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 ended
June 30, 2019March 31, 2020
or
☐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,MD21046
(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.

Corporate Office Properties Trust ☒ Yes   ☐ No
Corporate Office Properties, L.P. ☒ 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).

Corporate Office Properties Trust ☒ Yes   ☐ No
Corporate Office Properties, L.P. ☒ 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.

Corporate Office Properties Trust
Large accelerated filer☒ Accelerated filer☐ Non-accelerated filer☐ Smaller reporting company☐ Emerging growth company☐

Corporate Office Properties, L.P.
Large accelerated filer☐ Accelerated filer☐ Non-accelerated filer☒ Smaller reporting company☐ Emerging 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. 

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

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 ☐ Yes   ☒ No
Corporate Office Properties, L.P. ☐ Yes   ☒ No

As of July 26, 2019April 21, 2020, 111,949,887112,169,463 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 June 30, 2019March 31, 2020 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 June 30, 2019March 31, 2020, 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.business.

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
PART I: FINANCIAL INFORMATION
 
  
Item 1:
Financial Statements:
 
Consolidated Financial Statements of Corporate Office Properties Trust
 
 
Consolidated Balance Sheets as of June 30, 2019March 31, 2020 and December 31, 20182019 (unaudited)
3
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
4
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
5
 
Consolidated Statements of Equity for the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
6
 
Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
87
Consolidated Financial Statements of Corporate Office Properties, L.P.
 
 
Consolidated Balance Sheets as of June 30, 2019March 31, 2020 and December 31, 20182019 (unaudited)
9
Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited)
10
 
Consolidated Statements of OperationsComprehensive Income for the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
11
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)
12
Consolidated Statements of Equity for the Three and Six Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited) 
1312
 
Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2020 and 2019 and 2018 (unaudited)
1513
Notes to Consolidated Financial Statements (unaudited)
1715
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4037
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
5249
Item 4:
Controls and Procedures
5249
   
PART II: OTHER INFORMATION
 
   
Item 1:
Legal Proceedings
5350
Item 1A:
Risk Factors
5350
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
5351
Item 3:
Defaults Upon Senior Securities
5451
Item 4:
Mine Safety Disclosures
5451
Item 5:
Other Information
5451
Item 6:
Exhibits
5552
  
SIGNATURES
5653



PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements


Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
June 30,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
Assets 
  
 
  
Properties, net: 
  
 
  
Operating properties, net$2,719,585
 $2,847,265
$2,813,949
 $2,772,647
Projects in development or held for future development474,787
 403,361
605,679
 568,239
Total properties, net3,194,372
 3,250,626
3,419,628
 3,340,886
Property - operating right-of-use assets27,434
 —
27,793
 27,864
Property - finance right-of-use assets40,476
 —
40,450
 40,458
Assets held for sale, net54,448
 —
Cash and cash equivalents46,282
 8,066
159,061
 14,733
Investment in unconsolidated real estate joint ventures65,336
 39,845
51,220
 51,949
Accounts receivable58,189
 26,277
Accounts receivable, net30,317
 35,444
Deferred rent receivable86,707
 89,350
89,690
 87,736
Intangible assets on real estate acquisitions, net31,162
 43,470
26,078
 27,392
Deferred leasing costs (net of accumulated amortization of $33,866 and $31,994, respectively)52,227
 50,191
Investing receivables70,656
 56,982
Deferred leasing costs (net of accumulated amortization of $34,613 and $33,782, respectively)58,608
 58,392
Investing receivables (net of allowance for credit losses of $3,598 at March 31, 2020)71,197
 73,523
Prepaid expenses and other assets, net76,180
 91,198
80,415
 96,076
Total assets$3,803,469
 $3,656,005
$4,054,457
 $3,854,453
Liabilities and equity 
  
 
  
Liabilities: 
  
 
  
Debt, net$1,784,362
 $1,823,909
$2,076,839
 $1,831,139
Accounts payable and accrued expenses152,196
 92,855
128,441
 148,746
Rents received in advance and security deposits27,477
 30,079
33,323
 33,620
Dividends and distributions payable31,346
 30,856
31,301
 31,263
Deferred revenue associated with operating leases8,161
 9,125
6,972
 7,361
Property - operating lease liabilities16,640
 —
17,365
 17,317
Interest rate derivatives23,547
 5,459
63,232
 25,682
Other liabilities10,826
 10,414
8,886
 10,649
Total liabilities2,054,555
 2,002,697
2,366,359
 2,105,777
Commitments and contingencies (Note 17)


 




 


Redeemable noncontrolling interests29,803
 26,260
22,912
 29,431
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 111,949,887 at June 30, 2019 and 110,241,868 at December 31, 2018)1,119
 1,102
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,169,463 at March 31, 2020 and 112,068,705 at December 31, 2019)1,122
 1,121
Additional paid-in capital2,475,293
 2,431,355
2,476,677
 2,481,558
Cumulative distributions in excess of net income(780,667) (846,808)(790,600) (778,275)
Accumulated other comprehensive loss(23,465) (238)(62,201) (25,444)
Total Corporate Office Properties Trust’s shareholders’ equity1,672,280
 1,585,411
1,624,998
 1,678,960
Noncontrolling interests in subsidiaries: 
  
 
  
Common units in COPLP21,039
 19,168
19,600
 19,597
Preferred units in COPLP8,800
 8,800
8,800
 8,800
Other consolidated entities16,992
 13,669
11,788
 11,888
Noncontrolling interests in subsidiaries46,831
 41,637
40,188
 40,285
Total equity1,719,111
 1,627,048
1,665,186
 1,719,245
Total liabilities, redeemable noncontrolling interests and equity$3,803,469
 $3,656,005
$4,054,457
 $3,854,453


See accompanying notes to consolidated financial statements.


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Revenues 
  
     
  
Lease revenue$131,415
 $127,907
 $262,318
 $255,040
$131,012
 $130,903
Other property revenue1,356
 1,255
 2,443
 2,400
1,104
 1,087
Construction contract and other service revenues42,299
 17,581
 59,249
 44,779
13,681
 16,950
Total revenues175,070
 146,743
 324,010
 302,219
145,797
 148,940
Operating expenses 
  
  
  
 
  
Property operating expenses47,886
 49,446
 97,331
 100,397
49,999
 49,445
Depreciation and amortization associated with real estate operations34,802
 33,190
 69,598
 66,702
32,596
 34,796
Construction contract and other service expenses41,002
 16,941
 57,328
 43,157
13,121
 16,326
General, administrative and leasing expenses9,386
 7,628
 18,137
 14,920
7,486
 8,751
Business development expenses and land carry costs870
 1,234
 1,983
 2,848
1,118
 1,113
Total operating expenses133,946
 108,439
 244,377
 228,024
104,320
 110,431
Interest expense(18,475) (18,945) (37,149) (37,729)(16,840) (18,674)
Interest and other income1,849
 1,439
 4,135
 2,798
1,205
 2,286
Credit loss expense(689) —
Gain on sales of real estate84,469
 (23) 84,469
 (27)5
 —
Income before equity in income of unconsolidated entities and income taxes108,967
 20,775
 131,088
 39,237
25,158
 22,121
Equity in income of unconsolidated entities420
 373
 811
 746
441
 391
Income tax benefit (expense)176
 (63) (18) (118)
Income tax expense(49) (194)
Net income109,563
 21,085
 131,881
 39,865
25,550
 22,318
Net income attributable to noncontrolling interests: 
  
  
  
 
  
Common units in COPLP(1,339) (608) (1,596) (1,152)(287) (257)
Preferred units in COPLP(165) (165) (330) (330)(77) (165)
Other consolidated entities(1,268) (878) (2,305) (1,799)(1,132) (1,037)
Net income attributable to COPT common shareholders$106,791
 $19,434
 $127,650
 $36,584
$24,054
 $20,859
          
Earnings per common share: (1) 
  
  
  
 
  
Net income attributable to COPT common shareholders - basic$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19
Net income attributable to COPT common shareholders - diluted$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19

(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.


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2019 2018 2019 2018
Net income$109,563
 $21,085
 $131,881
 $39,865
Other comprehensive (loss) income 
  
  
  
Unrealized (loss) gain on interest rate derivatives(13,545) 1,912
 (22,390) 6,588
(Gain) loss on interest rate derivatives recognized in interest expense(557) (47) (1,127) 198
Other comprehensive (loss) income(14,102) 1,865
 (23,517) 6,786
Comprehensive income95,461
 22,950
 108,364
 46,651
Comprehensive income attributable to noncontrolling interests(2,597) (1,708) (3,941) (3,498)
Comprehensive income attributable to COPT$92,864
 $21,242
 $104,423
 $43,153
 For the Three Months Ended March 31,
 2020 2019
Net income$25,550
 $22,318
Other comprehensive loss: 
  
Unrealized loss on interest rate derivatives(37,705) (8,845)
Loss (gain) on interest rate derivatives recognized in interest expense131
 (570)
Total other comprehensive loss(37,574) (9,415)
Comprehensive (loss) income(12,024) 12,903
Comprehensive income attributable to noncontrolling interests(679) (1,344)
Comprehensive (loss) income attributable to COPT$(12,703) $11,559
 
See accompanying notes to consolidated financial statements.




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 
Common
Shares
 
Additional
Paid-in
Capital
 
Cumulative
Distributions in
Excess of Net
Income
 
Accumulated
Other
Comprehensive Loss
 
Noncontrolling
Interests
 Total
For the Three Months Ended June 30, 2018           
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
Common shares issued under forward equity sale agreements (1,100,000 shares)11
 32,240
 —
 —
 —
 32,251
Share-based compensation (10,137 shares issued, net of redemptions)—
 1,720
 —
 —
 —
 1,720
For the Three Months Ended March 31, 2019            
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—
 (198) —
 —
 —
 (198) —
 (1,817) —
 —
 —
 (1,817)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP—
 (538) —
 —
 538
 —
 —
 (1,322) —
 —
 1,322
 —
Comprehensive income—
 —
 19,434
 1,808
 1,117
 22,359
 —
 —
 20,859
 (9,300) 669
 12,228
Dividends—
 —
 (28,402) —
 —
 (28,402) —
 —
 (30,754) —
 —
 (30,754)
Distributions to owners of common and preferred units in COPLP—
 —
 —
 —
 (1,044) (1,044) —
 —
 —
 —
 (550) (550)
Contributions from noncontrolling interests in other consolidated entities —
 —
 —
 —
 2,570
 2,570
Distributions to noncontrolling interests in other consolidated entities—
 —
 —
 —
 (4) (4) —
 —
 —
 —
 (4) (4)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 (221) —
 —
 —
 (221) —
 (799) —
 —
 —
 (799)
Balance at June 30, 2018 (103,260,495 common shares outstanding)$1,033
 $2,254,430
 $(822,270) $9,012

