Notes to Consolidated Financial Statements
(unaudited)
1. Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of June 30, 2020, our properties included the following:
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•
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174 properties totaling 19.8 million square feet comprised of 15.6 million square feet in 150 office properties and 4.2 million square feet in 24 single-tenant data center shell properties (“data center shells”). We owned 15 of these data center shells through unconsolidated real estate joint ventures;
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•
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a wholesale data center with a critical load of 19.25 megawatts;
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•
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11 properties under development (nine office properties and two data center shells), including one partially-operational property, and expansions of three fully-operational properties that we estimate will total approximately 1.9 million square feet upon completion; and
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•
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approximately 900 acres of land controlled for future development that we believe could be developed into approximately 11.5 million square feet and 43 acres of other land.
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COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).
Equity interests in COPLP are in the form of common and preferred units. As of June 30, 2020, COPT owned 98.6% of the outstanding COPLP common units (“common units”); the remaining common units and all of the outstanding COPLP preferred units (“preferred units”) were owned by third parties. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT common shareholders. In the case of any series of preferred units held by COPT, there would be a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units.
COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
2. Summary of Significant Accounting Policies
Basis of Presentation
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.
These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2019 included in our 2019 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in our 2019 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.
Reclassifications
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.
Recent Accounting Pronouncements
Effective January 1, 2020, we adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that changes how entities measure credit losses for most financial assets and certain other instruments not measured at fair value through net income. The guidance replaces the current incurred loss model with an expected loss approach, resulting in a more timely recognition of such losses. The guidance applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables (excluding those arising from operating leases), loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments and guarantees). Under this guidance, we recognize an estimate of our expected credit losses on these asset types as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected. We adopted this guidance effective January 1, 2020 using the modified retrospective transition method under which we recognized a $5.5 million allowance for credit losses by means of a cumulative-effect adjustment to cumulative distributions in excess of net income of the Company (or common units of the Operating Partnership), and did not adjust prior comparative reporting periods. Our consolidated statements of operations reflect adjustments for changes in our expected credit losses occurring subsequent to adoption of this guidance.
Effective January 1, 2020, we adopted guidance issued by the FASB that modifies disclosure requirements for fair value measurements. The resulting changes in disclosure did not have a material impact on our consolidated financial statements.
Effective January 1, 2020, we adopted guidance issued by the FASB that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. FASB guidance did not previously address the accounting for such implementation costs. Our adoption of this guidance did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued guidance containing practical expedients for reference rate reform related activities pertaining to debt, leases, derivatives and other contracts. The guidance is optional and may be adopted over time as reference rate reform activities occur. During the six months ended June 30, 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of this guidance and may apply other elections as applicable as additional changes in the market occur.
In April 2020, the FASB issued a Staff Q&A document that addressed the accounting for lease accounting guidance for lease concessions resulting from the COVID-19 pandemic. Under existing lease guidance, we would normally have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated
as a lease modification) or if such a concession was implemented pursuant to enforceable rights and obligations within the existing lease agreement (and, therefore, not treated as a lease modification). The Staff Q&A document enabled us to bypass the lease-by-lease analysis for lease concessions resulting from the COVID-19 pandemic, and instead elect to either apply the lease modification accounting framework or not, with such elections applied consistently to leases with similar characteristics and similar circumstances. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (such as deferrals of lease payments or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We chose to apply the elections available under the Staff Q&A to restructurings of lease payment terms granted by us to tenants, the effect of which did not have a material impact on our consolidated financial statements.
Credit Losses, Financial Assets and Other Instruments
As discussed above, effective January 1, 2020, we adopted guidance issued by the FASB that changed how we measure credit losses for most financial assets and certain other instruments not measured at fair value through net income from an incurred loss model to an expected loss approach. Our items within the scope of this guidance included the following:
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investing receivables, as disclosed in Note 7;
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•
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tenant notes receivable;
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•
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other assets comprised of non-lease revenue related accounts receivable (primarily from construction contract services) and contract assets from unbilled construction contract revenue; and
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•
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off-balance sheet credit exposures.
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Under this guidance, we recognize an estimate of our expected credit losses on these items as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected (or as a separate liability in the case of off-balance sheet credit exposures). The allowance represents the portion of the amortized cost basis that we do not expect to collect (or loss we expect to incur in the case of off-balance sheet credit exposures) due to credit over the contractual life based on available information relevant to assessing the collectability of cash flows, which includes consideration of past events, current conditions and reasonable and supportable forecasts of future economic conditions (including consideration of asset- or borrower-specific factors). The guidance requires the allowance for expected credit losses to reflect the risk of loss, even when that risk is remote. An allowance for credit losses is measured and recorded upon the initial recognition of a financial asset (or off-balance sheet credit exposure), regardless of whether it is originated or purchased. Quarterly, the expected losses are re-estimated, considering any cash receipts and changes in risks or assumptions, with resulting adjustments recognized in the line entitled “credit loss expense” on our consolidated statements of operations.
We estimate expected credit losses for in-scope items using historical loss rate information developed for varying classifications of credit risk and contractual lives. Due to our limited quantity of items within the scope of this guidance and the unique risk characteristics of such items, we individually assign each in-scope item a credit risk classification. The credit risk classifications assigned by us are determined based on credit ratings assigned by ratings agencies (as available) or are internally-developed based on available financial information, historical payment experience, credit documentation, other publicly available information and current economic trends. In addition, for certain items in which the risk of credit loss is affected by the economic performance of a real estate development project, we develop probability weighted scenario analyses for varying levels of performance in estimating our credit loss allowance (applicable to our notes receivable from the City of Huntsville disclosed in Note 7 and a tax incremental financing obligation disclosed in Note 17).
The table below sets forth the activity for the allowance for credit losses (in thousands):
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For the Six Months Ended June 30, 2020
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Investing Receivables
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Tenant Notes
Receivable (1)
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Other Assets (2)
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Off-Balance Sheet Credit Exposures (3)
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Total
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December 31, 2019
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$
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—
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$
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97
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$
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—
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$
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—
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$
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97
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Cumulative effect of change for adoption of credit loss guidance
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3,732
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325
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144
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1,340
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5,541
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Credit loss expense
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244
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719
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25
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316
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1,304
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June 30, 2020
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$
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3,976
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$
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1,141
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$
|
169
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$
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1,656
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$
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6,942
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(1)
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Included in the line entitled “accounts receivable, net” on our consolidated balance sheets.
