Company Quick10K Filing
Quick10K
Corporate Office Properties Trust
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.60 112 $3,090
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-20 Regulation FD
8-K 2019-05-09 Shareholder Vote, Other Events, Exhibits
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2018-11-29 Enter Agreement, Officers, Other Events, Exhibits
8-K 2018-11-13 Other Events, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-10 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-10 Shareholder Vote, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-08 Earnings, Exhibits
8-K 2018-01-22 Enter Agreement, Officers, Exhibits
COUP Coupa Software 6,270
GMED Globus Medical 4,310
MWA Mueller Water Products 1,450
EFC Ellington Financial 541
SNSR World Surveillance Group 85
PMTS CPI Card Group 29
AETI American Electric Technologies 11
ZZHJC Atel Capital Equipment Fund Ix 0
UNIR Uniroyal Global 0
SVDN Savden Group 0
OFC 2019-03-31
Part I: Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 copt03312019ex101.htm
EX-10.2 copt03312019ex102.htm
EX-31.1 copt03312019ex311.htm
EX-31.2 copt03312019ex312.htm
EX-31.3 copt03312019ex313.htm
EX-31.4 copt03312019ex314.htm
EX-32.1 copt03312019ex321.htm
EX-32.2 copt03312019ex322.htm
EX-32.3 copt03312019ex323.htm
EX-32.4 copt03312019ex324.htm

Corporate Office Properties Trust Earnings 2019-03-31

OFC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 copt10qdoc03312019.htm 10-Q Document


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
           
Commission file number 1-14023 (Corporate Office Properties Trust)
Commission file number 333-189188 (Corporate Office Properties, L.P.)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
(Exact name of registrant as specified in its charter)
Corporate Office Properties Trust
 
Maryland
 
23-2947217
 
 
(State or other jurisdiction of
 
(IRS Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
Corporate Office Properties, L.P.
 
Delaware
 
23-2930022
 
 
(State or other jurisdiction of
 
(IRS Employer
 
 
incorporation or organization)
 
Identification No.)
6711 Columbia Gateway Drive, Suite 300, Columbia, MD
21046
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (443) 285-5400
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Corporate Office Properties Trust ý Yes   o No
Corporate Office Properties, L.P. ý Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Corporate Office Properties Trust ý Yes   o No
Corporate Office Properties, L.P. ý Yes   o No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Corporate Office Properties Trust
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o

Corporate Office Properties, L.P.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer ý
 
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Corporate Office Properties Trust o
Corporate Office Properties, L.P. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Corporate Office Properties Trust o Yes   ý No
Corporate Office Properties, L.P. o Yes   ý No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of beneficial interest, $0.01 par value
OFC
New York Stock Exchange

As of April 26, 2019, 111,917,479 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
 
 
 
 
 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2019 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.

COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of March 31, 2019, COPT owned 98.6% of the outstanding common units in COPLP; the remaining common units and all of the outstanding COPLP preferred units were owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the two operate as an interrelated, consolidated company. COPT is a REIT whose only material asset is its ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

Noncontrolling interests, shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of COPT and those of COPLP. The common limited partnership interests in COPLP not




owned by COPT are accounted for as partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements. COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships and limited liability companies (“LLCs”); the differences between shareholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real estate partnerships and LLCs. The only other significant differences between the consolidated financial statements of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan and the corresponding liability to the plan’s participants that are held directly by COPT.

We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
combined reports better reflect how management, investors and the analyst community view the business as a single operating unit;
combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements:
Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;
Note 8, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries; and
Note 16, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;
“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and
“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPLP.”

This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.





TABLE OF CONTENTS
 
FORM 10-Q
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements


Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,865,829

 
$
2,847,265

Projects in development or held for future development
437,173

 
403,361

Total properties, net
3,303,002

 
3,250,626

Property - operating right-of-use assets
27,569

 

Property - finance right-of-use assets
40,488

 

Cash and cash equivalents
7,780

 
8,066

Investment in unconsolidated real estate joint venture
39,359

 
39,845

Accounts receivable
25,261

 
26,277

Deferred rent receivable
91,304

 
89,350

Intangible assets on real estate acquisitions, net
33,172

 
43,470

Deferred leasing costs (net of accumulated amortization of $34,666 and $31,994, respectively)
51,736

 
50,191

Investing receivables
69,390

 
56,982

Interest rate derivatives
2,602

 
5,617

Prepaid expenses and other assets, net
84,196

 
85,581

Total assets
$
3,775,859

 
$
3,656,005

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,876,149

 
$
1,823,909

Accounts payable and accrued expenses
112,076

 
92,855

Rents received in advance and security deposits
25,635

 
30,079

Dividends and distributions payable
31,346

 
30,856

Deferred revenue associated with operating leases
8,415

 
9,125

Property - operating lease liabilities
16,619

 

Interest rate derivatives
11,894

 
5,459

Other liabilities
10,162

 
10,414

Total liabilities
2,092,296

 
2,002,697

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interests
27,385

 
26,260

Equity:
 