$66,280
 $1,508,485
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
                       
For the Three Months Ended June 30, 2019           
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
Redemption of common units—
 —
 —
 —
 (1) (1)
Share-based compensation (10,097 shares issued, net of redemptions)—
 1,487
 —
 —
 346
 1,833
For the Three Months Ended March 31, 2020            
Balance at December 31, 2019 (112,068,705 common shares outstanding) $1,121
 $2,481,558
 $(778,275) $(25,444) $40,285
 $1,719,245
Cumulative effect of accounting change for adoption of credit loss guidance —
 —
 (5,541) —
 —
 (5,541)
Balance at December 31, 2019, as adjusted 1,121
 2,481,558
 (783,816) (25,444) 40,285
 1,713,704
Conversion of common units to common shares (12,009 shares) —
 182
 —
 —
 (182) —
Share-based compensation (88,749 shares issued, net of redemptions) 1
 983
 —
 —
 226
 1,210
Redemption of vested equity awards—
 (103) —
 —
 —
 (103) —
 (1,492) —
 —
 —
 (1,492)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP—
 488
 —
 —
 (488) —
 —
 (453) —
 —
 453
 —
Comprehensive income—
 —
 106,791
 (13,927) 1,728
 94,592
Comprehensive loss —
 —
 24,054
 (36,757) (279) (12,982)
Dividends—
 —
 (30,755) —
 —
 (30,755) —
 —
 (30,838) —
 —
 (30,838)
Distributions to owners of common and preferred units in COPLP—
 —
 —
 —
 (553) (553) —
 —
 —
 —
 (420) (420)
Contributions from noncontrolling interests in other consolidated entities —
 —
 —
 —
 112
 112
Distributions to noncontrolling interests in other consolidated entities—
 —
 —
 —
 (4) (4) —
 —
 —
 —
 (7) (7)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 (2,076) —
 —
 —
 (2,076) —
 (4,101) —
 —
 —
 (4,101)
Balance at June 30, 2019 (111,949,887 common shares outstanding)$1,119
 $2,475,293
 $(780,667) $(23,465) $46,831
 $1,719,111
Balance at March 31, 2020 (112,169,463 common shares outstanding) $1,122
 $2,476,677
 $(790,600) $(62,201) $40,188
 $1,665,186

See accompanying notes to consolidated financial statements.








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 Six Months Ended June 30, 2018           
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 adjusted1,013
 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 (1,777,000 shares)18
 52,209
 —
 —
 —
 52,227
Share-based compensation (137,379 shares issued, net of redemptions)1
 3,399
 —
 —
 —
 3,400
Redemption of vested equity awards—
 (1,525) —
 —
 —
 (1,525)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP—
 (702) —
 —
 702
 —
Comprehensive income—
 —
 36,584
 6,569
 2,269
 45,422
Dividends—
 —
 (56,493) —
 —
 (56,493)
Distributions to owners of common and preferred units in COPLP—
 —
 —
 —
 (2,088) (2,088)
Distributions to noncontrolling interests in other consolidated entities—
 —
 —
 —
 (7) (7)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 (758) —
 —
 —
 (758)
Balance at June 30, 2018 (103,260,495 common shares outstanding)$1,033
 $2,254,430
 $(822,270) $9,012
 $66,280
 $1,508,485
            
For the Six Months Ended June 30, 2019           
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) —
Redemption of common units—
 —
 —
 —
 (1) (1)
Common shares issued under forward equity sale agreements (1,614,087 shares)16
 46,438
 —
 —
 —
 46,454
Share-based compensation (88,432 shares issued, net of redemptions)1
 3,049
 —
 —
 585
 3,635
Redemption of vested equity awards—
 (1,920) —
 —
 —
 (1,920)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP—
 (834) —
 —
 834
 —
Comprehensive income—
 —
 127,650
 (23,227) 2,397
 106,820
Dividends—
 —
 (61,509) —
 —
 (61,509)
Distributions to owners of common and preferred units in COPLP—
 —
 —
 —
 (1,103) (1,103)
Contributions from noncontrolling interests in other consolidated entities—
 —
 —
 —
 2,570
 2,570
Distributions to noncontrolling interests in other consolidated entities—
 —
 —
 —
 (8) (8)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 (2,875) —
 —
 —
 (2,875)
Balance at June 30, 2019 (111,949,887 common shares outstanding)$1,119
 $2,475,293
 $(780,667) $(23,465) $46,831
 $1,719,111

See accompanying notes to consolidated financial statements.


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Cash flows from operating activities 
  
 
  
Revenues from real estate operations received$257,832
 $262,602
$133,092
 $126,569
Construction contract and other service revenues received21,449
 18,411
24,925
 5,904
Property operating expenses paid(83,305) (83,642)(46,330) (42,974)
Construction contract and other service expenses paid(31,157) (62,624)(17,631) (4,614)
General, administrative, leasing, business development and land carry costs paid(16,541) (15,148)(12,371) (11,703)
Interest expense paid(34,896) (36,155)(16,767) (18,282)
Lease incentives paid(3,228) (4,825)(3,628) (1,158)
Other1,661
 2,093
928
 910
Net cash provided by operating activities111,815
 80,712
62,218
 54,652
Cash flows from investing activities 
  
 
  
Construction, development and redevelopment(219,633) (67,749)
Development and redevelopment of properties(92,802) (100,212)
Tenant improvements on operating properties(7,585) (18,352)(10,446) (4,174)
Other capital improvements on operating properties(8,920) (8,584)(5,457) (4,476)
Proceeds from property dispositions   
Distribution from unconsolidated real estate joint venture following contribution of properties129,783
 —
Sale of controlling interests in properties107,517
 —
Investing receivables funded(11,104) —
—
 (11,051)
Leasing costs paid(7,632) (3,838)(5,950) (2,539)
Other3,944
 1,715
192
 1,297
Net cash used in investing activities(13,630) (96,808)(114,463) (121,155)
Cash flows from financing activities 
  
 
  
