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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto

Commission file number 1-14023
ofc-20220930_g1.jpg
CORPORATE OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 23-2947217
(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

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

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. ☒ Yes   ☐ 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). ☒ Yes   ☐ 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.

Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

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.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☒ No

As of October 21, 2022, 112,423,263 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.



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)
September 30,
2022
December 31, 2021
Assets  
Properties, net:  
Operating properties, net$3,169,992 $3,090,510 
Projects in development or held for future development521,419 442,434 
Total properties, net3,691,411 3,532,944 
Property - operating right-of-use assets37,541 38,361 
Assets held for sale, net 192,699 
Cash and cash equivalents12,643 13,262 
Investment in unconsolidated real estate joint ventures38,644 39,889 
Accounts receivable, net39,720 40,752 
Deferred rent receivable 124,146 108,926 
Intangible assets on property acquisitions, net11,788 14,567 
Lease incentives, net49,083 51,486 
Deferred leasing costs (net of accumulated amortization of $34,711 and $31,768, respectively)
68,122 65,850 
Investing receivables (net of allowance for credit losses of $3,728 and $1,599, respectively)
102,550 82,226 
Prepaid expenses and other assets, net93,681 81,490 
Total assets$4,269,329 $4,262,452 
Liabilities and equity  
Liabilities:  
Debt, net$2,269,834 $2,272,304 
Accounts payable and accrued expenses156,815 186,202 
Rents received in advance and security deposits29,056 32,262 
Dividends and distributions payable31,407 31,299 
Deferred revenue associated with operating leases9,382 9,341 
Property - operating lease liabilities29,088 29,342 
Other liabilities17,634 17,729 
Total liabilities2,543,216 2,578,479 
Commitments and contingencies (Note 18)
Redeemable noncontrolling interests25,447 26,898 
Equity:  
Shareholders’ equity:  
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,423,263 at September 30, 2022 and 112,327,533 at December 31, 2021)
1,124 1,123 
Additional paid-in capital2,484,702 2,481,539 
Cumulative distributions in excess of net income(827,072)(856,863)
Accumulated other comprehensive income (loss)2,632 (3,059)
Total shareholders’ equity1,661,386 1,622,740 
Noncontrolling interests in subsidiaries:  
Common units in Corporate Office Properties, L.P. (“COPLP”)25,524 21,363 
Other consolidated entities13,756 12,972 
Noncontrolling interests in subsidiaries39,280 34,335 
Total equity1,700,666 1,657,075 
Total liabilities, redeemable noncontrolling interests and equity$4,269,329 $4,262,452 

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 September 30,For the Nine Months Ended September 30,
 2022202120222021
Revenues  
Lease revenue$146,481 $138,032 $430,147 $411,776 
Other property revenue1,206 841 3,066 2,146 
Construction contract and other service revenues34,813 28,046 130,570 64,592 
Total revenues182,500 166,919 563,783 478,514 
Operating expenses    
Property operating expenses57,663 52,728 168,960 156,918 
Depreciation and amortization associated with real estate operations35,247 33,807 104,323 103,039 
Construction contract and other service expenses33,555 27,089 126,509 61,964 
General, administrative and leasing expenses8,898 9,342 25,797 26,970 
Business development expenses and land carry costs552 1,093 2,036 3,559 
Total operating expenses135,915 124,059 427,625 352,450 
Interest expense(15,123)(15,720)(44,355)(49,181)
Interest and other income 2,290 1,818 6,001 5,911 
Credit loss (expense) recoveries(1,693)326 (1,602)1,040 
Gain on sales of real estate16 (32)12 39,711 
Loss on early extinguishment of debt (1,159)(342)(59,553)
Income from continuing operations before equity in income of unconsolidated entities and income taxes32,075 28,093 95,872 63,992 
Equity in income of unconsolidated entities308 297 1,514 779 
Income tax expense(67)(47)(224)(103)
Income from continuing operations32,316 28,343 97,162 64,668 
Discontinued operations 451 29,573 1,945 
Net income 32,316 28,794 126,735 66,613 
Net income attributable to noncontrolling interests:    
Common units in COPLP(476)(357)(1,828)(831)
Other consolidated entities(919)(1,336)(2,357)(2,949)
Net income attributable to COPT common shareholders$30,921 $27,101 $122,550 $62,833 
Basic earnings per common share: (1)    
Income from continuing operations$0.28 $0.24 $0.83 $0.54 
Discontinued operations  0.26 0.02 
Net income attributable to COPT common shareholders$0.28 $0.24 $1.09 $0.56 
Diluted earnings per common share: (1)
Income from continuing operations$0.27 $0.24 $0.83 $0.54 
Discontinued operations  0.25 0.02 
Net income attributable to COPT common shareholders$0.27 $0.24 $1.08 $0.56 
(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 September 30,For the Nine Months Ended September 30,
 2022202120222021
Net income$32,316 $28,794 $126,735 $66,613 
Other comprehensive income:    
Unrealized income (loss) on interest rate derivatives1,101 (118)4,646 426 
Reclassification adjustments on interest rate derivatives recognized in interest expense
(77)1,226 1,680 3,604 
Total other comprehensive income 1,024 1,108 6,326 4,030 
Comprehensive income33,340 29,902 133,061 70,643 
Comprehensive income attributable to noncontrolling interests(1,593)(1,733)(4,820)(4,000)
Comprehensive income attributable to COPT$31,747 $28,169 $128,241 $66,643 
 
