacted us to date primarily since we had contracts in place for much of our property operating expense, development and building improvement cash requirements. However, we are expecting: •continued increases in property operating expenses, particularly from new or renewed contracts for service arrangements. Most of our leases obligate tenants to pay either their full share of a building's operating expenses or their share to the extent such expenses exceed amounts established in their leases. We believe that these lease arrangements reduce our exposure to increases in property operating expenses; •increased costs for contemplated new property development, which could adversely affect our ability to achieve targeted development yields to the extent increases in market rental rates do not keep pace, and therefore could also reduce our willingness to commence development of new properties; •increased costs for tenant improvements associated with new leasing, which could reduce our willingness to enter into new leases to the extent increases in market rents do not keep pace with cost increases; and •increased costs for contemplated other capital improvements, which could affect our willingness, or timeline, for completing such improvements; •increased interest rates have not significantly affected us due in large part to debt refinancings that we completed in 2020 and 2021. Our debt is predominantly fixed rate and in the form of long-term unsecured notes, and we have no significant fixed rate debt maturing until 2026. Moreover, most of the effect of interest rate increases on our variable rate debt is hedged by interest rate swaps through the end of 2022; and •supply-chain related shortages have not had a significant effect on our ability to execute our operating and development activities. 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 and obtain cash for short and long-term capital needs; and •material cash requirements for known contractual and other obligations.
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. We caution readers that
forward-looking statements reflect our opinion only as of the date on which they
were made. You should not place undue reliance on forward-looking statements.
The following factors, among others,
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--------------------------------------------------------------------------------could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
•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, property operating and 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.
Occupancy and Leasing
The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:
June 30,
2022 December 31, 2021
Occupancy rates at period end
Total 91.6 % 92.4 %
Defense/IT Locations:
Fort Meade/BW Corridor 90.5 % 90.0 %
NoVA Defense/IT 88.2 % 89.5 %
Lackland Air Force Base 100.0 % 100.0 %
Navy Support 91.3 % 93.9 %
Redstone Arsenal 87.7 % 90.8 %
Data Center Shells 100.0 % 100.0 %
Total Defense/IT Locations 92.9 % 93.2 %
Regional Office 80.2 % 87.3 %
Other 75.5 % 66.2 %
Annualized rental revenue per occupied square foot at period
end $ 32.76 $ 32.47
Rentable Occupied
Square Feet Square Feet
(in thousands)
December 31, 2021 21,710 20,070
Vacated upon lease expiration (1) - (473)
Occupancy for new leases - 294
Developed 363 352
Other changes 16 -
June 30, 2022 22,089 20,243
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
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During the six months ended
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 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 inthe 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.
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 from continuing and discontinued operations and 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 that we sold onJanuary 25, 2022 . 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 14 to our consolidated financial statements. 32 --------------------------------------------------------------------------------
Comparison of Statements of Operations for the Three Months Ended
For the Three Months Ended
2022 2021 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 143,246 $ 137,219 $ 6,027
Construction contract and other service revenues 42,557 19,988 22,569
Total revenues 185,803 157,207 28,596
Operating expenses
Property operating expenses 54,116 50,914 3,202Depreciation and amortization associated with real estate operations
34,812 34,732 80
Construction contract and other service expenses 41,304 19,082 22,222
General, administrative and leasing expenses 8,355 9,222 (867)
Business development expenses and land carry costs 701 1,372 (671)
Total operating expenses 139,288 115,322 23,966
Interest expense (14,808) (15,942) 1,134
Interest and other income 1,818 2,228 (410)
Credit loss expense (225) (193) (32)
Gain on sales of real estate (19) 40,233 (40,252)
Loss on early extinguishment of debt - (25,228) 25,228
Equity in income of unconsolidated entities 318 260 58
Income tax expense (4) (24) 20
Income from continuing operations 33,595 43,219 (9,624)
Discontinued operations - 679 (679)
Net income $ 33,595 $ 43,898 $ (10,303)
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NOI from Real Estate Operations
For the
Three Months Ended
2022 2021 Variance
(Dollars in thousands,
except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding net lease termination revenue
and provision for collectability losses $ 131,535 $ 130,229 $ 1,306
Lease termination revenue, net 399 1,094 (695)
Provision for collectability losses included in lease revenue
(727) 5 (732)
Other property revenue 935 732 203
Same Properties total revenues 132,142 132,060 82
Developed and redeveloped properties placed in service 9,979
2,841 7,138
Wholesale data center - 7,204 (7,204)
Dispositions (4) 1,165 (1,169)
Other 1,129 1,153 (24)
143,246 144,423 (1,177)
Property operating expenses
Same Properties (50,972) (48,557) (2,415)Developed and redeveloped properties placed in service (2,291)
(1,150) (1,141)
Wholesale data center 50 (3,828) 3,878
Dispositions - (135) 135
Other (903) (946) 43
(54,116) (54,616) 500
UJV NOI allocable to COPT
Same Properties 924 923 1
Retained interest in newly-formed UJVs 156 50 106
1,080 973 107
NOI from real estate operations
Same Properties 82,094 84,426 (2,332)
Developed and redeveloped properties placed in service 7,688
1,691 5,997
Wholesale data center 50 3,376 (3,326)
Dispositions, net of retained interest in newly-formed
UJVs 152 1,080 (928)
Other 226 207 19
$ 90,210 $ 90,780 $ (570)
Same Properties NOI from real estate operations by
segment
Defense/IT Locations $ 76,319 $ 76,359 $ (40)
Regional Office 5,441 7,686 (2,245)
Other 334 381 (47)
$ 82,094 $ 84,426 $ (2,332)
Same Properties rent statistics
Average occupancy rate 91.6 % 93.7 % (2.1 %)
Average straight-line rent per occupied square foot (1)
(1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the periods set forth above.