Proceeds from debt      
Revolving Credit Facility258,000
 153,000
251,000
 123,000
Other debt proceeds10,606
 —
181,595
 3,350
Repayments of debt      
Revolving Credit Facility(308,000) (109,000)(186,000) (74,000)
Scheduled principal amortization(2,193) (2,101)(1,021) (1,098)
Payments on finance lease liabilities(110) (15,379)
Deferred financing costs paid(1,261) —
Net proceeds from issuance of common shares46,415
 52,277
—
 46,415
Common share dividends paid(61,040) (55,950)(30,817) (30,287)
Distributions paid to noncontrolling interests in COPLP(1,115) (2,110)(403) (553)
Distributions paid to redeemable noncontrolling interests(11,870) —
Redemption of vested equity awards(1,920) (1,525)(1,492) (1,817)
Other(44) (5,370)(2,729) 1,318
Net cash (used in) provided by financing activities(59,401) 13,842
Net cash provided by financing activities197,002
 66,328
Net increase (decrease) in cash and cash equivalents and restricted cash38,784
 (2,254)144,757
 (175)
Cash and cash equivalents and restricted cash 
  
 
  
Beginning of period11,950
 14,831
18,130
 11,950
End of period$50,734
 $12,577
$162,887
 $11,775

See accompanying notes to consolidated financial statements.
 



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Reconciliation of net income to net cash provided by operating activities: 
  
 
  
Net income$131,881
 $39,865
$25,550
 $22,318
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and other amortization70,527
 67,684
33,015
 35,229
Amortization of deferred financing costs and net debt discounts1,801
 1,648
961
 898
Increase in deferred rent receivable(2,419) (3,470)(2,230) (2,539)
Gain on sales of real estate(84,469) 27
Share-based compensation3,283
 3,132
1,389
 1,659
Other(2,996) (777)(52) (1,572)
Changes in operating assets and liabilities: 
   
  
(Increase) decrease in accounts receivable(31,846) 8,050
(Increase) decrease in prepaid expenses and other assets, net(852) 14,718
Increase (decrease) in accounts payable, accrued expenses and other liabilities29,507
 (49,422)
Decrease in accounts receivable4,547
 1,033
Decrease (increase) in prepaid expenses and other assets, net15,548
 (6,752)
(Decrease) increase in accounts payable, accrued expenses and other liabilities(16,213) 8,822
Decrease in rents received in advance and security deposits(2,602) (743)(297) (4,444)
Net cash provided by operating activities$111,815
 $80,712
$62,218
 $54,652
Reconciliation of cash and cash equivalents and restricted cash:      
Cash and cash equivalents at beginning of period$8,066
 $12,261
$14,733
 $8,066
Restricted cash at beginning of period3,884
 2,570
3,397
 3,884
Cash and cash equivalents and restricted cash at beginning of period$11,950
 $14,831
$18,130
 $11,950
      
Cash and cash equivalents at end of period$46,282
 $8,472
$159,061
 $7,780
Restricted cash at end of period4,452
 4,105
3,826
 3,995
Cash and cash equivalents and restricted cash at end of period$50,734
 $12,577
$162,887
 $11,775
Supplemental schedule of non-cash investing and financing activities: 
  
 
  
Increase in accrued capital improvements, leasing and other investing activity costs$29,862
 $2,909
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs$(4,795) $11,329
Finance right-of-use asset contributed by noncontrolling interest in joint venture$2,570
 $—
$—
 $2,570
Operating right-of-use assets obtained in exchange for operating lease liabilities$255
 $—
$—
 $276
Non-cash changes from property dispositions   
Contribution of properties to unconsolidated real estate joint venture$99,288
 $—
Investment in unconsolidated real estate joint venture retained in disposition$26,500
 $—
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests$(23,585) $6,719
Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests$(37,573) $(9,450)
Dividends/distributions payable$31,346
 $29,449
$31,301
 $31,346
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares$80
 $761
$182
 $80
Adjustments to noncontrolling interests resulting from changes in COPLP ownership$834
 $702
$453
 $1,322
Increase in redeemable noncontrolling interests and decrease in equity to adjust redeemable noncontrolling interests to fair value$2,875
 $758
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value$4,101
 $799
 
See accompanying notes to consolidated financial statements.





Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
June 30,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
Assets 
  
 
  
Properties, net: 
  
 
  
Operating properties, net$2,719,585
 $2,847,265
$2,813,949
 $2,772,647
Projects in development or held for future development474,787
 403,361
605,679
 568,239
Total properties, net3,194,372
 3,250,626
3,419,628
 3,340,886
Property - operating right-of-use assets27,434
 —
27,793
 27,864
Property - finance right-of-use assets40,476
 —
40,450
 40,458
Assets held for sale, net54,448
 —
Cash and cash equivalents46,282
 8,066
159,061
 14,733
Investment in unconsolidated real estate joint ventures65,336
 39,845
51,220
 51,949
Accounts receivable58,189
 26,277
Accounts receivable, net30,317
 35,444
Deferred rent receivable86,707
 89,350
89,690
 87,736
Intangible assets on real estate acquisitions, net31,162
 43,470
26,078
 27,392
Deferred leasing costs (net of accumulated amortization of $33,866 and $31,994, respectively)52,227
 50,191
Investing receivables70,656
 56,982
Deferred leasing costs (net of accumulated amortization of $34,613 and $33,782, respectively)58,608
 58,392
Investing receivables (net of allowance for credit losses of $3,598 at March 31, 2020)71,197
 73,523
Prepaid expenses and other assets, net71,943
 87,330
78,136
 93,016
Total assets$3,799,232
 $3,652,137
$4,052,178
 $3,851,393
Liabilities and equity 
  
 
  
Liabilities: 
  
 
  
