COPT Reports 4Q and Full Year 2018 Results

2/21/19

COLUMBIA, Md.--(BUSINESS WIRE)-- Corporate Office Properties Trust (OFC) (NYSE: OFC) announced financial and operating results for the fourth quarter and full year ended December 31, 2018.

Management Comments

“Our fourth quarter represented a strong finish to a solid year,” stated Stephen E. Budorick, COPT’s President & Chief Executive Officer. “Leasing further accelerated during the fourth quarter, resulting in nearly 250,000 square feet of vacancy leasing, 377,000 square feet of development leasing, and 700,000 square feet of renewals, resulting in a robust 82% retention rate. For the year, we leased over 4.2 million square feet, including nearly 600,000 square feet of vacancy leasing, and 1.1 million square feet of development leasing—the second highest level in our 20 year history as a public company.” He continued, “Thus far in 2019, we have completed the lease for the second floor at 310 NBP with the U.S. Government, are in advanced negotiations on a significant level of development leasing, and are on track to register another strong year of leasing in the operating portfolio.”

Financial Highlights

4th Quarter Financial Results:

  • Diluted earnings per share (“EPS”) was $0.16 for the quarter ended December 31, 2018 as compared to $0.10 for the fourth quarter of 2017.
  • Diluted funds from operations per share (“FFOPS”), as calculated in accordance with NAREIT’s definition, was $0.47 for the fourth quarter of 2018, equal to fourth quarter 2017 results.
  • FFOPS, as adjusted for comparability, was $0.50 for the quarter ended December 31, 2018 as compared to $0.53 for the fourth quarter of 2017.

Full Year 2018 Financial Results:

  • EPS for the year ended December 31, 2018 was $0.69 as compared to $0.56 for 2017.
  • Per NAREIT’s definition, FFOPS for 2018 was $1.97 as compared to $1.94 for 2017.
  • FFOPS, as adjusted for comparability, for 2018 was $2.01 as compared to $2.02 for 2017.

Adjustments for comparability encompass items such as gains and impairment losses on non-operating properties, losses on early extinguishment of debt, derivative gains (losses), issuance costs associated with redeemed preferred shares, demolition costs of redevelopment and nonrecurring improvements, and executive transition costs.

Operating Performance Highlights

Operating Portfolio Summary:

  • At December 31, 2018, the Company’s core portfolio of 161 operating office properties was 93.1% occupied and 94.0% leased.

    During the quarter, the Company placed two developments aggregating 238,000 square feet plus our build-to-suit for a defense contractor into service; all three developments were 100% leased. During the year, the Company placed seven developments totaling 688,000 square feet that were 90% leased and the build-to-suit for a defense contractor that was 100% leased into service.

Same-Property Performance:

  • At December 31, 2018, COPT’s same-property portfolio of 147 buildings was 93.0% occupied and 93.8% leased.
  • For the quarter and year ended December 31, 2018, the Company’s same-property cash NOI from Defense/IT locations increased 1.0% and 2.1%, respectively, over the prior year’s comparable periods. For the same time periods, the Company’s total same-property cash NOI decreased 1.1% and 0.4%, respectively, over the prior year’s comparable periods.

Leasing:

  • Square Feet Leased?For the quarter ended December 31, 2018, the Company leased 1.3 million total square feet, including 704,000 square feet of renewing leases, 248,000 square feet of new leases on vacant space, and 377,000 square feet in development projects.

    For the year ended December 31, 2018, the Company leased 4.2 million total square feet, including 2.5 million square feet of renewing leases, 596,000 square feet of new leases on vacant space, and 1.1 million square feet in development projects.

  • Renewal Rates?During the fourth quarter and year ended December 31, 2018, the Company renewed 82.2% and 78.4%, respectively, of total expiring leases.
  • Rent Spreads & Average Escalations on Renewing Leases?For the quarter ended December 31, 2018, rents on renewed space increased 3.0% on a GAAP basis and decreased 6.9% on a cash basis; average annual escalations on renewing leases in the fourth quarter were 2.7%. For the year ended December 31, 2018, rents on renewed space increased 6.8% on a GAAP basis and decreased 2.0% on a cash basis; average annual escalations on renewing leases for the year were 2.6%.
  • Lease Terms?In the fourth quarter, lease terms averaged 4.6 years on renewing leases, 8.5 years on new leasing of vacant space, and 14.7 years on development leasing. For the year, lease terms averaged 3.8 years on renewing leases, 7.4 years on new leasing of vacant space, and 12.4 years on development leasing.

Investment Activity Highlights

Development & Redevelopment Projects:

  • Construction Pipeline. At January 2, 2019, the Company’s construction pipeline consisted of nine properties totaling 1.1 million square feet that were 81% leased. These projects have a total estimated cost of $332.5 million, of which $162.4 million has been incurred.
  • Redevelopment. At the end of the quarter, one project was under redevelopment totaling 106,000 square feet that was 0% leased. Subsequent to the quarter, the Company executed a 10,000 square foot pre-lease, bringing the project to 9% leased. The Company has invested $11.6 million of the $25.1 million anticipated total cost.

Balance Sheet and Capital Transaction Highlights

  • As of December 31, 2018, the Company’s net debt plus preferred equity to adjusted book ratio was 39.1% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.0x. For the same period, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.6x.
  • As of December 31, 2018 and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.1%; additionally, 93% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 4.5 years.
  • During the fourth quarter and year ended December 31, 2018, the Company issued 1.4 million and 5.9 million common shares under its forward equity sale agreement for net proceeds of $40.0 million and $172.5 million, respectively. Also during the year, the Company issued 992,000 common shares through its At-the-Market (“ATM”) program at an average gross price of $30.46 per share for net proceeds of $29.8 million.
  • In October, the Company entered into a new $800 million credit agreement to replace its existing $800 million revolving credit facility. The new credit facility has a maturity date of March 2023, plus two six-month extension options. The new facility’s interest rate is calculated as LIBOR plus 77.5—145 basis points; based on the Company’s current credit ratings, the initial spread over LIBOR is 110 basis points.

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its fourth quarter and year end 2018 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Company Information

COPT is a REIT that owns, manages, leases, develops and selectively acquires office and data center properties in locations that support the United States Government and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what it believes are growing, durable, priority missions (“Defense/IT Locations”). The Company also owns a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimoreregion with durable Class-A office fundamentals and characteristics (“Regional Office Properties”). As of December 31, 2018, the Company derived 88% of its core portfolio annualized revenue from Defense/IT Locations and 12% from its Regional Office Properties. As of the same date and including six buildings owned through an unconsolidated joint venture, COPT’s core portfolio of 161 office and data center shell properties encompassed 17.9 million square feet and was 94.0% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts.