COPT Establishes 1Q and Full Year 2019 Guidance

COLUMBIA, Md.–(BUSINESS WIRE)–Corporate Office Properties Trust (“COPT” or the “Company”) (NYSE: OFC)
is establishing the following guidance for the year ending December 31,
2019:

  • Diluted earnings per share (“EPS”) in the range of $0.62−$0.66
  • Diluted FFO per share (“FFOPS”), as defined by NAREIT and as adjusted
    for comparability, in the range of $2.02−$2.06

For the quarter ending March 31, 2019, the Company is establishing the
following guidance:

  • EPS in the range of $0.14−$0.15
  • FFOPS, as defined by NAREIT and as adjusted for comparability, in the
    range of $0.49−$0.50

Management Comments

“2019 will be the year our financial results begin to benefit from our
leasing and development successes,” stated Stephen E. Budorick, COPT’s
President & Chief Executive Officer. “Over the coming quarters, we
expect our fourth quarter annualized FFO per share to reflect growth of
3−4% over 2018 results, which will position us to enter 2020 with solid
momentum.”

2019 Guidance Reconciliation Tables

Reconciliations of projected EPS to projected FFOPS, in accordance with
NAREIT and as adjusted for comparability, are as follows:

   
Quarter Ending Year Ending
March 31, 2019 December 31, 2019
Low   High Low   High
 
EPS $ 0.14 $ 0.15 $ 0.62 $ 0.66
Real estate depreciation and amortization 0.35 0.35 1.40 1.40
       
FFOPS, NAREIT definition and as adjusted for comparability $ 0.49 $ 0.50 $ 2.02 $ 2.06
 

Assumptions Underpinning Full Year 2019 Guidance

Tables 1 & 2 below detail assumptions that underpin the Company’s full
year and first quarter 2019 EPS and FFOPS guidance, respectively:

     
Table 1: Supporting Assumptions for 2019 Guidance (a)
 
Real Estate NOI     Investment Activity    
▪ 2019 Same-Property Pool ▪ Development Investment (c) $250 ‒ $300
▫ % change in cash NOI 1.5% ‒ 3.0% ▪ Acquisitions N/A
▫ Year-end occupancy 92% ‒ 94% ▪ Dispositions $125 ‒ $150
▪ Cash NOI from developments (b) $16 – $17
▪ COPT DC-6 cash NOI $15 – $16 Total G&A expenses (d)   $35 − $37
 
AFFO Adjustments & Information     Leasing    
▪ Recurring capital expenditures & TIs ($54) − ($56) ▪ Development Leasing Goal (SF) 900,000
▪ GAAP straight line rent adjustments ($10) – ($11) ▪ Tenant Retention Rate 70% ‒ 75%
▪ Dividend / Diluted AFFO payout ratio 70% ‒ 75% ▪ Cash rental rate ∆ on renewals (2%) − 0%
             
 
 
Table 2: Assumptions for 1Q 2019 Guidance (a)
 
Portfolio Metrics
▪ 2019 Same-Property Pool:
▫ Quarter-end occupancy 92% ‒ 93%
▪ Cash NOI from developments (b) $2.5 − $2.75
 
Investment Activity
▪ Development Investment (c) $100 ‒ $125
▪ Acquisitions or Dispositions   N/A
 

Footnotes for Tables 1&2:

a.

 

Dollars are in millions

b.

This amount represents cash NOI from developments placed into
service during 2018 and, accordingly, are not yet in the Company’s
same-property portfolio.

c.

Development spend excludes the value of owned land as of 1/1/2019
transferred to construction.

d.

Includes G&A, leasing expenses, business development expenses, and
land carry cost.

 

Company Information

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

Non-GAAP Measures

The Company believes that the measures defined below that are not
determined in accordance with generally accepted accounting principles
(“GAAP”) are helpful to investors in measuring its performance and
comparing it to that of other real estate investment trusts (“REITs”).
Since these measures exclude certain items includable in their
respective most comparable GAAP measures, reliance on the measures has
limitations; the Company’s management compensates for these limitations
by using the measures simply as supplemental measures that are weighed
in balance with other GAAP and non-GAAP measures. These measures should
not be used as an alternative to the respective most comparable GAAP
measures when evaluating the Company’s financial performance or to cash
flow from operating, investing and financing activities when evaluating
its liquidity or ability to make cash distributions or pay debt service.