Debt, net$1,784,362
 $1,823,909
$2,076,839
 $1,831,139
Accounts payable and accrued expenses152,196
 92,855
128,441
 148,746
Rents received in advance and security deposits27,477
 30,079
33,323
 33,620
Distributions payable31,346
 30,856
31,301
 31,263
Deferred revenue associated with operating leases8,161
 9,125
6,972
 7,361
Property - operating lease liabilities16,640
 —
17,365
 17,317
Interest rate derivatives23,547
 5,459
63,232
 25,682
Other liabilities6,589
 6,546
6,607
 7,589
Total liabilities2,050,318
 1,998,829
2,364,080
 2,102,717
Commitments and contingencies (Note 17)


 




 


Redeemable noncontrolling interests29,803
 26,260
22,912
 29,431
Equity: 
  
 
  
Corporate Office Properties, L.P.’s equity: 
  
 
  
Preferred units held by limited partner, 352,000 preferred units outstanding at June 30, 2019 and December 31, 20188,800
 8,800
Common units, 111,949,887 and 110,241,868 held by the general partner and 1,582,844 and 1,332,886 held by limited partners at June 30, 2019 and December 31, 2018, respectively1,716,912
 1,604,655
Preferred units held by limited partner, 352,000 preferred units outstanding at March 31, 2020 and December 31, 20198,800
 8,800
Common units, 112,169,463 and 112,068,705 held by the general partner and 1,620,449 and 1,482,425 held by limited partners at March 31, 2020 and December 31, 2019, respectively1,707,395
 1,724,159
Accumulated other comprehensive loss(23,638) (121)(62,843) (25,648)
Total Corporate Office Properties, L.P.’s equity1,702,074
 1,613,334
1,653,352
 1,707,311
Noncontrolling interests in subsidiaries17,037
 13,714
11,834
 11,934
Total equity1,719,111
 1,627,048
1,665,186
 1,719,245
Total liabilities, redeemable noncontrolling interests and equity$3,799,232
 $3,652,137
$4,052,178
 $3,851,393

See accompanying notes to consolidated financial statements.


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
(unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Revenues 
  
     
  
Lease revenue$131,415
 $127,907
 $262,318
 $255,040
$131,012
 $130,903
Other property revenue1,356
 1,255
 2,443
 2,400
1,104
 1,087
Construction contract and other service revenues42,299
 17,581
 59,249
 44,779
13,681
 16,950
Total revenues175,070
 146,743
 324,010
 302,219
145,797
 148,940
Operating expenses 
  
  
  
 
  
Property operating expenses47,886
 49,446
 97,331
 100,397
49,999
 49,445
Depreciation and amortization associated with real estate operations34,802
 33,190
 69,598
 66,702
32,596
 34,796
Construction contract and other service expenses41,002
 16,941
 57,328
 43,157
13,121
 16,326
General, administrative and leasing expenses9,386
 7,628
 18,137
 14,920
7,486
 8,751
Business development expenses and land carry costs870
 1,234
 1,983
 2,848
1,118
 1,113
Total operating expenses133,946
 108,439
 244,377
 228,024
104,320
 110,431
Interest expense(18,475) (18,945) (37,149) (37,729)(16,840) (18,674)
Interest and other income1,849
 1,439
 4,135
 2,798
1,205
 2,286
Credit loss expense(689) —
Gain on sales of real estate84,469
 (23) 84,469
 (27)5
 —
Income before equity in income of unconsolidated entities and income taxes108,967
 20,775
 131,088
 39,237
25,158
 22,121
Equity in income of unconsolidated entities420
 373
 811
 746
441
 391
Income tax benefit (expense)176
 (63) (18) (118)
Income tax expense(49) (194)
Net income109,563
 21,085
 131,881
 39,865
25,550
 22,318
Net income attributable to noncontrolling interests in consolidated entities(1,268) (878) (2,305) (1,799)(1,132) (1,037)
Net income attributable to COPLP108,295
 20,207
 129,576
 38,066
24,418
 21,281
Preferred unit distributions(165) (165) (330) (330)(77) (165)
Net income attributable to COPLP common unitholders$108,130
 $20,042
 $129,246
 $37,736
$24,341
 $21,116
          
Earnings per common unit: (1) 
  
  
  
 
  
Net income attributable to COPLP common unitholders - basic$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19
Net income attributable to COPLP common unitholders - diluted$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19

(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.


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2019 2018 2019 2018
Net income$109,563
 $21,085
 $131,881
 $39,865
Other comprehensive (loss) income 
  
    
Unrealized (loss) gain on interest rate derivatives(13,545) 1,912
 (22,390) 6,588
(Gain) loss on interest rate derivatives recognized in interest expense(557) (47) (1,127) 198
Other comprehensive (loss) income(14,102) 1,865
 (23,517) 6,786
Comprehensive income95,461
 22,950
 108,364
 46,651
Comprehensive income attributable to noncontrolling interests(1,268) (878) (2,305) (1,799)
Comprehensive income attributable to COPLP$94,193
 $22,072
 $106,059
 $44,852
 For the Three Months Ended March 31,
 2020 2019
Net income$25,550
 $22,318
Other comprehensive loss: 
  
Unrealized loss on interest rate derivatives(37,705) (8,845)
Loss (gain) on interest rate derivatives recognized in interest expense131
 (570)
Total other comprehensive loss(37,574) (9,415)
Comprehensive (loss) income(12,024) 12,903
Comprehensive income attributable to noncontrolling interests(753) (1,037)
Comprehensive (loss) income attributable to COPLP$(12,777) $11,866
 
See accompanying notes to consolidated financial statements.