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(2) The balance as of June 30, 2020 included $104,000 in the line entitled “accounts receivable, net” and $65,000 in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheets.
The following table presents the amortized cost basis of our investing receivables and tenants notes receivable by credit risk classification, by origination year as of June 30, 2020 (in thousands):
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Origination Year
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2015 and Earlier
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2016
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2017
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2018
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2019
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2020
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Total
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Investing receivables:
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Credit risk classification:
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Investment grade
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$
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61,329
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$
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—
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$
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887
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$
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—
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$
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—
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$
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—
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$
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62,216
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Non-investment grade
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3,020
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—
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—
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—
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11,073
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—
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14,093
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Total
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$
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64,349
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$
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—
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$
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887
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$
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—
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$
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11,073
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$
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—
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$
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76,309
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Tenant notes receivable:
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Credit risk classification:
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Investment grade
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$
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—
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$
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68
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$
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—
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$
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1,069
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$
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95
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$
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—
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$
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1,232
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Non-investment grade
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97
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202
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—
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178
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2,067
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|
1,600
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4,144
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Total
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$
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97
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$
|
270
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$
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—
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$
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1,247
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$
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2,162
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$
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1,600
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$
|
5,376
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Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings Ltd.), meaning that they are considered to have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or ratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification. The credit risk classifications of our investing receivables and tenant notes receivable were last updated in June 2020.
An insignificant portion of the investing and tenant notes receivables set forth above was past due, which we define as being delinquent by more than three months from the due date.
When we believe that collection of interest income on an investing or tenant note receivable is not probable, we place the receivable on nonaccrual status, meaning interest income is recognized when payments are received rather than on an accrual basis. Notes receivable on nonaccrual status as of June 30, 2020 and December 31, 2019 were not significant. We did not recognize any interest income during the three and six months ended June 30, 2020 on notes receivable on nonaccrual status.
We write off receivables when we believe the facts and circumstances indicate that continued pursuit of collection is no longer warranted. When cash is received in connection with receivables for which we have previously recognized credit losses, we recognize reductions in our credit loss expense.
3. Fair Value Measurements
Recurring Fair Value Measurements
COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that, prior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The Company froze additional entry into the plan effective December 31, 2019. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on COPT’s consolidated balance sheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded and totaled $2.5 million as of June 30, 2020, is included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets along with an insignificant amount of other marketable securities. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in “other liabilities” on COPT’s consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.
The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of June 30, 2020, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 9, we estimated the fair value of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
For additional fair value information, please refer to Note 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives.
COPT and Subsidiaries
The table below sets forth financial assets and liabilities of COPT and subsidiaries that are accounted for at fair value on a recurring basis as of June 30, 2020 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
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Description
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Quoted Prices in
Active Markets for
Identical Assets (Level 1)
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Significant Other
Observable Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Total
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Assets:
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Marketable securities in deferred compensation plan (1)
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Mutual funds
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$
|
2,512
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|
$
|
—
|
|
|
$
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—
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|
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$
|
2,512
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Other
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|
20
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|
|
—
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|
|
—
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|
20
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Mutual funds (1)
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|
7
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|
|
—
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|
|
—
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|
|
7
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Total assets
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$
|
2,539
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$
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—
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|
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$
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—
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$
|
2,539
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Liabilities:
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Deferred compensation plan liability (2)
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|
$
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—
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|
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$
|
2,532
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|
$
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—
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|
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$
|
2,532
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Interest rate derivatives
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—
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|
|
65,612
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|
|
—
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|
|
65,612
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Total liabilities
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$
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—
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|
|
$
|
68,144
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|
|
$
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—
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$
|
68,144
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(1) Included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.
COPLP and Subsidiaries
The table below sets forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a recurring basis as of June 30, 2020 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
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Description
|
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Quoted Prices in
Active Markets for
Identical Assets (Level 1)
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Significant Other
Observable Inputs(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Total
|
Assets:
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|
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|
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|
|
Mutual funds (1)
|
|
$
|
7
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
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Liabilities:
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|
|
|
|
|
|
|
|
|
|
|
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Interest rate derivatives
|
|
$
|
—
|
|
|
$
|
65,612
|
|
|
$
|
—
|
|
|
$
|
65,612
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(1) Included in the line entitled “prepaid expenses and other assets, net” on COPLP’s consolidated balance sheet.
4. Properties, Net
Operating properties, net consisted of the following (in thousands):
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|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Land
|
$
|
502,609
|
|
|
$
|
472,976
|
|
Buildings and improvements
|
3,451,302
|
|
|
3,306,791
|
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Less: Accumulated depreciation
|
(1,065,094
|
)
|
|
(1,007,120
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)
|
Operating properties, net
|
$
|
2,888,817
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|
|
$
|
2,772,647
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2020 Development Activities
During the six months ended June 30, 2020, we placed into service 621,000 square feet in four newly-developed properties and 21,000 square feet in a redeveloped property. As of June 30, 2020, we had 11 properties under development, including one partially-operational property, and expansions of three fully-operational properties that we estimate will total 1.9 million square feet upon completion.
5. Leases
Lessor Arrangements
We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of June 30, 2020, these leases, which may encompass all, or a portion of, a property, had remaining terms spanning from one month to 15 years and averaging approximately five years.
Our lease revenue is comprised of: fixed lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below- market lease intangibles; and variable lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is not fixed under the lease. The table below sets forth our allocation of lease revenue recognized between fixed and variable lease revenue (in thousands):
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|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
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Lease revenue
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fixed
|
|
$
|
103,993
|
|
|
$
|
104,193
|
|
|
$
|
208,102
|
|
|
$
|
208,837
|
|
Variable
|
|
28,154
|
|
|
27,222
|
|
|
55,057
|
|
|
53,481
|
|
|
|
$
|
132,147
|
|
|
$
|
131,415
|
|
|
$
|
263,159
|
|
|
$
|
262,318
|
|
Fixed contractual payments due under our property leases were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
June 30, 2020
|
|
December 31, 2019
|
2020 (1)
|
|
$
|
203,627
|
|
|
$
|
388,310
|
|
2021
|
|
372,518
|
|
|
336,482
|
|
2022
|
|
335,187
|
|
|
299,356
|
|
2023
|
|
281,094
|
|
|
245,661
|
|
2024
|
|
231,731
|
|
|
195,246
|
|
Thereafter
|
|
634,608
|
|
|
474,741
|
|
|
|
$
|
2,058,765
|
|
|
$
|
1,939,796
|
|
(1) As of June 30, 2020, represents the six months ending December 31, 2020.