Basic FFO available to common share and
common unit holders (“Basic FFO”)
This measure
is FFO adjusted to subtract (1) preferred share dividends, (2) income
attributable to noncontrolling interests through ownership of preferred
units in Corporate Office Properties, L.P. (the “Operating Partnership”)
or interests in other consolidated entities not owned by the Company,
(3) depreciation and amortization allocable to noncontrolling interests
in other consolidated entities, (4) Basic FFO allocable to restricted
shares and (5) issuance costs associated with redeemed preferred shares.
With these adjustments, Basic FFO represents FFO available to common
shareholders and holders of common units in the Operating Partnership
(“common units”). Common units are substantially similar to the
Company’s common shares of beneficial interest (“common shares”) and are
exchangeable into common shares, subject to certain conditions. The
Company believes that Basic FFO is useful to investors due to the close
correlation of common units to common shares, and believes that net
income is the most directly comparable GAAP measure to Basic FFO.

Cash net operating income (“Cash NOI”)‒Defined
as NOI from real estate operations adjusted to eliminate the effects of:
straight-line rental adjustments, amortization of tenant incentives,
amortization of acquisition intangibles included in FFO and NOI
(including above- and below-market leases and above- or below-market
cost arrangements), lease termination fees from tenants to terminate
their lease obligations prior to the end of the agreed upon lease terms
and rental revenue recognized under GAAP resulting from landlord assets
funded by tenants. Cash NOI also includes adjustments to NOI from real
estate operations for the effects of the items noted above pertaining to
an unconsolidated real estate JV that were allocable to the Company’s
ownership interest in the JV. Under GAAP, rental revenue is recognized
evenly over the term of tenant leases (through straight-line rental
adjustments and amortization of tenant incentives), which, given the
long-term nature of its leases, does not align with the economics of
when tenant payments are due to the Company under the arrangements. Also
under GAAP, when a property is acquired, the Company allocates the
acquisition to certain intangible components, which are then amortized
into NOI over their estimated lives, even though the resulting revenue
adjustments are not reflective of the Company’s lease economics. In
addition, revenue from lease termination fees and tenant-funded landlord
improvements, absent an adjustment from the Company, would result in
large one-time lump sum amounts in Cash NOI that the Company does not
believe are reflective of a property’s long-term value. The Company
believes that Cash NOI is a useful supplemental measure of operating
performance for a REIT’s operating real estate because it makes
adjustments to NOI for the above stated items to be more reflective of
the economics of when tenant payments are due under the Company’s leases
and the value of properties. As is the case with NOI, the measure is
useful, in its opinion, in evaluating and comparing the performance of
geographic segments, same-office property groupings and individual
properties. The Company believes that operating income, as reported on
its consolidated statements of operations, is the most directly
comparable GAAP measure to Cash NOI.

Diluted adjusted funds from operations
available to common share and common unit holders (“Diluted AFFO”)
Defined
as Diluted FFO, as adjusted for comparability, adjusted for the
following: (1) the elimination of the effect of (a) noncash rental
revenues and property operating expenses (comprised of straight-line
rental adjustments, which includes the amortization of recurring tenant
incentives, and amortization of acquisition intangibles included in FFO
and NOI, both of which are described under “Cash NOI” above), (b)
share-based compensation, net of amounts capitalized, (c) amortization
of deferred financing costs, (d) amortization of debt discounts and
premiums and (e) amortization of settlements of debt hedges; and (2)
replacement capital expenditures (defined below). Diluted AFFO also
includes adjustments to Diluted FFO, as adjusted for comparability for
the effects of the items noted above pertaining to an unconsolidated
real estate JV that were allocable to the Company’s ownership interest
in the JV. The Company believes that Diluted AFFO is a useful
supplemental measure of operating performance for a REIT because it
incorporates adjustments for: certain revenue and expenses that are not
associated with cash to or from the Company during the period; and
certain capital expenditures for operating properties incurred during
the period that do require cash outlays. The Company believes that net
income is the most directly comparable GAAP measure to Diluted AFFO.

Diluted FFO available to common share and
common unit holders (“Diluted FFO”)
Diluted FFO
is Basic FFO adjusted to add back any changes in Basic FFO that would
result from the assumed conversion of securities that are convertible or
exchangeable into common shares. The computation of Diluted FFO assumes
the conversion of common units in the Operating Partnership but does not
assume the conversion of other securities that are convertible into
common shares if the conversion of those securities would increase
Diluted FFO per share in a given period. The Company believes that
Diluted FFO is useful to investors because it is the numerator used to
compute Diluted FFO per share, discussed below. The Company believes
that net income is the most directly comparable GAAP measure to Diluted
FFO.