 
 

Corporate Office Properties Trust’s shareholders’ equity:
 

 
 

Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 111,939,790 at March 31, 2019 and 110,241,868 at December 31, 2018)
1,119

 
1,102

Additional paid-in capital
2,475,497

 
2,431,355

Cumulative distributions in excess of net income
(856,703
)
 
(846,808
)
Accumulated other comprehensive loss
(9,538
)
 
(238
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,610,375

 
1,585,411

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
20,167

 
19,168

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
16,836

 
13,669

Noncontrolling interests in subsidiaries
45,803

 
41,637

Total equity
1,656,178

 
1,627,048

Total liabilities, redeemable noncontrolling interests and equity
$
3,775,859

 
$
3,656,005


See accompanying notes to consolidated financial statements.

3



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2019
 
2018
Revenues
 

 
 

Lease revenue
$
130,903

 
$
127,133

Other property revenue
1,087

 
1,145

Construction contract and other service revenues
16,950

 
27,198

Total revenues
148,940

 
155,476

Operating expenses
 

 
 

Property operating expenses
49,445

 
50,951

Depreciation and amortization associated with real estate operations
34,796

 
33,512

Construction contract and other service expenses
16,326

 
26,216

General, administrative and leasing expenses
8,751

 
7,292

Business development expenses and land carry costs
1,113

 
1,614

Total operating expenses
110,431

 
119,585

Interest expense
(18,674
)
 
(18,784
)
Interest and other income
2,286

 
1,359

Gain on sales of real estate

 
(4
)
Income before equity in income of unconsolidated entities and income taxes
22,121

 
18,462

Equity in income of unconsolidated entities
391

 
373

Income tax expense
(194
)
 
(55
)
Net income
22,318

 
18,780

Net income attributable to noncontrolling interests:
 

 
 

Common units in COPLP
(257
)
 
(544
)
Preferred units in COPLP
(165
)
 
(165
)
Other consolidated entities
(1,037
)
 
(921
)
Net income attributable to COPT common shareholders
$
20,859

 
$
17,150

 
 
 
 
Earnings per common share: (1)
 

 
 

Net income attributable to COPT common shareholders - basic
$
0.19

 
$
0.17

Net income attributable to COPT common shareholders - diluted
$
0.19

 
$
0.17

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.

See accompanying notes to consolidated financial statements.

4



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2019
 
2018
Net income
$
22,318

 
$
18,780

Other comprehensive (loss) income
 

 
 

Unrealized (loss) gain on interest rate derivatives
(8,845
)
 
4,676

(Gain) loss on interest rate derivatives recognized in interest expense
(570
)
 
245

Other comprehensive (loss) income
(9,415
)
 
4,921

Comprehensive income
12,903

 
23,701

Comprehensive income attributable to noncontrolling interests
(1,344
)
 
(1,790
)
Comprehensive income attributable to COPT
$
11,559

 
$
21,911

 
See accompanying notes to consolidated financial statements.



5



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
 
Common
Shares
 
Additional
Paid-in
Capital
 
Cumulative
Distributions in
Excess of Net
Income
 
Accumulated
Other
Comprehensive Income (Loss)
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2017 (101,292,299 common shares outstanding)
$
1,013

 
$
2,201,047

 
$
(802,085
)
 
$
2,167

 
$
66,165

 
$
1,468,307

Cumulative effect of accounting change for adoption of hedge accounting guidance

 

 
(276
)
 
276

 

 

Balance at December 31, 2017, as adjusted
1,013

 
2,201,047

 
(802,361
)
 
2,443

 
66,165

 
1,468,307

Conversion of common units to common shares (53,817 shares)
1

 
760

 

 

 
(761
)
 

Common shares issued under forward equity sale agreements (677,000 shares)
7

 
19,969

 

 

 

 
19,976

Share-based compensation (127,242 shares issued, net of redemptions)
1

 
1,679

 

 

 

 
1,680

Redemption of vested equity awards

 
(1,327
)
 

 

 

 
(1,327
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP

 
(164
)
 

 

 
164

 

Comprehensive income

 

 
17,150

 
4,761

 
1,152

 
23,063

Dividends

 

 
(28,091
)
 

 

 
(28,091
)
Distributions to owners of common and preferred units in COPLP

 

 

 

 
(1,044
)
 
(1,044
)
Distributions to noncontrolling interests in other consolidated entities

 

 

 

 
(3
)
 
(3
)
Adjustment to arrive at fair value of redeemable noncontrolling interests

 
(537
)
 

 

 

 
(537
)
Balance at March 31, 2018 (102,150,358 common shares outstanding)
$
1,022

 
$
2,221,427

 
$
(813,302
)
 
$
7,204


$
65,673

 
$
1,482,024

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018 (110,241,868 common shares outstanding)
$
1,102

 
$
2,431,355

 
$
(846,808
)
 
$
(238
)
 