OurSame Properties pool consisted of 176 properties, comprising 92.1% of our portfolio's square footage as ofJune 30, 2022 . This pool of properties changed from the pool used for purposes of comparing 2021 and 2020 in our 2021 Annual Report on Form 10-K due to the addition of nine properties placed in service and 100% operational on or beforeJanuary 1, 2021 and eight properties owned through an unconsolidated real estate joint venture that was formed in 2020. 34 --------------------------------------------------------------------------------
Regarding the changes in NOI from real estate operations reported above:
•the decrease for ourSame Properties pool was attributable primarily to our Regional Office segment, which had lower occupancy in the current period due mostly to the scheduled lease expiration of a 140,000 square foot space; •developed and redeveloped properties placed in service reflects the effect of ten properties placed in service in 2021 and 2022; and •dispositions, net of retained interest in newly-formed UJVs reflects the effect of our sale of a 90% interest in two data center shells in 2021. NOI from Service Operations For the Three Months Ended June 30, 2022 2021 Variance (in thousands) Construction contract and other service revenues$ 42,557 $ 19,988 $ 22,569 Construction contract and other service expenses (41,304) (19,082) (22,222) NOI from service operations$ 1,253 $ 906 $ 347 Construction contract and other service revenues and expenses increased in the current period due primarily to a higher volume of construction activity for one 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.
Gain on sales of real estate
The gain on sales of real estate recognized in the prior period was due to our sale of a 90% interest in two data center shell properties.
Loss on extinguishment of debt
The loss on early extinguishment of debt recognized in the prior period was attributable to our redemption of unsecured senior notes that we refinanced.
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Comparison of Statements of Operations for the Six Months Ended June 30, 2022
and 2021
For the Six Months Ended June 30,
2022 2021 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 285,526 $ 275,049 $ 10,477
Construction contract and other service revenues 95,757 36,546 59,211
Total revenues 381,283 311,595 69,688
Operating expenses
Property operating expenses 111,297 104,190 7,107Depreciation and amortization associated with real estate operations
69,076 69,232 (156)
Construction contract and other service expenses 92,954 34,875 58,079
General, administrative and leasing expenses 16,899 17,628 (729)
Business development expenses and land carry costs 1,484 2,466 (982)
Total operating expenses 291,710 228,391 63,319
Interest expense (29,232) (33,461) 4,229
Interest and other income 3,711 4,093 (382)
Credit loss recoveries 91 714 (623)
Gain on sales of real estate (4) 39,743 (39,747)
Loss on early extinguishment of debt (342) (58,394) 58,052
Equity in income of unconsolidated entities 1,206 482 724
Income tax expense (157) (56) (101)
Income from continuing operations 64,846 36,325 28,521
Discontinued operations 29,573 1,494 28,079
Net income $ 94,419 $ 37,819 $ 56,600
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NOI from Real Estate Operations
For the
Six Months Ended
2022 2021 Variance
(Dollars in thousands,
except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue and
provision for collectability losses $ 264,040 $ 261,386 $ 2,654
Lease termination revenue, net 620 2,456 (1,836)
Provision for collectability losses included in lease revenue
(727) (119) (608)
Other property revenue 1,794 1,239 555
Same Properties total revenues 265,727 264,962 765
Developed and redeveloped properties placed in service 17,506
5,250 12,256
Wholesale data center 1,980 14,538 (12,558)
Dispositions (3) 2,846 (2,849)
Other 2,296 1,991 305
287,506 289,587 (2,081)
Property operating expenses
Same Properties (105,133) (100,212) (4,921)
Developed and redeveloped properties placed in service (4,356)
(1,712) (2,644)
Wholesale data center (975) (7,651) 6,676
Dispositions 1 (433) 434
Other (1,805) (1,582) (223)
(112,268) (111,590) (678)
UJV NOI allocable to COPT
Same Properties 1,850 1,840 10
Retained interest in newly-formed UJVs 310 50 260
2,160 1,890 270
NOI from real estate operations
Same Properties 162,444 166,590 (4,146)
Developed and redeveloped properties placed in service 13,150
3,538 9,612
Wholesale data center 1,005 6,887 (5,882)
Dispositions, net of retained interest in newly-formed
UJVs 308 2,463 (2,155)
Other 491 409 82
$ 177,398 Same Properties NOI from real estate operations by segment Defense/IT Locations
$ 149,905 $ 151,018 $ (1,113) Regional Office 11,900 14,887 (2,987) Other 639 685 (46)$ 162,444 $ 166,590 $ (4,146) Same Properties rent statistics Average occupancy rate 91.7 % 93.6 % (1.9 %)
Average straight-line rent per occupied square foot (1)
(1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the periods set forth above.