Diluted FFO available to common share and
common unit holders, as adjusted for comparability (“Diluted FFO, as
adjusted for comparability”)
Defined as Diluted
FFO or FFO adjusted to exclude: operating property acquisition costs;
gains on sales of, and impairment losses on, properties other than
previously depreciated operating properties; gain or loss on early
extinguishment of debt; FFO associated with properties that secured
non-recourse debt on which it defaulted and, subsequently, extinguished
via conveyance of such properties (including property NOI, interest
expense and gains on debt extinguishment); loss on interest rate
derivatives; demolition costs on redevelopment properties and
nonrecurring improvements; executive transition costs (including
separation related compensation and replacement recruitment costs for
Vice President level positions and above); and accounting charges for
original issuance costs associated with redeemed preferred shares.
Diluted FFO, as adjusted for comparability also includes adjustments to
Diluted FFO for the effects of the items noted above pertaining to an
unconsolidated real estate JV that were allocable to the Company’s
ownership interest in the JV. The Company believes this to be a useful
supplemental measure alongside Diluted FFO as it excludes gains and
losses from certain investing and financing activities and certain other
items that the Company believes are not closely correlated to (or
associated with) operating performance. The adjustment for FFO
associated with properties securing non-recourse debt on which the
Company defaulted pertains to the periods subsequent to default on the
loan’s payment terms, which was the result of the Company’s decision to
not support payments on the loan since the estimated fair value of the
properties was less than the loan balance. While the Company continued
as the legal owner of the properties during this period, all cash flows
produced by them went directly to the lender and the Company did not
fund any debt service shortfalls, which included incremental additional
interest under the default rate. The Company believes that net income is
the most directly comparable GAAP measure to this non-GAAP measure.

Diluted FFO per shareDiluted
FFO per share is (1) Diluted FFO divided by (2) the sum of the (a)
weighted average common shares outstanding during a period, (b) weighted
average common units outstanding during a period and (c) weighted
average number of potential additional common shares that would have
been outstanding during a period if other securities that are
convertible or exchangeable into common shares were converted or
exchanged. The computation of Diluted FFO per share assumes the
conversion of common units in the Operating Partnership but does not
assume the conversion of other securities that are convertible into
common shares if the conversion of those securities would increase
Diluted FFO per share in a given period. The Company believes that
Diluted FFO per share is useful to investors because it provides
investors with a further context for evaluating FFO results in the same
manner that investors use earnings per share (“EPS”) in evaluating net
income available to common shareholders. The Company believes that
diluted EPS is the most directly comparable GAAP measure to Diluted FFO
per share.

Diluted FFO per share, as adjusted for
comparability
‒Defined as (1) Diluted FFO available to
common share and common unit holders, as adjusted for comparability
divided by (2) the sum of the (a) weighted average common shares
outstanding during a period, (b) weighted average common units
outstanding during a period and (c) weighted average number of potential
additional common shares that would have been outstanding during a
period if other securities that are convertible or exchangeable into
common shares were converted or exchanged. The computation of this
measure assumes the conversion of common units in the Operating
Partnership but does not assume the conversion of other securities that
are convertible into common shares if the conversion of those securities
would increase the per share measure in a given period. The Company
believes this to be a useful supplemental measure alongside Diluted FFO
per share as it excludes gains and losses from investing and financing
activities and certain other items that it believes are not closely
correlated to (or associated with) operating performance. The Company
believes that diluted EPS is the most directly comparable GAAP measure.

Funds from operations (“FFO” or “FFO per
NAREIT”)
Defined as net income computed using
GAAP, excluding gains on sales of, and impairment losses on, previously
depreciated operating properties and real estate-related depreciation
and amortization. When multiple properties consisting of both operating
and non-operating properties exist on a single tax parcel, the Company
classifies all of the gains on sales of, and impairment losses on, the
tax parcel as all being for previously depreciated operating properties
when most of the value of the parcel is associated with operating
properties on the parcel. FFO also includes adjustments to net income
for the effects of the items noted above pertaining to an unconsolidated
real estate JV that were allocable to the Company’s ownership interest
in the JV. The Company believes that it uses the National Association of
Real Estate Investment Trust’s (“NAREIT”) definition of FFO, although
others may interpret the definition differently and, accordingly, its
presentation of FFO may differ from those of other REITs. The Company
believes that FFO is useful to management and investors as a
supplemental measure of operating performance because, by excluding
gains related to sales of, and impairment losses on, previously
depreciated operating properties and excluding real estate-related
depreciation and amortization, FFO can help one compare operating
performance between periods. The Company believes that net income is the
most directly comparable GAAP measure to FFO.

Net operating income from real estate
operations (“NOI”)
NOI, which is a segment
performance measure, includes: consolidated real estate revenues;
consolidated property operating expenses; and the net of revenues and
property operating expenses of real estate operations owned through an
unconsolidated real estate JV that is allocable to COPT’s ownership
interest in the JV. The Company believes that NOI is an important
supplemental measure of operating performance for a REIT’s operating
real estate because it provides a measure of the core real estate
operations that is unaffected by depreciation, amortization, financing
and general, administrative and leasing expenses; the Company believes
this measure is particularly useful in evaluating the performance of
geographic segments, same-office property groupings and individual
properties. The Company believes that operating income, as reported on
its consolidated statements of operations, is the most directly
comparable GAAP measure to NOI.