Lessee arrangements
As of June 30, 2020, our balance sheet included $71.5 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating or developing. The land leases have long durations with remaining terms ranging from 29 (excluding extension options) to 96 years, and included:
|
|
•
|
$37.8 million for land on which we are developing an office property in Washington, DC through our Stevens Investors, LLC joint venture, virtually all of the rent on which was previously paid. This lease has a 96-year remaining term, and we possess a bargain purchase option that we expect to exercise in 2021;
|
|
|
•
|
$10.2 million for land underlying operating office properties in Washington, DC under two leases with remaining terms of approximately 80 years;
|
|
|
•
|
$6.4 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 29 years and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;
|
|
|
•
|
$6.6 million for land in a research park in College Park, Maryland under four leases through our M Square Associates, LLC joint venture, all of the rent on which was previously paid. These leases had remaining terms ranging from 63 to 74 years;
|
|
|
•
|
$8.1 million for land in a business park in Huntsville, Alabama under 11 leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 43 to 50 years and options to renew for an additional 25 years that were not included in the term used in determining the asset balance; and
|
|
|
•
|
$2.3 million for other land underlying operating properties in our Fort Meade/BW Corridor sub-segment under two leases with remaining terms of approximately 48 years, all of the rent on which was previously paid.
|
Our property right-of-use assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Balance Sheet Location
|
|
June 30, 2020
|
|
December 31, 2019
|
Right-of-use assets
|
|
|
|
|
|
|
Operating leases - Property
|
|
Property - operating right-of-use assets
|
|
$
|
31,009
|
|
|
$
|
27,864
|
|
Finance leases - Property
|
|
Property - finance right-of-use assets
|
|
40,441
|
|
|
40,458
|
|
Total right-of-use assets
|
|
|
|
$
|
71,450
|
|
|
$
|
68,322
|
|
Property lease liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Balance Sheet Location
|
|
June 30, 2020
|
|
December 31, 2019
|
Lease liabilities
|
|
|
|
|
|
|
Operating leases - Property
|
|
Property - operating lease liabilities
|
|
$
|
20,796
|
|
|
$
|
17,317
|
|
Finance leases - Property
|
|
Other liabilities
|
|
688
|
|
|
702
|
|
Total lease liabilities
|
|
|
|
$
|
21,484
|
|
|
$
|
18,019
|
|
The table below sets forth the weighted average terms and discount rates of our property leases as of June 30, 2020:
|
|
|
|
|
Weighted average remaining lease term
|
|
|
Operating leases
|
|
65 years
|
|
Finance leases
|
|
< 1 year
|
|
Weighted average discount rate
|
|
|
Operating leases
|
|
7.22
|
%
|
Finance leases
|
|
3.62
|
%
|
The table below presents our total property lease cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
Lease cost
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating lease cost
|
|
|
|
|
|
|
|
|
|
|
Property leases
|
|
Property operating expenses
|
|
$
|
445
|
|
|
$
|
413
|
|
|
$
|
876
|
|
|
$
|
826
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
|
Amortization of property right-of-use assets
|
|
Property operating expenses
|
|
9
|
|
|
12
|
|
|
18
|
|
|
12
|
|
|
|
|
|
$
|
454
|
|
|
$
|
425
|
|
|
$
|
894
|
|
|
$
|
838
|
|
The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
Supplemental cash flow information
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
541
|
|
|
$
|
550
|
|
Financing cash flows for financing leases
|
|
$
|
14
|
|
|
$
|
4
|
|
Payments on property leases were due as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
As of December 31, 2019
|
Year Ending December 31,
|
|
Operating leases
|
|
Finance leases
|
|
Total
|
|
Operating leases
|
|
Finance leases
|
|
Total
|
2020 (1)
|
|
$
|
636
|
|
|
$
|
660
|
|
|
$
|
1,296
|
|
|
$
|
1,092
|
|
|
$
|
674
|
|
|
$
|
1,766
|
|
2021
|
|
1,328
|
|
|
14
|
|
|
1,342
|
|
|
1,138
|
|
|
14
|
|
|
1,152
|
|
2022
|
|
1,352
|
|
|
14
|
|
|
1,366
|
|
|
1,162
|
|
|
14
|
|
|
1,176
|
|
2023
|
|
1,358
|
|
|
—
|
|
|
1,358
|
|
|
1,167
|
|
|
—
|
|
|
1,167
|
|
2024
|
|
1,363
|
|
|
—
|
|
|
1,363
|
|
|
1,173
|
|
|
—
|
|
|
1,173
|
|
Thereafter
|
|
113,780
|
|
|
—
|
|
|
113,780
|
|
|
100,609
|
|
|
—
|
|
|
100,609
|
|
Total lease payments
|
|
119,817
|
|
|
688
|
|
|
120,505
|
|
|
106,341
|
|
|
702
|
|
|
107,043
|
|
Less: Amount representing interest
|
|
(99,021
|
)
|
|
—
|
|
|
(99,021
|
)
|
|
(89,024
|
)
|
|
—
|
|
|
(89,024
|
)
|
Lease liability
|
|
$
|
20,796
|
|
|
$
|
688
|
|
|
$
|
21,484
|
|
|
$
|
17,317
|
|
|
$
|
702
|
|
|
$
|
18,019
|
|
(1) As of June 30, 2020, represents the six months ending December 31, 2020.
6. Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of June 30, 2020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 (1)
|
|
|
Date Acquired
|
|
Nominal Ownership %
|
|
|
|
Total Assets
|
|
Encumbered Assets
|
|
Total Liabilities
|
Entity
|
|
|
|
Location
|
|
|
|
LW Redstone Company, LLC
|
|
3/23/2010
|
|
85%
|
|
Huntsville, Alabama
|
|
$
|
335,040
|
|
|
$
|
111,380
|
|
|
$
|
107,223
|
|
M Square Associates, LLC
|
|
6/26/2007
|
|
50%
|
|
College Park, Maryland
|
|
92,946
|
|
|
62,725
|
|
|
56,153
|
|
Stevens Investors, LLC
|
|
8/11/2015
|
|
95%
|
|
Washington, DC
|
|
141,952
|
|
|
141,234
|
|
|
69,982
|
|
|
|
|
|
|
|
|
|
$
|
569,938
|
|
|
$
|
315,339
|
|
|
$
|
233,358
|
|
|
|
(1)
|
Excludes amounts eliminated in consolidation.
|
In March 2020, the LW Redstone Company, LLC joint venture agreement was amended to change the distribution terms to allow the venture to distribute financing proceeds to satisfy our partner’s cumulative preferred return and to provide our partner a priority preferred return on its invested capital.
Unconsolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Acquired
|
|
Nominal Ownership %
|
|
Number of Properties
|
|
Carrying Value of Investment (1)
|
Entity
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
GI-COPT DC Partnership LLC
|
|
7/21/2016
|
|
50%
|
|
6
|
|
|
$
|
36,720
|
|
|
$
|
37,816
|
|
BREIT COPT DC JV LLC
|
|
6/20/2019
|
|
10%
|
|
9
|
|
|
13,737
|
|
|
14,133
|
|
|
|
|
|
|
|
15
|
|
|
$
|
50,457
|
|
|
$
|
51,949
|
|
(1) Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.
In May 2020, the GI-COPT DC Partnership LLC joint venture agreement was amended to reflect our agreement to initially fund the costs of expanding certain of the joint venture’s existing operating properties. Following our completion of, and the tenant’s commencement of rent payments on, the property expansion, the joint venture will reimburse us for the lesser of the actual development costs of the expansion or $6 million using proceeds from proportional capital contributions by us and our partner.
7. Investing Receivables
Investing receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Notes receivable from the City of Huntsville
|
$
|
62,216
|
|
|
$
|
59,427
|
|
Other investing loans receivable
|
14,093
|
|
|
14,096
|
|
Amortized cost basis
|
76,309
|
|
|
73,523
|
|
Allowance for credit losses
|
(3,976
|
)
|
|
—
|
|
Investing receivables, net
|
$
|
72,333
|
|
|
$
|
73,523
|
|
The balances above include accrued interest receivable, net of allowance for credit losses, of $1.9 million as of June 30, 2020 and $4.7 million as of December 31, 2019.
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6) and carry an interest rate of 9.95%. Our other investing loans receivable carry an interest rate of 8.0%.
The fair value of these receivables was approximately $77 million as of June 30, 2020 and $74 million as of December 31, 2019.
8. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Lease incentives, net
|
$
|
29,092
|
|
|
$
|
28,433
|
|
Furniture, fixtures and equipment, net
|
9,015
|
|
|
7,823
|
|
Non-real estate equity investments
|
6,726
|
|
|
6,705
|
|
Prepaid expenses
|
6,600
|
|
|
18,835
|
|
Construction contract costs in excess of billings, net
|
5,508
|
|
|
17,223
|
|
Restricted cash
|
4,270
|
|
|
3,397
|
|
Deferred financing costs, net (1)
|
3,069
|
|
|
3,633
|
|
Deferred tax asset, net (2)
|
2,249
|
|
|
2,328
|
|
Other assets
|
8,998
|
|
|
4,639
|
|
Total for COPLP and subsidiaries
|
75,527
|
|
|
93,016
|
|
Marketable securities in deferred compensation plan
|
2,532
|
|
|
3,060
|
|
Total for COPT and subsidiaries
|
$
|
78,059
|
|
|
$
|
96,076
|
|
(1) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
(2) Includes a valuation allowance of $533,000 as of June 30, 2020 and $480,000 as of December 31, 2019.
9. Debt, Net
Our debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value (1) as of
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
June 30, 2020
|
|
|
|
|
Stated Interest Rates
|
|
Scheduled Maturity
|
Mortgage and Other Secured Debt:
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgage debt (2)
|
|
$
|
141,729
|
|
|
$
|
143,430
|
|
|
3.82% - 4.62% (3)
|
|
2023-2026
|
Variable rate secured debt (4)
|
|
108,392
|
|
|
68,055
|
|
|
LIBOR + 1.45% to 2.35% (5)
|
|
2020-2026
|
Total mortgage and other secured debt
|
|
250,121
|
|
|
211,485
|
|
|
|
|
|
Revolving Credit Facility (6)
|
|
169,000
|
|
|
177,000
|
|
|
LIBOR + 0.775% to 1.45% (7)
|
|
March 2023 (6)
|
Term Loan Facility (8)
|
|
398,058
|
|
|
248,706
|
|
|
LIBOR + 1.00% to 1.65% (9)
|
|
2022
|
Unsecured Senior Notes
|
|
|
|
|
|
|
|
|
3.60%, $350,000 aggregate principal
|
|
348,658
|
|
|
348,431
|
|
|
3.60% (10)
|
|
May 2023
|
5.25%, $250,000 aggregate principal
|
|
247,920
|
|
|
247,652
|
|
|
5.25% (11)
|
|
February 2024
|
3.70%, $300,000 aggregate principal
|
|
299,585
|
|
|
299,324
|
|
|
3.70% (12)
|
|
June 2021
|
5.00%, $300,000 aggregate principal
|
|
297,707
|
|
|
297,503
|
|
|
5.00% (13)
|
|
July 2025
|
Unsecured note payable
|
|
970
|
|
|
1,038
|
|
|
0% (14)
|
|
May 2026
|
Total debt, net
|
|
$
|
2,012,019
|
|
|
$
|
1,831,139
|
|
|
|
|
|
|
|
(1)
|
The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $6.0 million as of June 30, 2020 and $5.8 million as of December 31, 2019.
|
|
|
(2)
|
Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $186,000 as of June 30, 2020 and $217,000 as of December 31, 2019.
|
|
|
(3)
|
The weighted average interest rate on our fixed rate mortgage debt was 4.16% as of June 30, 2020.
|
|
|
(4)
|
Includes a construction loan with $47.6 million in remaining borrowing capacity as of June 30, 2020.
|
|
|
(5)
|
The weighted average interest rate on our variable rate secured debt was 2.22% as of June 30, 2020.
|
|
|
(6)
|
The facility matures in March 2023, with the ability for us to further extend such maturity 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. In connection with this facility, we also have the ability to borrow up to $500.0 million under new term loans from the facility’s lender group provided that there is no default under the facility and subject to the approval of the lenders.
|
|
|
(7)
|
The weighted average interest rate on the Revolving Credit Facility was 1.20% as of June 30, 2020.
|
(8) On March 6, 2020, we amended this loan facility to increase the loan amount by $150.0 million and change the interest terms.
|
|
(9)
|
The interest rate on this loan was 1.17% as of June 30, 2020.
|
|
|
(10)
|
The carrying value of these notes reflects an unamortized discount totaling $939,000 as of June 30, 2020 and $1.1 million as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%.
|
|
|
(11)
|
The carrying value of these notes reflects an unamortized discount totaling $1.9 million as of June 30, 2020 and $2.1 million as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%.
|
|
|
(12)
|
The carrying value of these notes reflects an unamortized discount totaling $324,000 as of June 30, 2020 and $534,000 as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%.
|
(13) The carrying value of these notes reflects an unamortized discount totaling $1.9 million as of June 30, 2020 and $2.1 million as of December 31, 2019. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%.
|
|
(14)
|
This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $191,000 as of June 30, 2020 and $223,000 as of December 31, 2019.
|
All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed COPLP’s Revolving Credit Facility, Term Loan Facilities and Unsecured Senior Notes.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants. As of June 30, 2020, we were compliant with these financial covenants.