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
For the Three Months Ended September 30, 2021
Balance at June 30, 2021 (112,336,070 common shares outstanding)
$1,123 $2,478,416 $(835,894)$(6,415)$34,082 $1,671,312 
Redemption of common units— — — — (56)(56)
Share-based compensation (10,659 shares redeemed, net of issuances)
 1,064 — — 1,098 2,162 
Redemption of vested equity awards— (64)— — — (64)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 1,051 — — (1,051) 
Comprehensive income— — 27,101 1,068 600 28,769 
Dividends— — (30,883)— — (30,883)
Distributions to owners of common units in COPLP— — — — (398)(398)
Distributions to noncontrolling interests in other consolidated entities— — — — (8)(8)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (55)— — — (55)
Balance at September 30, 2021 (112,325,411 common shares outstanding)
$1,123 $2,480,412 $(839,676)$(5,347)$34,267 $1,670,779 
For the Three Months Ended September 30, 2022
Balance at June 30, 2022 (112,424,671 common shares outstanding)
$1,124 $2,481,139 $(827,076)$1,806 $38,958 $1,695,951 
Redemption of common units— — — — (86)(86)
Share-based compensation (1,408 shares redeemed, net of issuances)
 1,045 — — 1,389 2,434 
Redemption of vested equity awards— (48)— — — (48)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 1,301 — — (1,301) 
Comprehensive income— — 30,921 826 799 32,546 
Dividends— — (30,917)— — (30,917)
Distributions to owners of common units in COPLP— — — — (471)(471)
Distributions to noncontrolling interests in other consolidated entities— — — — (8)(8)
Adjustment to arrive at fair value of redeemable noncontrolling interests— 1,265 — — — 1,265 
Balance at September 30, 2022 (112,423,263 common shares outstanding)
$1,124 $2,484,702 $(827,072)$2,632 $39,280 $1,700,666 

See accompanying notes to consolidated financial statements.



6


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity (continued)
(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
For the Nine Months Ended September 30, 2021
Balance at December 31, 2020 (112,181,759 common shares outstanding)
$1,122 $2,478,906 $(809,836)$(9,157)$32,677 $1,693,712 
Conversion of common units to common shares (8,054 shares)
— 121 — — (121) 
Redemption of common units— — — — (297)(297)
Share-based compensation (135,598 shares issued, net of redemptions)
1 3,239 — — 3,082 6,322 
Redemption of vested equity awards— (2,422)— — — (2,422)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 1,245 — — (1,245) 
Comprehensive income— — 62,833 3,810 1,714 68,357 
Dividends— — (92,673)— — (92,673)
Distributions to owners of common units in COPLP— — — — (1,196)(1,196)
Distributions to noncontrolling interests in other consolidated entities— — — — (23)(23)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (677)— — — (677)
Other— — — — (324)(324)
Balance at September 30, 2021 (112,325,411 common shares outstanding)
$1,123 $2,480,412 $(839,676)$(5,347)$34,267 $1,670,779 
For the Nine Months Ended September 30, 2022
Balance at December 31, 2021 (112,327,533 common shares outstanding)
$1,123 $2,481,539 $(856,863)$(3,059)$34,335 $1,657,075 
Redemption of common units— — — — (462)(462)
Share-based compensation (95,730 shares issued, net of redemptions)
1 3,066 — — 4,045 7,112 
Redemption of vested equity awards— (1,168)— — — (1,168)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— (77)— — 77  
Comprehensive income— — 122,550 5,691 2,720 130,961 
Dividends— — (92,759)— — (92,759)
Distributions to owners of common units in COPLP— — — — (1,412)(1,412)
Distributions to noncontrolling interests in other consolidated entities— — — — (23)(23)
Adjustment to arrive at fair value of redeemable noncontrolling interests— 1,342 — — — 1,342 
Balance at September 30, 2022 (112,423,263 common shares outstanding)
$1,124 $2,484,702 $(827,072)$2,632 $39,280 $1,700,666 