 


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  Limited Partner Preferred Units Common Units Accumulated Other Comprehensive Loss Noncontrolling Interests in Subsidiaries  
Units Amount Units Amount Total EquityUnits Amount Units Amount Total Equity
For the Three Months Ended June 30, 2018             
Balance at March 31, 2018352,000
 $8,800
 105,347,419
 $1,453,262
 $7,370
 $12,592
 $1,482,024
For the Three Months Ended March 31, 2019             
Balance at December 31, 2018352,000
 $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—
 —
 1,100,000
 32,251
 —
 —
 32,251
—
 —
 1,614,087
 46,454
 —
 —
 46,454
Share-based compensation (units net of redemption)—
 —
 10,137
 1,720
 —
 —
 1,720
—
 —
 326,973
 1,802
 —
 —
 1,802
Redemptions of vested equity awards—
 —
 —
 (198) —
 —
 (198)—
 —
 —
 (1,817) —
 —
 (1,817)
Comprehensive income—
 165
 —
 20,042
 1,865
 287
 22,359
—
 165
 —
 21,116
 (9,415) 362
 12,228
Distributions to owners of common and preferred units—
 (165) —
 (29,281) —
 —
 (29,446)—
 (165) —
 (31,139) —
 —
 (31,304)
Contributions from noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 2,570
 2,570
Distributions to noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 (4) (4)—
 —
 —
 —
 —
 (4) (4)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 —
 —
 (221) —
 —
 (221)—
 —
 —
 (799) —
 —
 (799)
Balance at June 30, 2018352,000
 $8,800
 106,457,556
 $1,477,575
 $9,235
 $12,875
 $1,508,485
Balance at March 31, 2019352,000
 $8,800
 113,515,814
 $1,640,272
 $(9,536) $16,642
 $1,656,178
                          
For the Three Months Ended June 30, 2019             
Balance at March 31, 2019352,000
 $8,800
 113,515,814
 $1,640,272
 $(9,536) $16,642
 $1,656,178
Redemption of common units—
 —
 (44) (1) —
 —
 (1)
For the Three Months Ended March 31, 2020             
Balance at December 31, 2019352,000
 $8,800
 113,551,130
 $1,724,159
 $(25,648) $11,934
 $1,719,245
Cumulative effect of accounting change for adoption of credit loss guidance—
 —
 —
 (5,541) —
 —
 (5,541)
Balance at December 31, 2019, as adjusted352,000
 8,800
 113,551,130
 1,718,618
 (25,648) 11,934
 1,713,704
Share-based compensation (units net of redemption)—
 —
 16,961
 1,833
 —
 —
 1,833
—
 —
 238,782
 1,210
 —
 —
 1,210
Redemptions of vested equity awards—
 —
 —
 (103) —
 —
 (103)—
 —
 —
 (1,492) —
 —
 (1,492)
Comprehensive income—
 165
 —
 108,130
 (14,102) 399
 94,592
Comprehensive loss—
 77
 —
 24,341
 (37,195) (205) (12,982)
Distributions to owners of common and preferred units—
 (165) —
 (31,143) —
 —
 (31,308)—
 (77) —
 (31,181) —
 —
 (31,258)
Contributions from noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 112
 112
Distributions to noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 (4) (4)—
 —
 —
 —
 —
 (7) (7)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 —
 —
 (2,076) —
 —
 (2,076)—
 —
 —
 (4,101) —
 —
 (4,101)
Balance at June 30, 2019352,000
 $8,800
 113,532,731
 $1,716,912
 $(23,638) $17,037
 $1,719,111
Balance at March 31, 2020352,000
 $8,800
 113,789,912
 $1,707,395
 $(62,843) $11,834
 $1,665,186

See accompanying notes to consolidated financial statements.


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity (continued)
(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
For the Six Months Ended June 30, 2018             
Balance at December 31, 2017352,000
 $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 adjusted352,000
 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—
 —
 1,777,000
 52,227
 —
 —
 52,227
Share-based compensation (units net of redemption)—
 —
 137,379
 3,400
 —
 —
 3,400
Redemptions of vested equity awards—
 —
 —
 (1,525) —
 —
 (1,525)
Comprehensive income—
 330
 —
 37,736
 6,786
 570
 45,422
Distributions to owners of common and preferred units—
 (330) —
 (58,251) —
 —
 (58,581)
Distributions to noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 (7) (7)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 —
 —
 (758) —
 —
 (758)
Balance at June 30, 2018352,000
 $8,800
 106,457,556
 $1,477,575
 $9,235
 $12,875
 $1,508,485
              
For the Six Months Ended June 30, 2019             
Balance at December 31, 2018352,000
 $8,800
 111,574,754
 $1,604,655
 $(121) $13,714
 $1,627,048
Redemption of common units—
 —
 (44) (1) —
 —
 (1)
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)—
 —
 343,934
 3,635
 —
 —
 3,635
Redemptions of vested equity awards—
 —
 —
 (1,920) —
 —
 (1,920)
Comprehensive income—
 330
 —
 129,246
 (23,517) 761
 106,820
Distributions to owners of common and preferred units—
 (330) —
 (62,282) —
 —
 (62,612)
Contributions from noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 2,570
 2,570
Distributions to noncontrolling interests in subsidiaries—
 —
 —
 —
 —
 (8) (8)
Adjustment to arrive at fair value of redeemable noncontrolling interests—
 —
 —
 (2,875) —
 —
 (2,875)
Balance at June 30, 2019352,000
 $8,800
 113,532,731
 $1,716,912
 $(23,638) $17,037
 $1,719,111

See accompanying notes to consolidated financial statements.