We capitalized interest costs of $3.2 million in the three months ended June 30, 2020, $2.4 million in the three months ended June 30, 2019, $6.5 million in the six months ended June 30, 2020 and $4.4 million in the six months ended June 30, 2019.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Fixed-rate debt
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Senior Notes
|
$
|
1,193,870
|
|
|
$
|
1,224,800
|
|
|
$
|
1,192,910
|
|
|
$
|
1,227,441
|
|
Other fixed-rate debt
|
142,699
|
|
|
145,473
|
|
|
144,468
|
|
|
149,907
|
|
Variable-rate debt
|
675,450
|
|
|
666,040
|
|
|
493,761
|
|
|
495,962
|
|
|
$
|
2,012,019
|
|
|
$
|
2,036,313
|
|
|
$
|
1,831,139
|
|
|
$
|
1,873,310
|
|
10. Interest Rate Derivatives
The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was designated as a cash flow hedge of interest rate risk (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Notional Amount
|
|
Fixed Rate
|
|
Floating Rate Index
|
|
Effective Date
|
|
Expiration Date
|
|
June 30,
2020
|
|
December 31,
2019
|
$
|
12,234
|
|
(1)
|
1.390%
|
|
One-Month LIBOR
|
|
10/13/2015
|
|
10/1/2020
|
|
$
|
(38
|
)
|
|
$
|
23
|
|
100,000
|
|
|
1.901%
|
|
One-Month LIBOR
|
|
9/1/2016
|
|
12/1/2022
|
|
(4,326
|
)
|
|
(1,028
|
)
|
100,000
|
|
|
1.905%
|
|
One-Month LIBOR
|
|
9/1/2016
|
|
12/1/2022
|
|
(4,336
|
)
|
|
(1,037
|
)
|
50,000
|
|
|
1.908%
|
|
One-Month LIBOR
|
|
9/1/2016
|
|
12/1/2022
|
|
(2,171
|
)
|
|
(524
|
)
|
11,200
|
|
(2)
|
1.678%
|
|
One-Month LIBOR
|
|
8/1/2019
|
|
8/1/2026
|
|
(858
|
)
|
|
(20
|
)
|
150,000
|
|
|
0.498%
|
|
One-Month LIBOR
|
|
4/1/2020
|
|
12/31/2020
|
|
(248
|
)
|
|
—
|
|
23,000
|
|
(3)
|
0.573%
|
|
One-Month LIBOR
|
|
4/1/2020
|
|
3/26/2025
|
|
(378
|
)
|
|
—
|
|
75,000
|
|
|
3.176%
|
|
Three-Month LIBOR
|
|
6/30/2020
|
|
6/30/2030
|
|
(18,779
|
)
|
|
(8,640
|
)
|
75,000
|
|
|
3.192%
|
|
Three-Month LIBOR
|
|
6/30/2020
|
|
6/30/2030
|
|
(18,897
|
)
|
|
(8,749
|
)
|
75,000
|
|
|
2.744%
|
|
Three-Month LIBOR
|
|
6/30/2020
|
|
6/30/2030
|
|
(15,581
|
)
|
|
(5,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(65,612
|
)
|
|
$
|
(25,659
|
)
|
|
|
(1)
|
The notional amount of this instrument is scheduled to amortize to $12.1 million.
|
|
|
(2)
|
The notional amount of this instrument is scheduled to amortize to $10.0 million.
|
|
|
(3)
|
The notional amount of this instrument is scheduled to amortize to $22.1 million.
|
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
Derivatives
|
|
Balance Sheet Location
|
|
June 30,
2020
|
|
December 31, 2019
|
Interest rate swaps designated as cash flow hedges
|
|
Prepaid expenses and other assets, net
|
|
$
|
—
|
|
|
$
|
23
|
|
Interest rate swaps designated as cash flow hedges
|
|
Interest rate derivatives (liabilities)
|
|
$
|
(65,612
|
)
|
|
$
|
(25,682
|
)
|
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in AOCL on Derivatives
|
|
Amount of (Loss) Gain Reclassified from AOCL into Interest Expense on Statement of Operations
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
Derivatives in Hedging Relationships
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest rate derivatives
|
|
$
|
(3,315
|
)
|
|
$
|
(13,545
|
)
|
|
$
|
(41,020
|
)
|
|
$
|
(22,390
|
)
|
|
$
|
(935
|
)
|
|
$
|
557
|
|
|
$
|
(1,066
|
)
|
|
$
|
1,127
|
|
Based on the fair value of our derivatives as of June 30, 2020, we estimate that approximately $8.1 million of losses will be reclassified from accumulated other comprehensive loss (“AOCL”) as an increase to interest expense over the next 12 months.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on
our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of June 30, 2020, we were not in default with any of these provisions. As of June 30, 2020, the fair value of interest rate derivatives in a liability position related to these agreements was $65.8 million, excluding the effects of accrued interest and credit valuation adjustments. As of June 30, 2020, we had not posted any collateral related to these agreements. If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value, which was $66.2 million as of June 30, 2020.
11. Redeemable Noncontrolling Interests
Our partners in two real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC, have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2020
|
|
2019
|
Beginning balance
|
|
$
|
29,431
|
|
|
$
|
26,260
|
|
Distributions to noncontrolling interests
|
|
(12,695
|
)
|
|
(876
|
)
|
Net income attributable to noncontrolling interests
|
|
2,075
|
|
|
1,544
|
|
Adjustment to arrive at fair value of interests
|
|
4,337
|
|
|
2,875
|
|
Ending balance
|
|
$
|
23,148
|
|
|
$
|
29,803
|
|
We determine the fair value of the interests based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partners from the properties underlying the respective joint ventures. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancy projections and estimated operating and development expenditures.