$
41,637

 
$
1,627,048

Conversion of common units to common shares (5,500 shares)

 
80

 

 

 
(80
)
 

Common shares issued under forward equity sale agreements (1,614,087 shares)
16

 
46,438

 

 

 

 
46,454

Share-based compensation (78,335 shares issued, net of redemptions)
1

 
1,562

 

 

 
239

 
1,802

Redemption of vested equity awards

 
(1,817
)
 

 

 

 
(1,817
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP

 
(1,322
)
 

 

 
1,322

 

Comprehensive income

 

 
20,859

 
(9,300
)
 
669

 
12,228

Dividends

 

 
(30,754
)
 

 

 
(30,754
)
Distributions to owners of common and preferred units in COPLP

 

 

 

 
(550
)
 
(550
)
Contributions from noncontrolling interests in other consolidated entities

 

 

 

 
2,570

 
2,570

Distributions to noncontrolling interests in other consolidated entities

 

 

 

 
(4
)
 
(4
)
Adjustment to arrive at fair value of redeemable noncontrolling interests

 
(799
)
 

 

 

 
(799
)
Balance at March 31, 2019 (111,939,790 common shares outstanding)
$
1,119

 
$
2,475,497

 
$
(856,703
)
 
$
(9,538
)
 
$
45,803

 
$
1,656,178


See accompanying notes to consolidated financial statements.

6



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
126,569

 
$
135,027

Construction contract and other service revenues received
5,904

 
9,268

Property operating expenses paid
(42,974
)
 
(43,212
)
Construction contract and other service expenses paid
(4,614
)
 
(41,128
)
General, administrative, leasing, business development and land carry costs paid
(11,703
)
 
(10,900
)
Interest expense paid
(18,282
)
 
(19,092
)
Lease incentives paid
(1,158
)
 
(4,204
)
Other
910

 
436

Net cash provided by operating activities
54,652

 
26,195

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(100,212
)
 
(17,540
)
Tenant improvements on operating properties
(4,174
)
 
(9,077
)
Other capital improvements on operating properties
(4,476
)
 
(5,198
)
Investing receivables funded
(11,051
)
 

Leasing costs paid
(2,539
)
 
(2,015
)
Other
1,297

 
(974
)
Net cash used in investing activities
(121,155
)
 
(34,804
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
123,000

 
82,000

Other debt proceeds
3,350

 

Repayments of debt
 
 
 
Revolving Credit Facility
(74,000
)
 
(55,000
)
Scheduled principal amortization
(1,098
)
 
(1,052
)
Payments on finance lease liabilities
(52
)
 
(4,202
)
Net proceeds from issuance of common shares
46,415

 
19,989

Common share dividends paid
(30,287
)
 
(27,855
)
Distributions paid to noncontrolling interests in COPLP
(553
)
 
(1,059
)
Redemption of vested equity awards
(1,817
)
 
(1,327
)
Other
1,370

 
(5,183
)
Net cash provided by financing activities
66,328

 
6,311

Net decrease in cash and cash equivalents and restricted cash
(175
)
 
(2,298
)
Cash and cash equivalents and restricted cash
 

 
 

Beginning of period
11,950

 
14,831

End of period
$
11,775

 
$
12,533


See accompanying notes to consolidated financial statements.
 


7



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2019
 
2018
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
22,318

 
$
18,780

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and other amortization
35,229

 
34,035

Amortization of deferred financing costs and net debt discounts
898

 
822

Increase in deferred rent receivable
(2,539
)
 
(1,512
)
Gain on sales of real estate

 
4

Share-based compensation
1,659

 
1,545

Other
(1,572
)
 
(907
)
Changes in operating assets and liabilities:
 

 
 
Decrease in accounts receivable
1,033

 
7,877

(Increase) decrease in prepaid expenses and other assets, net
(6,752
)
 
8,533

Increase (decrease) in accounts payable, accrued expenses and other liabilities
8,822

 
(43,903
)
(Decrease) increase in rents received in advance and security deposits
(4,444
)
 
921

Net cash provided by operating activities
$
54,652

 
$
26,195

Reconciliation of cash and cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents at beginning of period
$
8,066

 
$
12,261

Restricted cash at beginning of period
3,884

 
2,570

Cash and cash equivalents and restricted cash at beginning of period
$
11,950

 
$
14,831

 
 
 
 
Cash and cash equivalents at end of period
$
7,780

 
$
8,888

Restricted cash at end of period
3,995

 
3,645

Cash and cash equivalents and restricted cash at end of period
$
11,775

 
$
12,533

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase in accrued capital improvements, leasing and other investing activity costs
$
11,329

 
$
12,232

Finance right-of-use asset contributed by noncontrolling interest in joint venture
$
2,570

 
$

Operating right-of-use assets obtained in exchange for operating lease liabilities
$
276

 
$

(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests
$
(9,450
)
 
$
4,887

Dividends/distributions payable
$
31,346

 
$
29,146

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
80

 
$
761

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
1,322

 
$
164

Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value
$
799

 
$
537

 
See accompanying notes to consolidated financial statements.