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Cash flows from operating activities 
  
 
  
Revenues from real estate operations received$257,832
 $262,602
$133,092
 $126,569
Construction contract and other service revenues received21,449
 18,411
24,925
 5,904
Property operating expenses paid(83,305) (83,642)(46,330) (42,974)
Construction contract and other service expenses paid(31,157) (62,624)(17,631) (4,614)
General, administrative, leasing, business development and land carry costs paid(16,541) (15,148)(12,371) (11,703)
Interest expense paid(34,896) (36,155)(16,767) (18,282)
Lease incentives paid(3,228) (4,825)(3,628) (1,158)
Other1,661
 2,093
928
 910
Net cash provided by operating activities111,815
 80,712
62,218
 54,652
Cash flows from investing activities 
  
 
  
Construction, development and redevelopment(219,633) (67,749)
Development and redevelopment of properties(92,802) (100,212)
Tenant improvements on operating properties(7,585) (18,352)(10,446) (4,174)
Other capital improvements on operating properties(8,920) (8,584)(5,457) (4,476)
Proceeds from property dispositions   
Distribution from unconsolidated real estate joint venture following contribution of properties129,783
 —
Sale of controlling interests in properties107,517
 —
Investing receivables funded(11,104) —
—
 (11,051)
Leasing costs paid(7,632) (3,838)(5,950) (2,539)
Other3,944
 1,715
192
 1,297
Net cash used in investing activities(13,630) (96,808)(114,463) (121,155)
Cash flows from financing activities 
  
 
  
Proceeds from debt      
Revolving Credit Facility258,000
 153,000
251,000
 123,000
Other debt proceeds10,606
 —
181,595
 3,350
Repayments of debt      
Revolving Credit Facility(308,000) (109,000)(186,000) (74,000)
Scheduled principal amortization(2,193) (2,101)(1,021) (1,098)
Payments on finance lease liabilities(110) (15,379)
Deferred financing costs paid(1,261) —
Net proceeds from issuance of common units46,415
 52,277
—
 46,415
Common unit distributions paid(61,825) (57,730)(31,143) (30,675)
Preferred unit distributions paid(330) (330)
Distributions paid to redeemable noncontrolling interests(11,870) —
Redemption of vested equity awards(1,920) (1,525)(1,492) (1,817)
Other(44) (5,370)(2,806) 1,153
Net cash (used in) provided by financing activities(59,401) 13,842
Net cash provided by financing activities197,002
 66,328
Net increase (decrease) in cash and cash equivalents and restricted cash38,784
 (2,254)144,757
 (175)
Cash and cash equivalents and restricted cash 
  
 
  
Beginning of period11,950
 14,831
18,130
 11,950
End of period$50,734
 $12,577
$162,887
 $11,775

See accompanying notes to consolidated financial statements.


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

For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Reconciliation of net income to net cash provided by operating activities: 
  
 
  
Net income$131,881
 $39,865
$25,550
 $22,318
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and other amortization70,527
 67,684
33,015
 35,229
Amortization of deferred financing costs and net debt discounts1,801
 1,648
961
 898
Increase in deferred rent receivable(2,419) (3,470)(2,230) (2,539)
Gain on sales of real estate(84,469) 27
Share-based compensation3,283
 3,132
1,389
 1,659
Other(2,996) (777)(52) (1,572)
Changes in operating assets and liabilities: 
   
  
(Increase) decrease in accounts receivable(31,846) 8,050
(Increase) decrease in prepaid expenses and other assets, net(483) 14,296
Increase (decrease) in accounts payable, accrued expenses and other liabilities29,138
 (49,000)
Decrease in accounts receivable4,547
 1,033
Decrease (increase) in prepaid expenses and other assets, net14,768
 (6,406)
(Decrease) increase in accounts payable, accrued expenses and other liabilities(15,433) 8,476
Decrease in rents received in advance and security deposits(2,602) (743)(297) (4,444)
Net cash provided by operating activities$111,815
 $80,712
$62,218
 $54,652
Reconciliation of cash and cash equivalents and restricted cash:      
Cash and cash equivalents at beginning of period$8,066
 $12,261
$14,733
 $8,066
Restricted cash at beginning of period3,884
 2,570
3,397
 3,884
Cash and cash equivalents and restricted cash at beginning of period$11,950
 $14,831
$18,130
 $11,950
      
Cash and cash equivalents at end of period$46,282
 $8,472
$159,061
 $7,780
Restricted cash at end of period4,452
 4,105
3,826
 3,995
Cash and cash equivalents and restricted cash at end of period$50,734
 $12,577
$162,887
 $11,775
Supplemental schedule of non-cash investing and financing activities: 
  
 
  
Increase in accrued capital improvements, leasing and other investing activity costs$29,862
 $2,909
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs$(4,795) $11,329
Finance right-of-use asset contributed by noncontrolling interest in joint venture$2,570
 $—
$—
 $2,570
Operating right-of-use assets obtained in exchange for operating lease liabilities$255
 $—
$—
 $276
Non-cash changes from property dispositions   
Contribution of properties to unconsolidated real estate joint venture$99,288
 $—
Investment in unconsolidated real estate joint venture retained in disposition$26,500
 $—
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests$(23,585) $6,719
Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests$(37,573) $(9,450)
Distributions payable$31,346
 $29,449
$31,301
 $31,346
Increase in redeemable noncontrolling interests and decrease in equity to adjust redeemable noncontrolling interests to fair value$2,875
 $758
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value$4,101
 $799
 
See accompanying notes to consolidated financial statements.




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 (“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 June 30, 2019March 31, 2020, our properties included the following:

169171 properties totaling 18.919.4 million square feet comprised of 15.315.4 million square feet in 147148 office properties and 3.74.0 million square feet in 2223 single-tenant data center shell properties (“data center shells”). We owned 1315 of these data center shells through unconsolidated real estate joint ventures;
a wholesale data center with a critical load of 19.25 megawatts;
14 properties under constructiondevelopment or redevelopment (nine(11 office properties and five3 data center shells) that we estimate will total approximately 2.22.3 million square feet upon completion, including three1 partially-operational properties;property; and
approximately 900 acres of land controlled for future development that we believe could be developed into approximately 11.611.2 million square feet and 15043 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, development 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 June 30, 2019,March 31, 2020, 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 thosethat of COPT common shareholders. However, COPLP’s commonIn the case of any series of preferred units includeheld by COPT, there would be a special classseries of unit referred topreferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms 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 commonsuch series of COPLP preferred 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.