12. Equity
Common Shares/Units
As of June 30, 2020, COPT had remaining capacity under its at-the-market stock offering program equal to an aggregate gross sales price of $300 million in common share sales.
During the six months ended June 30, 2020, certain COPLP limited partners converted 12,009 common units in COPLP for an equal number of common shares in COPT.
We declared dividends per COPT common share and distributions per COPLP common unit of $0.275 in the three months ended June 30, 2020 and 2019 and $0.550 in the six months ended June 30, 2020 and 2019.
See Note 15 for disclosure of COPT common share and COPLP common unit activity pertaining to our share-based compensation plans.
13. Information by Business Segment
We have the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. We also report on Defense/IT Locations sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (“Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville); and data center shells (properties leased to tenants to be operated as data centers in which the tenants generally fund the costs for the power, fiber connectivity and data center infrastructure).
We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”). Amounts reported for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.
The table below reports segment financial information for our reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Property Segments
|
|
|
|
|
|
|
|
Defense/Information Technology Locations
|
|
|
|
|
|
|
|
|
|
Fort Meade/BW Corridor
|
|
Northern Virginia Defense/IT
|
|
Lackland Air Force Base
|
|
Navy Support Locations
|
|
Redstone Arsenal
|
|
Data Center Shells
|
|
Total Defense/IT Locations
|
|
Regional Office
|
|
Wholesale
Data Center
|
|
Other
|
|
Total
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from real estate operations
|
$
|
62,698
|
|
|
$
|
14,447
|
|
|
$
|
13,257
|
|
|
$
|
8,119
|
|
|
$
|
4,647
|
|
|
$
|
7,076
|
|
|
$
|
110,244
|
|
|
$
|
15,162
|
|
|
$
|
6,455
|
|
|
$
|
677
|
|
|
$
|
132,538
|
|
Property operating expenses
|
(20,859
|
)
|
|
(5,335
|
)
|
|
(7,785
|
)
|
|
(3,171
|
)
|
|
(1,612
|
)
|
|
(789
|
)
|
|
(39,551
|
)
|
|
(6,888
|
)
|
|
(3,463
|
)
|
|
(302
|
)
|
|
(50,204
|
)
|
UJV NOI allocable to COPT
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,725
|
|
|
1,725
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,725
|
|
NOI from real estate operations
|
$
|
41,839
|
|
|
$
|
9,112
|
|
|
$
|
5,472
|
|
|
$
|
4,948
|
|
|
$
|
3,035
|
|
|
$
|
8,012
|
|
|
$
|
72,418
|
|
|
$
|
8,274
|
|
|
$
|
2,992
|
|
|
$
|
375
|
|
|
$
|
84,059
|
|
Additions to long-lived assets
|
$
|
6,958
|
|
|
$
|
3,204
|
|
|
$
|
—
|
|
|
$
|
2,110
|
|
|
$
|
146
|
|
|
$
|
—
|
|
|
$
|
12,418
|
|
|
$
|
4,445
|
|
|
$
|
7,904
|
|
|
$
|
103
|
|
|
$
|
24,870
|
|
Transfers from non-operating properties
|
$
|
3,975
|
|
|
$
|
524
|
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
29,171
|
|
|
$
|
49,964
|
|
|
$
|
83,779
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,779
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from real estate operations
|
$
|
61,659
|
|
|
$
|
13,912
|
|
|
$
|
12,104
|
|
|
$
|
8,185
|
|
|
$
|
3,968
|
|
|
$
|
8,624
|
|
|
$
|
108,452
|
|
|
$
|
15,018
|
|
|
$
|
8,560
|
|
|
$
|
741
|
|
|
$
|
132,771
|
|
Property operating expenses
|
(19,344
|
)
|
|
(4,694
|
)
|
|
(6,648
|
)
|
|
(3,286
|
)
|
|
(1,599
|
)
|
|
(759
|
)
|
|
(36,330
|
)
|
|
(7,590
|
)
|
|
(3,618
|
)
|
|
(348
|
)
|
|
(47,886
|
)
|
UJV NOI allocable to COPT
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,251
|
|
|
1,251
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,251
|
|
NOI from real estate operations
|
$
|
42,315
|
|
|
$
|
9,218
|
|
|
$
|
5,456
|
|
|
$
|
4,899
|
|
|
$
|
2,369
|
|
|
$
|
9,116
|
|
|
$
|
73,373
|
|
|
$
|
7,428
|
|
|
$
|
4,942
|
|
|
$
|
393
|
|
|
$
|
86,136
|
|
Additions to long-lived assets
|
$
|
7,499
|
|
|
$
|
1,703
|
|
|
$
|
—
|
|
|
$
|
928
|
|
|
$
|
536
|
|
|
$
|
—
|
|
|
$
|
10,666
|
|
|
$
|
4,870
|
|
|
$
|
95
|
|
|
$
|
34
|
|
|
$
|
15,665
|
|
Transfers from non-operating properties
|
$
|
1,338
|
|
|
$
|
20
|
|
|
$
|
1,833
|
|
|
$
|
—
|
|
|
$
|
5,576
|
|
|
$
|
92,844
|
|
|
$
|
101,611
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,611
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from real estate operations
|
$
|
127,136
|
|
|
$
|
28,125
|
|
|
$
|
25,333
|
|
|
$
|
16,460
|
|
|
$
|
9,323
|
|
|
$
|
12,653
|
|
|
$
|
219,030
|
|
|
$
|
30,622
|
|
|
$
|
13,627
|
|
|
$
|
1,375
|
|
|
$
|
264,654
|
|
Property operating expenses
|
(42,081
|
)
|
|
(10,520
|
)
|
|
(14,580
|
)
|
|
(6,456
|
)
|
|
(3,459
|
)
|
|
(1,446
|
)
|
|
(78,542
|
)
|
|
(14,425
|
)
|
|
(6,696
|
)
|
|
(540
|
)
|
|
(100,203
|
)
|
UJV NOI allocable to COPT
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,438
|
|
|
3,438
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,438
|
|
NOI from real estate operations
|
$
|
85,055
|
|
|
$
|
17,605
|
|
|
$
|
10,753
|
|
|
$
|
10,004
|
|
|
$
|
5,864
|
|
|
$
|
14,645
|
|
|
$
|
143,926
|
|
|
$
|
16,197
|
|
|
$
|
6,931
|
|
|
$
|
835
|
|
|
$
|
167,889
|
|
Additions to long-lived assets
|
$
|
14,633
|
|
|
$
|
5,895
|
|
|
$
|
—
|
|
|
$
|
3,868
|
|
|
$
|
316
|
|
|
$
|
—
|
|
|
$
|
24,712
|
|
|
$
|
7,802
|
|
|
$
|
8,782
|
|
|
$
|
168
|
|
|
$
|
41,464
|
|
Transfers from non-operating properties
|
$
|
4,513
|
|
|
$
|
780
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