Regarding the changes in NOI from real estate operations reported above:
•the decrease for ourSame Properties pool was attributable primarily to our Regional Office segment, which had lower occupancy in the current period due mostly to the scheduled lease expiration of a 140,000 square foot space; 37 -------------------------------------------------------------------------------- •developed and redeveloped properties placed in service reflects the effect of ten properties placed in service in 2021 and 2022; and •dispositions, net of retained interest in newly-formed UJVs reflects the effect of our sale of a 90% interest in two data center shells in 2021. NOI from Service Operations For the Six Months Ended June 30, 2022 2021 Variance (in thousands) Construction contract and other service revenues$ 95,757 $ 36,546 $ 59,211 Construction contract and other service expenses (92,954) (34,875) (58,079) NOI from service operations$ 2,803
Construction contract and other service revenue and expenses increased in the current period due primarily to a higher volume of construction activity for one of our tenants. Interest expense Interest expense decreased due to lower weighted average interest rates in the current period resulting primarily from debt refinancings that we completed in 2021. Gain on sales of real estate
The gain on sales of real estate recognized in the prior period was due to our sale of a 90% interest in two data center shell properties.
Loss on extinguishment of debt
The loss on early extinguishment of debt recognized in the prior period was attributable to our purchase or redemption of unsecured senior notes that we refinanced.
Discontinued operations
Discontinued operations includes our wholesale data center, which we sold on
Funds from Operations
Funds from operations ("FFO") is defined as net income computed using GAAP,
excluding gains on sales and impairment losses of real estate (net of associated
income tax) and real estate-related depreciation and amortization. FFO also
includes adjustments to net income for the effects of the items noted above
pertaining to UJVs that were allocable to our ownership interest in the UJVs. We
believe that we use the National Association of Real Estate Investment Trusts
("Nareit") definition of FFO, although others may interpret the definition
differently and, accordingly, our presentation of FFO may differ from those of
other REITs. We believe that FFO is useful to management and investors as a
supplemental measure of operating performance because, by excluding gains on
sales and impairment losses of real estate and investments in unconsolidated
real estate joint ventures (net of associated income tax), and real
estate-related depreciation and amortization, FFO can help one compare our
operating performance between periods. In addition, since most equity REITs
provide FFO information to the investment community, we believe that FFO is
useful to investors as a supplemental measure for comparing our results to those
of other equity REITs. We believe that net income is the most directly
comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income, reliance on the
measure has limitations; management compensates for these limitations by using
the measure simply as a supplemental measure that is weighed in balance with
other GAAP and non-GAAP measures. FFO is not necessarily an indication of our
cash flow available to fund cash needs. Additionally, it should not be used as
an alternative to net income when evaluating our financial performance or to
cash flow from operating, investing and financing activities when evaluating our
liquidity or ability to make cash distributions or pay debt service.
Basic FFO available to common share and common unit holders ("Basic FFO") is FFO
adjusted to subtract (1) preferred share dividends, (2) income attributable to
noncontrolling interests through ownership of preferred units in the Operating
Partnership or interests in other consolidated entities not owned by us,
(3) depreciation and amortization allocable to noncontrolling interests in other
consolidated entities and (4) Basic FFO allocable to share-based compensation
awards. With these adjustments, Basic FFO represents FFO available to common
shareholders and common unitholders. Common units in 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
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--------------------------------------------------------------------------------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 the
effects of the excluded items; we compensate for these limitations in
essentially the same manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the
conversion of common units in COPLP but do not assume the conversion of other
securities that are convertible into common shares if the conversion of those
securities would increase per share measures in a given period.