See accompanying notes to consolidated financial statements.
7


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
For the Nine Months Ended September 30,
 20222021
Cash flows from operating activities  
Revenues from real estate operations received$431,447 $427,448 
Construction contract and other service revenues received130,710 68,780 
Property operating expenses paid(179,306)(168,009)
Construction contract and other service expenses paid(128,428)(50,275)
General, administrative, leasing, business development and land carry costs paid(24,630)(22,367)
Interest expense paid(37,561)(46,621)
Lease incentives paid(8,360)(8,694)
Other3,262 (359)
Net cash provided by operating activities187,134 199,903 
Cash flows from investing activities  
Development and redevelopment of properties(223,298)(176,554)
Tenant improvements on operating properties(22,550)(15,149)
Other capital improvements on operating properties(28,705)(19,256)
Proceeds from sale of properties220,810 114,050 
Investing receivables funded(19,000)(1,196)
Leasing costs paid(10,544)(14,929)
Other852 1,042 
Net cash used in investing activities(82,435)(111,992)
Cash flows from financing activities  
Proceeds from debt
Revolving Credit Facility451,000 456,000 
Unsecured senior notes 987,210 
Other debt proceeds 4,630 
Repayments of debt
Revolving Credit Facility(254,000)(589,000)
Unsecured senior notes (600,000)
Scheduled principal amortization(2,469)(2,911)
Other debt repayments(200,000)(188,960)
Deferred financing costs paid (2,662)
Payments in connection with early extinguishment of debt(6)(55,720)
Common share dividends paid(92,731)(92,632)
Other(7,411)(7,754)
Net cash used in financing activities(105,617)(91,799)
Net decrease in cash and cash equivalents and restricted cash(918)(3,888)
Cash and cash equivalents and restricted cash  
Beginning of period17,316 22,033 
End of period$16,398 $18,145 

See accompanying notes to consolidated financial statements.
 

8


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
For the Nine Months Ended September 30,
 20222021
Reconciliation of net income to net cash provided by operating activities:  
Net income $126,735 $66,613 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and other amortization106,084 113,676 
Amortization of deferred financing costs and net debt discounts3,503 3,969 
Increase in deferred rent receivable(13,660)(13,515)
Gain on sales of real estate(28,576)(39,711)
Share-based compensation6,542 5,960 
Loss on early extinguishment of debt342 59,553 
Other(2,580)(3,708)
Changes in operating assets and liabilities: 
Decrease in accounts receivable2,098 6,269 
Increase in lease incentives and prepaid expenses and other assets, net(7,646)(13,120)
(Decrease) increase in accounts payable, accrued expenses and other liabilities(2,502)15,250 
Decrease in rents received in advance and security deposits(3,206)(1,333)
Net cash provided by operating activities$187,134 $199,903 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period$13,262 $18,369 
Restricted cash at beginning of period4,054 3,664 
Cash and cash equivalents and restricted cash at beginning of period$17,316 $22,033 
Cash and cash equivalents at end of period$12,643 $14,570 
Restricted cash at end of period3,755 3,575 
Cash and cash equivalents and restricted cash at end of period$16,398 $18,145 
Supplemental schedule of non-cash investing and financing activities:  
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs$(21,401)$17,590 
Recognition of operating right-of-use assets and related lease liabilities$683 $328 
Investment in unconsolidated real estate joint venture retained in property disposition$ $11,842 
Increase in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests$5,901 $4,030 
Dividends/distributions payable$31,407 $31,306 
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares$ $121 
Adjustments to noncontrolling interests resulting from changes in COPLP ownership$77 $(1,245)
(Decrease) increase in redeemable noncontrolling interests and (increase) decrease in equity to carry redeemable noncontrolling interests at fair value$(1,342)$677 
 
See accompanying notes to consolidated financial statements.

9


Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”). 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 September 30, 2022, our properties included the following:

188 properties totaling 22.1 million square feet comprised of 17.1 million square feet in 161 office properties and 5.0 million square feet in 27 single-tenant data center shells. We owned 19 of these data center shells through unconsolidated real estate joint ventures;
12 properties under development (nine office properties and three data center shells), including one partially-operational property, and an expansion of one fully-operational property that we estimate will total approximately 1.9 million square feet upon completion; and
approximately 710 acres of land controlled for future development that we believe could be developed into approximately 8.4 million square feet and 43 acres of other land.
 
We conduct almost all of our operations and own almost all of our assets through our operating partnership, Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT is the sole general partner. 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 September 30, 2022, COPT owned 98.0% of the outstanding COPLP common units (“common units”) and there were no preferred units outstanding. 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.

COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
  
2.    Summary of Significant Accounting Policies
 
Basis of Presentation
 
These 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.  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, 2021 included in our 2021 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 2021 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

10


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, including amounts reclassified in conjunction with the transfer of a wholesale data center to discontinued operations in the fourth quarter of 2021. We provide disclosure regarding our discontinued operations in Note 4.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board 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 elected over time as reference rate reform activities occur. In 2020, we elected to apply an expedient to treat any changes in loans resulting from reference rate reform as debt modifications (as opposed to extinguishments) and 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 the hedge accounting 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.

3.     Fair Value Measurements

Recurring Fair Value Measurements

We have 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. Effective December 31, 2019, no new investments of deferred compensation were eligible for the plan.  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 our 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 $1.8 million as of September 30, 2022, is included in the line entitled “prepaid expenses and other assets, net” on our 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 our 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, inclu