30,307
|
|
|
$
|
106,196
|
|
|
$
|
141,956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
141,956
|
|
Segment assets at June 30, 2020
|
$
|
1,271,790
|
|
|
$
|
394,363
|
|
|
$
|
144,253
|
|
|
$
|
181,744
|
|
|
$
|
167,161
|
|
|
$
|
382,749
|
|
|
$
|
2,542,060
|
|
|
$
|
389,058
|
|
|
$
|
205,711
|
|
|
$
|
3,710
|
|
|
$
|
3,140,539
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from real estate operations
|
$
|
124,342
|
|
|
$
|
28,743
|
|
|
$
|
23,665
|
|
|
$
|
16,340
|
|
|
$
|
7,907
|
|
|
$
|
15,978
|
|
|
$
|
216,975
|
|
|
$
|
29,851
|
|
|
$
|
16,431
|
|
|
$
|
1,504
|
|
|
$
|
264,761
|
|
Property operating expenses
|
(41,679
|
)
|
|
(9,986
|
)
|
|
(12,607
|
)
|
|
(6,690
|
)
|
|
(3,138
|
)
|
|
(1,112
|
)
|
|
(75,212
|
)
|
|
(15,006
|
)
|
|
(6,456
|
)
|
|
(657
|
)
|
|
(97,331
|
)
|
UJV NOI allocable to COPT
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,470
|
|
|
2,470
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,470
|
|
NOI from real estate operations
|
$
|
82,663
|
|
|
$
|
18,757
|
|
|
$
|
11,058
|
|
|
$
|
9,650
|
|
|
$
|
4,769
|
|
|
$
|
17,336
|
|
|
$
|
144,233
|
|
|
$
|
14,845
|
|
|
$
|
9,975
|
|
|
$
|
847
|
|
|
$
|
169,900
|
|
Additions to long-lived assets
|
$
|
11,434
|
|
|
$
|
3,150
|
|
|
$
|
—
|
|
|
$
|
5,945
|
|
|
$
|
836
|
|
|
$
|
—
|
|
|
$
|
21,365
|
|
|
$
|
8,859
|
|
|
$
|
251
|
|
|
$
|
44
|
|
|
$
|
30,519
|
|
Transfers from non-operating properties
|
$
|
6,378
|
|
|
$
|
4,529
|
|
|
$
|
8,336
|
|
|
$
|
—
|
|
|
$
|
9,211
|
|
|
$
|
112,632
|
|
|
$
|
141,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
141,086
|
|
Segment assets at June 30, 2019
|
$
|
1,274,336
|
|
|
$
|
398,586
|
|
|
$
|
146,475
|
|
|
$
|
187,172
|
|
|
$
|
115,222
|
|
|
$
|
307,676
|
|
|
$
|
2,429,467
|
|
|
$
|
393,110
|
|
|
$
|
209,787
|
|
|
$
|
3,776
|
|
|
$
|
3,036,140
|
|
The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Segment revenues from real estate operations
|
$
|
132,538
|
|
|
$
|
132,771
|
|
|
$
|
264,654
|
|
|
$
|
264,761
|
|
Construction contract and other service revenues
|
12,236
|
|
|
42,299
|
|
|
25,917
|
|
|
59,249
|
|
Total revenues
|
$
|
144,774
|
|
|
$
|
175,070
|
|
|
$
|
290,571
|
|
|
$
|
324,010
|
|
The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
UJV NOI allocable to COPT
|
$
|
1,725
|
|
|
$
|
1,251
|
|
|
$
|
3,438
|
|
|
$
|
2,470
|
|
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense
|
(1,270
|
)
|
|
(830
|
)
|
|
(2,540
|
)
|
|
(1,657
|
)
|
Add: Equity in loss of unconsolidated non-real estate entities
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Equity in income of unconsolidated entities
|
$
|
454
|
|
|
$
|
420
|
|
|
$
|
895
|
|
|
$
|
811
|
|
As previously discussed, we provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer 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. The table below sets forth the computation of our NOI from service operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Construction contract and other service revenues
|
$
|
12,236
|
|
|
$
|
42,299
|
|
|
$
|
25,917
|
|
|
$
|
59,249
|
|
Construction contract and other service expenses
|
(11,711
|
)
|
|
(41,002
|
)
|
|
(24,832
|
)
|
|
(57,328
|
)
|
NOI from service operations
|
$
|
525
|
|
|
$
|
1,297
|
|
|
$
|
1,085
|
|
|
$
|
1,921
|
|
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income as reported on our consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
NOI from real estate operations
|
$
|
84,059
|
|
|
$
|
86,136
|
|
|
$
|
167,889
|
|
|
$
|
169,900
|
|
NOI from service operations
|
525
|
|
|
1,297
|
|
|
1,085
|
|
|
1,921
|
|
Interest and other income
|
2,282
|
|
|
1,849
|
|
|
3,487
|
|
|
4,135
|
|
Credit loss expense
|
(615
|
)
|
|
—
|
|
|
(1,304
|
)
|
|
—
|
|
Gain on sales of real estate
|
—
|
|
|
84,469
|
|
|
5
|
|
|
84,469
|
|
Equity in income of unconsolidated entities
|
454
|
|
|
420
|
|
|
895
|
|
|
811
|
|
Income tax (expense) benefit
|
(30
|
)
|
|
176
|
|
|
(79
|
)
|
|
(18
|
)
|
Depreciation and other amortization associated with real estate operations
|
(33,612
|
)
|
|
(34,802
|
)
|
|
(66,208
|
)
|
|
(69,598
|
)
|
General, administrative and leasing expenses
|
(8,158
|
)
|
|
(9,386
|
)
|
|
(15,644
|
)
|
|
(18,137
|
)
|
Business development expenses and land carry costs
|
(1,262
|
)
|
|
(870
|
)
|
|
(2,380
|
)
|
|
(1,983
|
)
|
Interest expense
|
(16,797
|
)
|
|
(18,475
|
)
|
|
(33,637
|
)
|
|
(37,149
|
)
|
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities
|
(1,725
|
)
|
|
(1,251
|
)
|
|
(3,438
|
)
|
|
(2,470
|
)
|
Net income
|
$
|
25,121
|
|
|
$
|
109,563
|
|
|
$
|
50,671
|
|
|
$
|
131,881
|
|
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
June 30,
2019
|
Segment assets
|
$
|
3,140,539
|
|
|
$
|
3,036,140
|
|
Operating properties lease liabilities included in segment assets
|
19,073
|
|
|
16,502
|
|
Non-operating property assets
|
679,207
|
|
|
523,801
|
|
Other assets
|
172,506
|
|
|
227,026
|
|
Total COPT consolidated assets
|
$
|
4,011,325
|
|
|
$
|
3,803,469
|
|
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, gain on sales of real estate and equity in income of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate general, administrative and leasing expenses, business development expenses and land carry costs, interest and other income, credit loss expense, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.