8





Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
March 31,
2019
 
December 31,
2018
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,865,829

 
$
2,847,265

Projects in development or held for future development
437,173

 
403,361

Total properties, net
3,303,002

 
3,250,626

Property - operating right-of-use assets
27,569

 

Property - finance right-of-use assets
40,488

 

Cash and cash equivalents
7,780

 
8,066

Investment in unconsolidated real estate joint venture
39,359

 
39,845

Accounts receivable
25,261

 
26,277

Deferred rent receivable
91,304

 
89,350

Intangible assets on real estate acquisitions, net
33,172

 
43,470

Deferred leasing costs (net of accumulated amortization of $34,666 and $31,994, respectively)
51,736

 
50,191

Investing receivables
69,390

 
56,982

Interest rate derivatives
2,602

 
5,617

Prepaid expenses and other assets, net
79,982

 
81,713

Total assets
$
3,771,645

 
$
3,652,137

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,876,149

 
$
1,823,909

Accounts payable and accrued expenses
112,076

 
92,855

Rents received in advance and security deposits
25,635

 
30,079

Distributions payable
31,346

 
30,856

Deferred revenue associated with operating leases
8,415

 
9,125

Property - operating lease liabilities
16,619

 

Interest rate derivatives
11,894

 
5,459

Other liabilities
5,948

 
6,546

Total liabilities
2,088,082

 
1,998,829

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interests
27,385

 
26,260

Equity:
 

 
 

Corporate Office Properties, L.P.’s equity:
 

 
 

Preferred units held by limited partner, 352,000 preferred units outstanding at March 31, 2019 and December 31, 2018
8,800

 
8,800

Common units, 111,939,790 and 110,241,868 held by the general partner and 1,576,024 and 1,332,886 held by limited partners at March 31, 2019 and December 31, 2018, respectively
1,640,272

 
1,604,655

Accumulated other comprehensive loss
(9,536
)
 
(121
)
Total Corporate Office Properties, L.P.’s equity
1,639,536

 
1,613,334

Noncontrolling interests in subsidiaries
16,642

 
13,714

Total equity
1,656,178

 
1,627,048

Total liabilities, redeemable noncontrolling interests and equity
$
3,771,645

 
$
3,652,137


See accompanying notes to consolidated financial statements.

9



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
(unaudited)
 
For the Three Months Ended March 31,
 
2019
 
2018
Revenues
 

 
 

Lease revenue
$
130,903

 
$
127,133

Other property revenue
1,087

 
1,145

Construction contract and other service revenues
16,950

 
27,198

Total revenues
148,940

 
155,476

Operating expenses
 

 
 

Property operating expenses
49,445

 
50,951

Depreciation and amortization associated with real estate operations
34,796

 
33,512

Construction contract and other service expenses
16,326

 
26,216

General, administrative and leasing expenses
8,751

 
7,292

Business development expenses and land carry costs
1,113

 
1,614

Total operating expenses
110,431

 
119,585

Interest expense
(18,674
)
 
(18,784
)
Interest and other income
2,286

 
1,359

Gain on sales of real estate

 
(4
)
Income before equity in income of unconsolidated entities and income taxes
22,121

 
18,462

Equity in income of unconsolidated entities
391

 
373

Income tax expense
(194
)
 
(55
)
Net income
22,318

 
18,780

Net income attributable to noncontrolling interests in consolidated entities
(1,037
)
 
(921
)
Net income attributable to COPLP
21,281

 
17,859

Preferred unit distributions
(165
)
 
(165
)
Net income attributable to COPLP common unitholders
$
21,116

 
$
17,694

 
 
 
 
Earnings per common unit: (1)
 

 
 

Net income attributable to COPLP common unitholders - basic
$
0.19

 
$
0.17

Net income attributable to COPLP common unitholders - diluted
$
0.19

 
$
0.17

(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

See accompanying notes to consolidated financial statements.

10



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 
For the Three Months Ended March 31,
 
2019
 
2018
Net income
$
22,318

 
$
18,780

Other comprehensive (loss) income
 
 
 
Unrealized (loss) gain on interest rate derivatives
(8,845
)
 
4,676

(Gain) loss on interest rate derivatives recognized in interest expense
(570
)
 
245

Other comprehensive (loss) income
(9,415
)
 
4,921

Comprehensive income
12,903

 
23,701

Comprehensive income attributable to noncontrolling interests
(1,037
)
 
(921
)
Comprehensive income attributable to COPLP
$
11,866

 
$
22,780

 
See accompanying notes to consolidated financial statements.