Payout ratios based on Diluted AFFOThese
payout ratios are defined as (1) the sum of (a) dividends on
unrestricted common shares and (b) distributions to holders of interests
in the Operating Partnership and dividends on convertible preferred
shares when such distributions and dividends are included in Diluted FFO
divided by (2) the respective non-GAAP measures on which the payout
ratios are based.

Replacement capital expendituresReplacement
capital expenditures are defined as tenant improvements and incentives,
building improvements and leasing costs incurred during the period for
operating properties that are not (1) items contemplated prior to
the acquisition of a property, (2) improvements associated with the
expansion of a building or its improvements, (3) renovations to a
building which change the underlying classification of the building (for
example, from industrial to office or Class C office to Class B office),
(4) capital improvements that represent the addition of something
new to the property rather than the replacement of something (for
example, the addition of a new heating and air conditioning unit
that is not replacing one that was previously there) or 5) replacements
of significant components of a building after the building has reached
the end of its original useful life. Replacement capital expenditures
excludes expenditures of operating properties included in disposition
plans during the period that were already sold or are held for future
disposition. For cash tenant incentives not due to the tenant for a
period exceeding three months past the date on which such
incentives were incurred, the Company recognizes such incentives as
replacement capital expenditures in the periods such incentives are due
to the tenant. Replacement capital expenditures, which is
included in the computation of Diluted AFFO, is intended to represent
non-transformative capital expenditures of existing properties
held for long-term investment. The Company believes that the excluded
expenditures are more closely associated with its investing activities
than the performance of its operating portfolio.

Same-PropertiesOperating
office and data center shell properties continually owned and 100%
operational since at least 1/1/18, excluding properties held for sale.

Same-Property NOI and Same-Property Cash NOIDefined
as NOI, or Cash NOI, from real estate operations of Same-Properties. The
Company believes that these are important supplemental measures of
operating performance of Same-Properties for the same reasons discussed
above for NOI from real estate operations and Cash NOI.

Forward-Looking Information

This press release may contain “forward-looking” statements, as
defined in Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, that are based on the Company’s
current expectations, estimates and projections about future events and
financial trends affecting the Company. Forward-looking statements can
be identified by the use of words such as “may,” “will,” “should,”
“could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other
comparable terminology.
Forward-looking statements are inherently
subject to risks and uncertainties, many of which the Company cannot
predict with accuracy and some of which the Company might not even
anticipate.
Although the Company believes that the expectations,
estimates and projections reflected in such forward-looking statements
are based on reasonable assumptions at the time made, the Company can
give no assurance that these expectations, estimates and projections
will be achieved.
Future events and actual results may differ
materially from those discussed in the forward-looking statements.

Important factors that may affect these expectations, estimates, and
projections include, but are not limited to:

  • general economic and business conditions, which will, among other
    things, affect office property and data center demand and rents,
    tenant creditworthiness, interest rates, financing availability and
    property values;
  • adverse changes in the real estate markets including, among other
    things, increased competition with other companies;
  • governmental actions and initiatives, including risks associated
    with the impact of a prolonged government shutdown or budgetary
    reductions or impasses, such as a reduction in rental revenues,
    non-renewal of leases, and/or a curtailment of demand for additional
    space by the Company’s strategic customers;
  • the Company’s ability to borrow on favorable terms;
  • risks of real estate acquisition and development activities,
    including, among other things, risks that development projects may not
    be completed on schedule, that tenants may not take occupancy or pay
    rent or that development or operating costs may be greater than
    anticipated;
  • risks of investing through joint venture structures, including
    risks that the Company’s joint venture partners may not fulfill their
    financial obligations as investors or may take actions that are
    inconsistent with the Company’s objectives;
  • changes in the Company’s plans for properties or views of market
    economic conditions or failure to obtain development rights, either of
    which could result in recognition of significant impairment losses;
  • the Company’s ability to satisfy and operate effectively under
    Federal income tax rules relating to real estate investment trusts and
    partnerships;
  • possible adverse changes in tax laws;
  • the dilutive effects of issuing additional common shares;
  • the Company’s ability to achieve projected results;
  • security breaches relating to cyber attacks, cyber intrusions or
    other factors; and
  • environmental requirements.

The Company undertakes no obligation to update or supplement any
forward-looking statements.

Contacts

IR Contacts:
Stephanie Krewson-Kelly
443-285-5453
stephanie.kelly@copt.com

Michelle Layne
443-285-5452
michelle.layne@copt.com

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