14. Construction Contract and Other Service Revenues
We disaggregate our construction contract and other service revenues by compensation arrangement and by service type as we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and other service revenues by compensation arrangement (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Construction contract revenue:
|
|
|
|
|
|
|
|
Guaranteed maximum price
|
$
|
5,432
|
|
|
$
|
25,792
|
|
|
$
|
10,476
|
|
|
$
|
38,148
|
|
Firm fixed price
|
2,984
|
|
|
1,335
|
|
|
8,056
|
|
|
3,660
|
|
Cost-plus fee
|
3,563
|
|
|
14,969
|
|
|
6,872
|
|
|
17,029
|
|
Other
|
257
|
|
|
203
|
|
|
513
|
|
|
412
|
|
|
$
|
12,236
|
|
|
$
|
42,299
|
|
|
$
|
25,917
|
|
|
$
|
59,249
|
|
The table below reports construction contract and other service revenues by service type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Construction contract revenue:
|
|
|
|
|
|
|
|
Construction
|
$
|
10,851
|
|
|
$
|
42,010
|
|
|
$
|
23,734
|
|
|
$
|
58,499
|
|
Design
|
1,128
|
|
|
86
|
|
|
1,670
|
|
|
338
|
|
Other
|
257
|
|
|
203
|
|
|
513
|
|
|
412
|
|
|
$
|
12,236
|
|
|
$
|
42,299
|
|
|
$
|
25,917
|
|
|
$
|
59,249
|
|
We recognized an increase (decrease) in revenue of $74,000 and $(14,000) in the three months ended June 30, 2020 and 2019, respectively, and $74,000 and $18,000 in the six months ended June 30, 2020 and 2019, respectively, from performance obligations satisfied (or partially satisfied) in previous periods.
Accounts receivable related to our construction contract services is included in accounts receivable, net on our consolidated balance sheets. The beginning and ending balances of accounts receivable related to our construction contracts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
12,378
|
|
|
$
|
6,701
|
|
Ending balance
|
$
|
8,898
|
|
|
$
|
34,837
|
|
The increase in the accounts receivable balance reported above for the six months ended June 30, 2019 was due primarily to significant amounts billed near the end of the period.
Contract assets, which we refer to herein as construction contract costs in excess of billings, net are included in prepaid expenses and other assets, net reported on our consolidated balance sheets. The beginning and ending balances of our contract assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
17,223
|
|
|
$
|
3,189
|
|
Ending balance
|
$
|
5,508
|
|
|
$
|
12,629
|
|
Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
1,184
|
|
|
$
|
568
|
|
Ending balance
|
$
|
2,435
|
|
|
$
|
156
|
|
Portion of beginning balance recognized in revenue during:
|
|
|
|
Three months ended June 30
|
$
|
92
|
|
|
$
|
6
|
|
Six months ended June 30
|
$
|
738
|
|
|
$
|
445
|
|
Revenue allocated to the remaining performance obligations under existing contracts as of June 30, 2020 that will be recognized as revenue in future periods was $70.5 million, approximately $20 million of which we expect to recognize during the remainder of 2020.
We incurred no deferred incremental costs to obtain or fulfill our construction contracts or other service revenues and had no significant credit loss expense on construction contracts receivable or unbilled construction revenue in the three or six months ended June 30, 2020 and 2019.
15. Share-Based Compensation
Restricted Shares
During the six months ended June 30, 2020, certain employees and non-employee members of our Board of Trustees (“Trustees”) were granted a total of 152,793 restricted common shares with an aggregate grant date fair value of $3.9 million (weighted average of $25.20 per share). Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. Restricted shares granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. During the six months ended June 30, 2020, forfeiture restrictions lapsed on 159,083 previously issued common shares; these shares had a weighted average grant date fair value of $28.16 per share, and the aggregate intrinsic value of the shares on the vesting dates was $4.0 million.
Deferred Share Awards
During the six months ended June 30, 2020, certain non-employee Trustees were granted a total of 7,972 deferred share awards with an aggregate grant date fair value of $187,000 ($23.44 per share). Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date elected by the Trustee (generally upon cessation of being a Trustee).
Performance Share Awards (“PSUs”)
We issued 23,181 common shares on January 13, 2020 to executives in settlement of PSUs granted in 2017, representing 53% of the target awards for those PSUs.
Profit Interest Units (“PIUs”)
For 2020, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred share awards and PSUs). Our executives and certain of our Trustees selected PIUs as their form of share-based compensation for their 2020 grants. We granted two forms of PIUs: time-based PIUs (“TB-PIUs”); and performance-based PIUs (“PB-PIUs”). TB-PIUs are subject to forfeiture restrictions until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are subject to a market condition in that the number of earned awards are determined at the end of the performance period (as described further below) and then settled in vested PIUs. Vested PIUs carry substantially the same rights to redemption and distributions as non-PIU common units.
TB-PIUs
During the six months ended June 30, 2020, our executives and certain non-employee Trustees were granted a total of 75,053 TB-PIUs with an aggregate grant date fair value of $1.9 million (weighted average of $25.14 per TB-PIU). TB-PIUs granted to executives vest in equal one-third increments over a three-year period beginning on the first anniversary of the date of grant. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights. During the six months ended June 30, 2020, 20,622 TB-PIUs awarded to our former Executive Vice President and Chief Operating Officer were forfeited upon his resignation. During the six months ended June 30, 2020, forfeiture restrictions lapsed on 25,182 previously issued TB-PIUs; these TB-PIUs had a grant date fair value of $26.30 per unit, and the aggregate intrinsic value of the TB-PIUs on the vesting date was $640,000.