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The table below sets forth the computation of the above stated measures, and
provides reconciliations to the GAAP measures associated with such measures:
For the Three Months Ended June For the Six Months Ended June
30, 30,
2022 2021 2022 2021
(Dollars and shares in thousands, except per share data)
Net income $ 33,595 $ 43,898 $ 94,419 $ 37,819
Real estate-related depreciation and amortization 34,812 37,555 69,076 74,876
Depreciation and amortization on UJVs allocable to COPT
525 476 1,051 930
Gain on sales of real estate 19 (40,233) (28,560) (39,743)
FFO 68,951 41,696 135,986 73,882
FFO allocable to other noncontrolling interests (1,178) (1,302)
(2,220) (2,329)
Basic FFO allocable to share-based compensation
awards (357) (193) (719) (353)
Basic FFO available to common share and common unit holders
67,416 40,201 133,047 71,200
Redeemable noncontrolling interests 4 11 (2) 70
Diluted FFO adjustments allocable to share-based
compensation awards 27 - 54 -
Diluted FFO available to common share and common
unit holders 67,447 40,212 133,099 71,270
Loss on early extinguishment of debt - 25,228 342 58,394
Demolition costs on redevelopment and nonrecurring
improvements - 302 - 302
Executive transition costs 137 - 137 -Diluted FFO comparability adjustments allocable to share-based compensation awards
- (137) (2) (304)
Diluted FFO available to common share and common
unit holders, as adjusted for comparability
Weighted average common shares 112,082 111,974 112,052 111,931 Conversion of weighted average common units 1,476 1,262 1,430 1,254
Weighted average common shares/units - Basic FFO per share
113,558 113,236 113,482 113,185
Dilutive effect of share-based compensation awards 429 297 427 280
Redeemable noncontrolling interests 126 133 129 125
Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability
114,113 113,666 114,038 113,590
Diluted FFO per share $ 0.59 $ 0.35 $ 1.17 $ 0.63
Diluted FFO per share, as adjusted for comparability $ 0.59 $ 0.58 $ 1.17 $ 1.14
Denominator for diluted EPS 112,637 112,404 112,608 112,336
Weighted average common units 1,476 1,262 1,430 1,254
Denominator for diluted FFO per share and as
adjusted for comparability 114,113 113,666 114,038 113,590
Property Additions
The table below sets forth the major components of our additions to properties
for the six months ended
Development$ 138,409
Tenant improvements on operating properties (1) 16,207 Capital improvements on operating properties 13,584
$ 168,200
(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$708,000 when comparing the six months endedJune 30, 2022 and 2021, which included a decrease in interest expense paid resulting from debt refinancings completed in 2021 that reduced our borrowing rates on unsecured senior notes and affected the timing of our interest payments on such notes. 40 -------------------------------------------------------------------------------- Net cash flow provided by investing activities increased$65.5 million when comparing the six months endedJune 30, 2022 and 2021 due to$220.8 million in proceeds from properties sold in the current period (primarily pertaining to our wholesale data center) as compared to$114.4 million in the prior period (mostly from our sale of a 90% interest in two data center shells), partially offset by a$32.0 million increase in cash outlays for development and redevelopment of properties in the current period.
Net cash flow used in financing activities in the six months ended
•net repayment of debt borrowings of
Net cash flow used in financing activities in the six months ended
•dividends to common shareholders of
Supplemental Guarantor Information
As ofJune 30, 2022 , 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. As permitted under Rule 13-01(a)(4)(vi), we do not provide summarized financial information for theOperating Partnership since: the assets, liabilities, and results of operations of the Company and theOperating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company; and we believe that inclusion of such summarized financial information would be repetitive and not provide incremental value to investors.
Liquidity and Capital Resources
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 ofJune 30, 2022 , the maximum borrowing capacity under this facility totaled$800.0 million , of which$619.0 million was available. Our senior unsecured debt is 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. InMay 2022 , we replaced our 2018 ATM stock offering program with the 2022 ATM Program 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. 41 --------------------------------------------------------------------------------
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$55 million during the remainder of 2022); •debt balloon payments due upon maturity; and •dividends to our shareholders.
We expect to use cash flow from operations during the remainder of 2022 and annually thereafter for the foreseeable future to fund all of these cash requirements except for debt balloon payments due upon maturity and a portion of property development/redevelopment costs.
During the remainder of 2022, we expect to spend approximately$165 million on development/redevelopment costs, most of which was contractually obligated as ofJune 30, 2022 ; 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 ofJune 30, 2022 , we had$100 million in debt balloon payments due inDecember 2022 that we expect to repay 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 fund property development and redevelopment activities 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 9. 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 ofJune 30, 2022 , 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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