COPT Reports Third Quarter 2019 Results

Corporate Office Properties Trust ("COPT” or the "Company”) (NYSE:OFC) announced financial and operating results for the third quarter ended September 30, 2019.

Management Comments

Stephen E. Budorick, COPT’s President & Chief Executive Officer, commented, "Third quarter FFO per share met the high-end of our guidance, and the strengthening demand taking place throughout our Defense/IT locations continued to support record-levels of leasing, both for new developments and within our operating portfolio. Our 2.1 million square feet of development leasing through the third quarter is 68% greater than our prior full-year record set in 2012, and our 622,000 square feet of vacancy leasing this year is on-pace to set a new annual record.” He continued, "We expect to finish the year with strength, and for leasing momentum to carry into 2020.”

Financial Highlights

3^rd Quarter Financial Results:

• Diluted earnings per share ("EPS”) was $0.19 for the quarter ended September 30, 2019 as compared to $0.18 for the third quarter of 2018.
• Diluted funds from operations per share ("FFOPS”), as calculated in accordance with Nareit’s definition and as adjusted for comparability, was $0.51 for the third quarter of 2019 as compared to $0.50 for third quarter 2018 results.

Operating Performance Highlights

Operating Portfolio Summary:

• At September 30, 2019, the Company’s core portfolio of 167 operating office and data center shell properties was 92.8% occupied and 94.5% leased.
• During the quarter, the Company placed portions of two developments aggregating 17,000 square feet into service that were 100% leased. During the nine months ended September 30, 2019, the Company placed 804,000 square feet into service in properties that were 100% leased.

Same-Property Performance:

• At September 30, 2019, COPT’s same-property portfolio of 150 buildings was 91.9% occupied and 93.8% leased.
• For the quarter and nine months ended September 30, 2019, the Company’s same-property cash NOI increased 0.5% and 3.2%, respectively, over the prior year’s comparable periods.

Leasing:

• Total Square Feet Leased?For the quarter ended September 30, 2019, the Company leased 1.7 million total square feet, including 592,000 square feet of renewals, 251,000 square feet of new leases on vacant space, and 875,000 square feet in development projects.
  
  During the nine months ended September 30, 2019, the Company leased 4.2 million total square feet, including 1.5 million square feet of renewals, 622,000 square feet of new leases on vacant space, and 2.1 million square feet in development projects.

• Renewal Rates?During the quarter and nine months ended September 30, 2019, the Company respectively renewed 71.9% and 75.4% of total expiring leases.
• Cash Rent Spreads & Average Escalations on Renewing Leases?For the quarter and nine months ended September 30, 2019, cash rents on renewed space decreased 6.3% and 5.3%, respectively. For the same time periods, average annual escalations on renewing leases were 2.2% and 2.4%, respectively.
• Lease Terms?In the third quarter, lease terms averaged 3.8 years on renewing leases, 5.8 years on new leasing of vacant space, and 13.6 years on development leasing. For the nine months, lease terms averaged 3.4 years on renewing leases, 6.0 years on new leasing of vacant space, and 12.7 years on development leasing.

Investment Activity Highlights

Development & Redevelopment Projects:

• Construction Pipeline?At October 9, 2019, the Company’s construction pipeline consisted of 14 properties totaling 2.5 million square feet that were 82% leased. These projects have a total estimated cost of $715.4 million, of which $304.5 million has been incurred.
• Redevelopment?At September 30, 2019, one project was under redevelopment totaling 106,000 square feet that was 80% leased. The Company has invested $22.4 million of the $25.9 million anticipated total cost.

Balance Sheet and Capital Transaction Highlights

• As of September 30, 2019, the Company’s net debt plus preferred equity to adjusted book ratio was 37.5% and its net debt plus preferred equity to in-place adjusted EBITDA ratio was 6.1x. For the same period, the Company’s adjusted EBITDA fixed charge coverage ratio was 3.7x.
• As of September 30, 2019, and including the effect of interest rate swaps, the Company’s weighted average effective interest rate was 4.1%; additionally, 86.4% of the Company’s debt was subject to fixed interest rates and the consolidated debt portfolio had a weighted average maturity of 3.8 years.
• During the third quarter, the Company’s joint venture with Blackstone Real Estate Income Trust, Inc. ("BREIT”) placed $154 million of mortgage debt on its seven data center shells. The mortgage debt matures in July 2029, is interest-only for the term, and bears interest at 3.64%. COPT received its 10% share of the mortgage proceeds.

2019 Guidance
Management is updating its previously issued guidance range of $1.52?$1.56 for full year EPS to a new range of $1.53-$1.55. The Company is tightening its previously issued guidance range for full year FFOPS, as adjusted for comparability, of $2.01?$2.05, to a new range of $2.02?$2.04.

Management also is establishing EPS and FFOPS, as adjusted for comparability, guidance for the fourth quarter ending December 31, 2019 at ranges of $0.30?$0.32 and $0.49?$0.51, respectively. Reconciliations of projected diluted EPS to projected FFOPS are as follows:

Updated Full-Year Guidance Assumptions—As a reminder, Management expects to complete the sale of two additional data center shells to the BREIT joint venture during 4Q19 to fund additional development. Management is updating the following assumptions for its full-year guidance:

• Development Leasing Objective. Management is increasing its development leasing goal for the year, from the previously elevated target of 2.0 million square feet, to a new target of 2.2 million square feet.
• Same-Property Cash NOI Growth. Management is increasing and tightening its previously increased guidance for full-year same-property cash NOI growth, from the prior range of 2.75%-3.25% to the new range of 3.25%-3.5%. The increase reflects expense management improvements at the property level.
• Same-Property Year-End Occupancy. The Company is adjusting its expectation for same-property occupancy at year end from the prior range of 92%-93%, to 91.5%-92.0%. The decrease reflects expected occupancy dates on approximately 50,000 square feet of new tenancy slipping from late 4Q19 into 1Q20.

Associated Supplemental Presentation
Prior to the call, the Company will post a slide presentation to accompany management’s prepared remarks for its third 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 third 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 COPT’s Investors website. Additionally, a telephonic replay of this call will be available beginning at 3:00 p.m. Eastern Time on Tuesday, October 29 through 2:00 p.m. Eastern Time on Tuesday, November 12. 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 3489935.

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 September 30, 2019, 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 13 buildings owned through unconsolidated joint ventures, COPT’s core portfolio of 167 office and data center shell properties encompassed 18.8 million square feet and was 94.5% 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 and the Company undertakes no obligation to update or supplement any forward-looking statements.

The areas of risk that may affect these expectations, estimates and projections include, but are not limited to, those risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

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