COPT Reports First Quarter 2019 Results

Corporate Office Properties Trust ("COPT” or the "Company”) (NYSE: OFC) announced financial and operating results for the first quarter ended March 31, 2019.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, "Our first quarter results combined with our leasing successes in April represent a strong start to the year, and demonstrate the strength of demand recovery throughout our Defense/IT locations. We have achieved our full-year goal of leasing 900,000 square feet in development projects and, based on the pipeline of opportunities before us, are increasing our target to 1.4 million square feet.” He continued, "Including development starts for the four-building campus we announced today and a new building for U.S. Government use, our construction pipeline now includes 1.9 million square feet of projects that, on average are 81% leased. To fund this elevated level of development, we are increasing our disposition objective. Our patience with the DoD’s lease procurement process and our willingness to engage in long-term solutions for customers at our Defense/IT locations are starting to pay off with increased levels of development opportunities.”

Financial Highlights

1^st Quarter Financial Results:

• Diluted earnings per share ("EPS”) was $0.19 for the quarter ended March 31, 2019 as compared to $0.17 for the first quarter of 2018.
• Diluted funds from operations per share ("FFOPS”), as calculated in accordance with Nareit’s definition, was $0.50 for the first quarter of 2019 as compared to $0.49 for first quarter 2018 results.
• FFOPS, as adjusted for comparability, was $0.50 for the quarter ended March 31, 2019, equal to first quarter of 2018. Adjustments for comparability encompass items such as losses on early extinguishment of debt, demolition costs of redevelopment, and executive transition costs.

Operating Performance Highlights

Operating Portfolio Summary:

• At March 31, 2019, the Company’s core portfolio of 163 operating office properties was 92.8% occupied and 93.7% leased.
• During the quarter, the Company placed three developments aggregating 181,000 square feet into service; all three developments were 100% leased.

Same-Property Performance:

• At March 31, 2019, COPT’s same-property portfolio of 156 buildings was 92.7% occupied and 93.5% leased.
• For the quarter ended March 31, 2019, the Company’s same-property cash NOI from Defense/IT locations increased 4.9%, over the prior year’s comparable period. For the same time periods, the Company’s total same-property cash NOI increased 4.7%, over the prior year’s comparable period.

Leasing:

• Total Square Feet Leased?For the quarter ended March 31, 2019, the Company leased 956,000 total square feet, including 291,000 square feet of renewing leases, 126,000 square feet of new leases on vacant space, and 539,000 square feet in development projects. During the month of April, the Company completed an additional 110,000 square feet of vacancy leasing and over 350,000 square feet of development leasing.
• Renewal Rates?During the first quarter ended March 31, 2019, the Company renewed 71.3% of total expiring leases, which was in-line with its full year guidance for retaining 70%-75% of expiring leases.
• Rent Spreads & Average Escalations on Renewing Leases?For the quarter ended March 31, 2019, rents on renewed space decreased 4.8% on a GAAP basis and 6.8% on a cash basis; average annual escalations on renewing leases in the first quarter were 2.5%. The first quarter decline in renewing rents was incorporated into the Company’s initial guidance, and management reiterates its full-year guidance for cash rents on renewing leases to roll flat to down 2%.
• Lease Terms?In the first quarter, lease terms averaged 3.9 years on renewing leases, 5.6 years on new leasing of vacant space, and 13.2 years on development leasing.

Investment Activity Highlights

Development & Redevelopment Projects:

• Construction Pipeline. At April 30, 2019, the Company’s construction pipeline consisted of 14 properties totaling 1.9 million square feet that were 81% leased. These projects have a total estimated cost of $496.1 million, of which $195.5 million has been incurred.
• Redevelopment. At the end of the quarter, one project was under redevelopment totaling 106,000 square feet that was 10% leased. The Company has invested $13.7 million of the $25.1 million anticipated total cost.

Balance Sheet and Capital Transaction Highlights

• During the quarter ended March 31, 2019, the Company issued the remaining 1.6 million common shares under its forward equity sale agreements for net proceeds of $46.5 million.
• As of March 31, 2019, the Company’s net debt plus preferred equity to adjusted book ratio was 39.0% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.2x. For the same period, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.6x.
• As of March 31, 2019, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.1%; additionally, 90.5% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 4.2 years.

2019 Guidance

Due to the greater volume of development opportunities and related funding needs, management is lowering its previously issued guidance ranges of $0.62?$0.66 and $2.02?$2.06, respectively, for full year EPS and FFOPS, as adjusted for comparability, to revised ranges of $0.61?$0.65 and $2.01?$2.05. Management also is establishing EPS and FFOPS, as adjusted for comparability, guidance for the second quarter ending June 30, 2019 at ranges of $0.15?$0.16 and $0.50?$0.51, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Associated Supplemental Presentation

Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its first quarter 2019 conference call, the details of which are provided below. The accompanying slide presentation can be viewed on and downloaded from the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Conference Call Information

Management will discuss first quarter 2019 results on its conference call tomorrow at 12:00 p.m. Eastern Time, details of which are listed below:

The conference call will also be available via live webcast in the ‘Latest Updates’ section of COPT’s Investors website: https://investors.copt.com/

Replay Information

A replay of the conference call will be available immediately via webcast on the Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Wednesday, May 1 through 3:00 p.m. Eastern Time on Wednesday, May 15. To access the replay within the United States, please call 855-859-2056; to access it from outside the United States, please call 404-537-3406. In either case, use passcode 3888259.

Definitions

For definitions of certain terms used in this press release, please refer to the information furnished in the Company’s Supplemental Information Package furnished on a Form 8-K which can be found on its website (www.copt.com). Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in the attached tables.

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 March 31, 2019, the Company derived 89% of its core portfolio annualized revenue from Defense/IT Locations and 11% 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 163 office and data center shell properties encompassed 18.2 million square feet and was 93.7% leased; the Company also owned one wholesale data center with a critical load of 19.25 megawatts.

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 reduced or delayed 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. For further information, please refer to the Company’s filings with the Securities and Exchange Commission, particularly the section entitled "Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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