 

11



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
 
Limited Partner Preferred Units
 
Common Units
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Subsidiaries
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Total Equity
Balance at December 31, 2017
352,000

 
$
8,800

 
104,543,177

 
$
1,445,022

 
$
2,173

 
$
12,312

 
$
1,468,307

Cumulative effect of accounting change for adoption of hedge accounting guidance

 

 

 
(276
)
 
276

 

 

Balance at December 31, 2017, as adjusted
352,000

 
8,800

 
104,543,177

 
1,444,746

 
2,449

 
12,312

 
1,468,307

Issuance of common units resulting from common shares issued under COPT forward equity sale agreements

 

 
677,000

 
19,976

 

 

 
19,976

Share-based compensation (units net of redemption)

 

 
127,242

 
1,680

 

 

 
1,680

Redemptions of vested equity awards

 

 

 
(1,327
)
 

 

 
(1,327
)
Comprehensive income

 
165

 

 
17,694

 
4,921

 
283

 
23,063

Distributions to owners of common and preferred units

 
(165
)
 

 
(28,970
)
 

 

 
(29,135
)
Distributions to noncontrolling interests in subsidiaries

 

 

 

 

 
(3
)
 
(3
)
Adjustment to arrive at fair value of redeemable noncontrolling interests

 

 

 
(537
)
 

 

 
(537
)
Balance at March 31, 2018
352,000

 
$
8,800

 
105,347,419

 
$
1,453,262

 
$
7,370

 
$
12,592

 
$
1,482,024

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
352,000

 
$
8,800

 
111,574,754

 
$
1,604,655

 
$
(121
)
 
$
13,714

 
$
1,627,048

Issuance of common units resulting from common shares issued under COPT forward equity sale agreements

 

 
1,614,087

 
46,454

 

 

 
46,454

Share-based compensation (units net of redemption)

 

 
326,973

 
1,802

 

 

 
1,802

Redemptions of vested equity awards

 

 

 
(1,817
)
 

 

 
(1,817
)
Comprehensive income

 
165

 

 
21,116

 
(9,415
)
 
362

 
12,228

Distributions to owners of common and preferred units

 
(165
)
 

 
(31,139
)
 

 

 
(31,304
)
Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 
2,570

 
2,570

Distributions to noncontrolling interests in subsidiaries

 

 

 

 

 
(4
)
 
(4
)
Adjustment to arrive at fair value of redeemable noncontrolling interests

 

 

 
(799
)
 

 

 
(799
)
Balance at March 31, 2019
352,000

 
$
8,800

 
113,515,814

 
$
1,640,272

 
$
(9,536
)
 
$
16,642

 
$
1,656,178


See accompanying notes to consolidated financial statements.

12



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
126,569

 
$
135,027

Construction contract and other service revenues received
5,904

 
9,268

Property operating expenses paid
(42,974
)
 
(43,212
)
Construction contract and other service expenses paid
(4,614
)
 
(41,128
)
General, administrative, leasing, business development and land carry costs paid
(11,703
)
 
(10,900
)
Interest expense paid
(18,282
)
 
(19,092
)
Lease incentives paid
(1,158
)
 
(4,204
)
Other
910

 
436

Net cash provided by operating activities
54,652

 
26,195

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(100,212
)
 
(17,540
)
Tenant improvements on operating properties
(4,174
)
 
(9,077
)
Other capital improvements on operating properties
(4,476
)
 
(5,198
)
Investing receivables funded
(11,051
)
 

Leasing costs paid
(2,539
)
 
(2,015
)
Other
1,297

 
(974
)
Net cash used in investing activities
(121,155
)
 
(34,804
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
123,000

 
82,000

Other debt proceeds
3,350

 

Repayments of debt
 
 
 
Revolving Credit Facility
(74,000
)
 
(55,000
)
Scheduled principal amortization
(1,098
)
 
(1,052
)
Payments on finance lease liabilities
(52
)
 
(4,202
)
Net proceeds from issuance of common units
46,415

 
19,989

Common unit distributions paid
(30,675
)
 
(28,749
)
Preferred unit distributions paid
(165
)
 
(165
)
Redemption of vested equity awards
(1,817
)
 
(1,327
)
Other
1,370

 
(5,183
)
Net cash provided by financing activities
66,328

 
6,311

Net decrease in cash and cash equivalents and restricted cash
(175
)
 
(2,298
)
Cash and cash equivalents and restricted cash
 

 
 

Beginning of period
11,950

 
14,831

End of period
$
11,775

 
$
12,533


See accompanying notes to consolidated financial statements.

13



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)

 
For the Three Months Ended March 31,
 
2019
 
2018
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
22,318

 
$
18,780

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and other amortization
35,229

 
34,035

Amortization of deferred financing costs and net debt discounts
898

 
822

Increase in deferred rent receivable
(2,539
)
 
(1,512
)
Gain on sales of real estate

 
4

Share-based compensation
1,659

 
1,545

Other
(1,572
)
 
(907
)
Changes in operating assets and liabilities:
 

 
 
Decrease in accounts receivable
1,033

 
7,877

(Increase) decrease in prepaid expenses and other assets, net
(6,406
)
 
8,398

Increase (decrease) in accounts payable, accrued expenses and other liabilities
8,476

 
(43,768
)
(Decrease) increase in rents received in advance and security deposits
(4,444
)
 
921

Net cash provided by operating activities
$
54,652

 
$
26,195

Reconciliation of cash and cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents at beginning of period
$
8,066

 
$
12,261

Restricted cash at beginning of period
3,884

 
2,570

Cash and cash equivalents and restricted cash at beginning of period
$
11,950

 
$
14,831

 
 
 
 
Cash and cash equivalents at end of period
$
7,780

 
$
8,888

Restricted cash at end of period
3,995

 
3,645

Cash and cash equivalents and restricted cash at end of period
$
11,775

 
$
12,533

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase in accrued capital improvements, leasing and other investing activity costs
$
11,329

 
$
12,232

Finance right-of-use asset contributed by noncontrolling interest in joint venture
$
2,570

 
$

Operating right-of-use assets obtained in exchange for operating lease liabilities
$
276

 
$

(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests
$
(9,450
)
 
$
4,887

Distributions payable
$
31,346

 
$
29,146

Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value
$
799

 
$
537

 
See accompanying notes to consolidated financial statements.



14



Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
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 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 March 31, 2019, our properties included the following:

165 properties totaling 18.3 million square feet comprised of 15.2 million square feet in 146 office properties and 3.1 million square feet in 19 single-tenant data center shell properties (“data center shells”). We owned six of these data center shells through an unconsolidated real estate joint venture;
a wholesale data center with a critical load of 19.25 megawatts;
15 properties under construction or redevelopment (ten office properties and five data center shells) that we estimate will total approximately 2.0 million square feet upon completion, including two partially-operational properties; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately 11.6 million square feet and 150 acres of other land.
 
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 and construction and development 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 March 31, 2019, 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 those of COPT common shareholders. However, COPLP’s common units include a special class of unit referred to as profit interest units (“PIUs”) originating from certain share-based compensation awards issued to executives (described further in Note 15) that are subject to vesting and certain tax event criteria, and accordingly may carry different rights to redemption and distributions than non-PIU common 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.

15




 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, 2018 included in our 2018 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 2018 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

Reclassification

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, including reclassifications of our revenue from real estate operations in connection with our adoption of new lease guidance described below.

Recent Accounting Pronouncements

In February 2016, the FASB issued guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases.  This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. The resulting classification determines whether the lease expense is recognized based on an effective interest method or straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This guidance requires lessors of real estate to account for leases using an approach substantially equivalent to guidance previously in place for operating leases, direct financing leases and sales-type leases.  We adopted this guidance on January 1, 2019 using a modified retrospective transition approach under which we elected to apply the guidance effective January 1, 2019 and not adjust prior comparative reporting periods (except for our presentation of lease revenue discussed below). We elected to apply a package of practical expedients that enabled us to carry forward upon adoption our historical assessments of: expired or existing leases regarding their lease classification and deferred recognition of non-incremental direct leasing costs; and whether any expired or existing contracts are, or contain, leases. We also elected a practical expedient that enabled us to avoid the need to assess whether expired or existing land easements not previously accounted for as leases are, or contain, a lease. In addition, we elected a practical expedient for our rental properties (as lessor) to avoid separating non-lease components that otherwise would need to be accounted for under the recently-adopted revenue accounting guidance (such as tenant reimbursements of property operating expenses) from the associated lease component since (1) the non-lease components have the same timing and pattern of transfer as the associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease; this enables us to account for the combination of the lease component and non-lease components as an operating lease since the lease component is the predominant component of the combined components. Below is a summary of the primary changes in our accounting and reporting that resulted from our adoption of this guidance:

Property leases in which we are the lessor:
Deferral of non-incremental leasing costs: For new or extended tenant leases, we no longer defer recognition of non-incremental leasing costs that we would have deferred under prior accounting guidance (refer to our 2018 Annual Report on Form 10-K in which we reported amounts deferred in 2018, 2017 and 2016).
Change in presentation of revenue: Due to our adoption of the practical expedient discussed above to not separate non-lease component revenue from the associated lease component, we are aggregating revenue from our lease components and non-lease components (comprised predominantly of tenant operating expense reimbursements) into the line entitled “lease revenue.” We are reporting other revenue from our properties in the line entitled “other property revenue.” We recast prior periods for these changes in presentation.
Changes in assessment of lease revenue collectability: Changes in our assessment of lease revenue collectability that previously would have resulted in charges to bad debt expense under prior guidance are being recognized as an

16



adjustment to rental revenue under the new guidance. Such amounts recognized by us in prior periods were not significant.
Operating expenses paid directly by tenants to third parties: Operating expenses paid directly by tenants to third parties (primarily for real estate taxes) and revenue associated with such tenant payments that would have been recognized under prior guidance will no longer be reported on our Statement of Operations. Such amounts recognized by us in prior periods were not significant.
Leases (the most significant of which are ground leases) in which we are the lessee:
Balance sheet presentation of property operating lease right-of-use assets: Upon adoption on January 1, 2019, we recognized property right-of-use assets and offsetting lease liabilities for existing operating leases totaling $16 million for the present value of minimum lease payments under these leases, and also reclassified an additional $11 million in amounts previously presented elsewhere on our balance sheet in connection with these leases to the right-of-use assets. We will recognize additional right-of-use assets and lease liabilities as we enter into new operating leases.
Balance sheet presentation of property finance lease right-of-use assets: Property right-of-use assets of finance leases that previously were presented as properties under prior guidance are being presented as property finance right-of-use assets under the new guidance. As a result, we reclassified $38 million in assets from properties to property finance right-of-use assets upon adoption on January 1, 2019.
Segment assets: We changed our definition of segment assets used for our reportable segments to include property right-of-use assets associated with operating properties, net of related lease liabilities.

In June 2016, the FASB issued guidance that changes how entities measure credit losses for most financial assets and certain other instruments that are 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 will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments). Under the new guidance, an entity will recognize its estimate of expected credit losses as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and to be presented at the net amount expected to be collected. The guidance is effective for us beginning January 1, 2020, with early adoption permitted after December 2018. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

In August 2018, the FASB issued guidance that modifies disclosure requirements for fair value measurements. This guidance is effective for us beginning January 1, 2020. Early adoption is permitted for this guidance, and entities are permitted to early adopt with respect to any removed or modified disclosures while delaying adoption of additional disclosure requirements until the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued guidance 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. The guidance is effective for us beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

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 permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. 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, totaled $4.2 million as of March 31, 2019, and is included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets. 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

17



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 March 31, 2019, 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 values 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 March 31, 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Marketable securities in deferred compensation plan (1)
 
 

 
 

 
 

 
 

Mutual funds
 
$
4,171

 
$

 
$

 
$
4,171

Other
 
43

 

 

 
43

Interest rate derivatives
 

 
2,602

 

 
2,602

Total assets
 
$
4,214

 
$
2,602

 
$

 
$
6,816

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (2)
 
$

 
$
4,214

 
$

 
$
4,214

Interest rate derivatives
 

 
11,894

 

 
11,894

Total liabilities
 
$

 
$
16,108

 
$

 
$
16,108


(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.

18




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 March 31, 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$

 
$
2,602

 
$

 
$
2,602

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$

 
$
11,894

 
$

 
$
11,894


4.    Properties, Net
 
Operating properties, net consisted of the following (in thousands): 
 
March 31,
2019
 
December 31,
2018
Land
$
505,062

 
$
503,274

Buildings and improvements
3,288,033

 
3,241,894

Less: Accumulated depreciation
(927,266
)
 
(897,903
)
Operating properties, net
$
2,865,829

 
$
2,847,265


Properties we had in development or held for future development consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Land
$
227,852

 
$
207,760

Development in progress, excluding land
209,321

 
195,601

Projects in development or held for future development
$
437,173

 
$
403,361


2019 Construction Activities

During the three months ended March 31, 2019, we placed into service 181,000 square feet in three newly-constructed properties (including one partially-operational property). As of March 31, 2019, we had 14 properties under construction (including two partially-operational properties), or which we were contractually committed to construct, that we estimate will total 1.9 million square feet upon completion and one property under redevelopment that we estimate will total 106,000 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 March 31, 2019, these leases, which may encompass all, or a portion of, a property, had remaining lease terms spanning from one month to 15 years and averaging approximately five years. These leases usually include options under which the tenant may renew its lease based on market rates at the time of renewal, which are then typically subject to further negotiation. These leases occasionally provide the tenant with an option to terminate its lease early usually for a defined termination fee. While a significant portion of our portfolio is leased to the United States Government, and the majority of those leases consist of a series of one-year renewal options, or provide for early termination rights, we have concluded that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably assured for virtually all of these leases.


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Most of our lease revenue is from fixed contractual payments defined under the lease that, in most cases, escalate annually over the term of the lease. Our lease revenue also includes variable lease payments predominantly for tenant reimbursements of property operating expenses and lease termination fees. Property operating expense reimbursement structures vary, with some tenants responsible for all of a property’s expenses, while others are responsible for their share of a property’s expense only to the extent such expenses exceed amounts defined in the lease (which are derived from the property’s historical expense levels). Lease termination fees in most cases result from a tenant’s exercise of an existing right under a lease, and are usually equal to a defined percentage of the remaining rents due under the lease and/or the remaining unamortized lease origination costs (including tenant improvements and lease commissions).

The table below sets forth our allocation of lease revenue recognized between fixed contractual payments and variable lease payments (in thousands):
Lease revenue
 
For the Three Months Ended
March 31, 2019
Fixed contractual payments
 
$
105,335

Variable lease payments
 
25,568

 
 
$
130,903


Fixed contractual payments due under our property leases were as follows (in thousands):
Year Ending December 31,
 
March 31, 2019
 
December 31, 2018
2019 (1)
 
$
305,864

 
$
400,617

2020
 
347,477

 
337,646

2021
 
293,546

 
280,369

2022
 
258,502

 
246,329

2023
 
206,833

 
194,888

Thereafter
 
562,614

 
523,932

 
 
$
1,974,836

 
$
1,983,781


(1) As of March 31, 2019, represents the nine months ending December 31, 2019.

Lessee arrangements

We lease from third parties land underlying properties that we are operating or developing. These ground leases have long durations with remaining terms ranging from 30 years (excluding extension options) to 97 years. As of March 31, 2019, our balance sheet included $68.1 million in right-of-use assets associated with ground leases that 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 97-year remaining lease term, and we possess a bargain purchase option that we expect to exercise in 2020;
$10.4 million for land underlying office properties in Washington, DC under two leases with remaining terms of approximately 80 years;
$6.5 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 30 years and an option to renew for an additional 49 years that was included in the lease term used in determining the asset balance;
$6.7 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 64 to 75 years;
$4.3 million for land in a business park in Huntsville, Alabama under nine leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 44 to 50 years and options to renew for an additional 25 years that were not included in the lease term used in determining the asset balance; and
$2.3 million for other land in our Fort Meade/BW Corridor sub-segment under two leases with remaining terms of approximately 49 years all of the rent on which was previously paid.

As of March 31, 2019, our balance sheet also included right-of-use lease assets totaling $1.2 million in connection with vehicles and office equipment that we lease from third parties.

In determining operating right-of-use assets and lease liabilities for our existing operating leases upon our adoption of the new lease guidance discussed further in Note 2, as well as for new operating leases in the current period, we were required to

20



estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. Since the terms under our ground leases are significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimate of this rate required significant judgment, and considered factors such as interest rates available to us on a fully-collateralized basis for shorter-termed debt and U.S. Treasury rates.

Our right-of-use assets consisted of the following (in thousands):
Leases
 
Balance Sheet Location
 
March 31, 2019
Right-of-use assets
 
 
 
 
Operating leases - Property
 
Property - operating right-of-use assets
 
$
27,569

Finance leases
 
 
 
 
Property
 
Property - finance right-of-use assets
 
40,488

Vehicles and office equipment
 
Prepaid expenses and other assets, net
 
1,197

Total finance lease right-of-use assets
 
 
 
41,685

 
 
 
 
 
Total right-of-use assets
 
 
 
$
69,254


Lease liabilities consisted of the following (in thousands):
Leases
 
Balance Sheet Location
 
March 31, 2019
Lease liabilities
 
 
 
 
Operating leases - Property
 
Property - operating lease liabilities
 
$
16,619

Finance leases
 
Other liabilities
 
1,275

 
 
 
 
 
Total lease liabilities
 
 
 
$
17,894


The table below sets forth the weighted average lease terms and discount rates of our leases as of March 31, 2019:
Weighted average remaining lease term
 
 
Operating leases
 
70 years

Finance leases
 
2 years

Weighted average discount rate
 
 
Operating leases
 
7.35
%
Finance leases
 
3.10
%

The table below presents our total lease cost (in thousands):
Lease cost
 
Statement of Operations Location
 
For the Three Months Ended
March 31, 2019
Operating lease cost
 
 
 
 
Property leases
 
Property operating expense
 
$
413

Vehicles and office equipment
 
General, administrative and leasing expense
 
17

Finance lease cost
 
 
 
 
Amortization of vehicles and office equipment right-of-use assets
 
General, administrative and leasing expense
 
113

Interest on lease liabilities
 
Interest expense
 
4

 
 
 
 
$
547


The table below presents the effect of lease payments on our consolidated statement of cash flows (in thousands):
Supplemental cash flow information
 
For the Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows for operating leases
 
$
228

Operating cash flows for financing leases
 
$
4

Financing cash flows for financing leases
 
$
52



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Payments on leases as of March 31, 2019 were due as follows (in thousands):
Year Ending December 31,
 
 Operating leases
 
Finance leases
 
Total
2019 (1)
 
$
830

 
$
179

 
$
1,009

2020
 
1,128

 
862

 
1,990

2021
 
1,111

 
202

 
1,313

2022
 
1,129

 
64

 
1,193

2023
 
1,135

 

 
1,135

Thereafter
 
99,185

 

 
99,185

Total lease payments
 
104,518

 
1,307

 
105,825

Less: Amount representing interest
 
(87,899
)
 
(32
)
 
(87,931
)
Lease liability
 
$
16,619

 
$
1,275

 
$
17,894


(1) Represents the nine months ending December 31, 2019.

Future minimum rental payments on leases as of December 31, 2018 were due as follows (in thousands):
Year Ending December 31,
 
 Operating leases
 
Finance leases
 
Total
2019
 
$
1,101

 
$
219

 
$
1,320

2020
 
1,110

 
844

 
1,954

2021
 
1,094

 
184

 
1,278

2022
 
1,115

 
49

 
1,164

2023
 
1,119

 

 
1,119

Thereafter
 
83,373