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, 20182019 included in our 20182019 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 20182019 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

ReclassificationReclassifications

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.equity.

Recent Accounting Pronouncements

In February 2016, the FASBEffective January 1, 2020, we adopted guidance 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


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 guidanceFinancial Accounting Standards Board (“FASB”) 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 applyapplies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables (excluding those arising from operating leases), loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments)commitments and guarantees). Under the newthis guidance, an entity willwe recognize itsan estimate of our expected credit losses on these asset types 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. TheWe adopted this guidance is effective for us beginning January 1, 2020 with earlyusing the modified retrospective transition method under which we recognized a $5.5 million allowance for credit losses by means of a cumulative-effect adjustment to cumulative distributions in excess of net income of the Company (or common units of the Operating Partnership), and did not adjust prior comparative reporting periods. Our consolidated statements of operations reflect adjustments for changes in our expected credit losses occurring subsequent to adoption permitted after December 2018. We are currently assessing the financial impact of this guidance on our consolidated financial statements.guidance.

In August 2018,Effective January 1, 2020, we adopted guidance issued by 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 additionalThe resulting changes in disclosure requirements until the effective date. We dodid not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In August 2018,Effective January 1, 2020, we adopted guidance issued by 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 theOur adoption of this guidance todid not have a material impact on our consolidated financial statements.

Credit Losses, Financial Assets and Other Instruments

As discussed above, effective January 1, 2020, we adopted guidance issued by the FASB that changed how we measure credit losses for most financial assets and certain other instruments not measured at fair value through net income from an incurred loss model to an expected loss approach. Our items within the scope of this guidance included the following:

investing receivables, as disclosed in Note 7;
tenant notes receivable;
other assets comprised of non-lease revenue related accounts receivable (primarily from construction contract services) and contract assets from unbilled construction contract revenue; and


off-balance sheet credit exposures, which included $4.8 million in unfunded commitments to fund tenant loans and a tax incremental financing obligation disclosed in Note 17.

Under this guidance, we recognize an estimate of our expected credit losses on these items as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and be presented at the net amount expected to be collected (or as a separate liability in the case of off-balance sheet credit exposures). The allowance represents the portion of the amortized cost basis that we do not expect to collect (or loss we expect to incur in the case of off-balance sheet credit exposures) due to credit over the contractual life based on available information relevant to assessing the collectability of cash flows, which includes consideration of past events, current conditions and reasonable and supportable forecasts of future economic conditions (including consideration of asset- or borrower-specific factors). The guidance requires the allowance for expected credit losses to reflect the risk of loss, even when that risk is remote. An allowance for credit losses is measured and recorded upon the initial recognition of a financial asset (or off-balance sheet credit exposures), regardless of whether it is originated or purchased. Quarterly, the expected losses are re-estimated, considering any cash receipts and changes in risks or assumptions, with resulting adjustments recognized in the line entitled “credit loss expense” on our consolidated statements of operations.

We estimate expected credit losses for in-scope items using historical loss rate information developed for varying classifications of credit risk and contractual lives of such items. Due to our limited quantity of items within the scope of this guidance and the unique risk characteristics of such items, we individually assign each in-scope item a credit risk classification. The credit risk classifications assigned by us are determined based on credit ratings assigned by ratings agencies (as available) or are internally-developed based on available financial information, historical payment experience, credit documentation, other publicly available information and current economic trends. In addition, for certain items in which the risk of credit loss is affected by the economic performance of a real estate development project, we develop probability weighted scenario analyses for varying levels of performance in estimating our credit loss allowance (applicable to our investing receivable from the City of Huntsville disclosed in Note 7 and a tax incremental financing obligation disclosed in Note 17).

The table below sets forth the activity for the allowance for credit losses (in thousands):
 For the Three Months Ended March 31, 2020
 Investing Receivables 
Tenant Notes
Receivable (1)
 Other Assets (2) Off-Balance Sheet Credit Exposures (3) Total
December 31, 2019$—
 $(97) $—
 $—
 $(97)
Cumulative effect of change for adoption of credit loss guidance(3,732) (325) (144) (1,340) (5,541)
Credit loss expense134
 23
 (77) (769) (689)
March 31, 2020$(3,598) $(399) $(221) $(2,109) $(6,327)
(1)Included in the line entitled “accounts receivable, net” on our consolidated balance sheets.
(2) The balance as of March 31, 2020 included $181,000 in the line entitled “accounts receivable, net” and $40,000 in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheets.

Most of our credit loss expense for the three months ended March 31, 2020 was attributable to a new commitment to fund a tenant note receivable for improvements in a property.



The following table presents the amortized cost basis of our investing receivables and tenants notes receivable by credit risk classification, by origination year as of March 31, 2020 (in thousands):
 Origination Year  
 2015 and Earlier 2016 2017 2018 2019 2020 Total as of March 31, 2020
Investing receivables:             
Credit risk classification:             
Investment grade$59,833
 $—
 $866
 $—
 $—
 $—
 $60,699
Non-investment grade3,020
 —
 —
 —
 11,076
 —
 14,096
Total$62,853
 $—
 $866
 $—
 $11,076
 $—
 $74,795
              
Tenant notes receivable:             
Credit risk classification:             
Investment grade$21
 $78
 $—
 $1,100
 $100
 $—
 $1,299
Non-investment grade97
 219
 —
 185
 2,079
 —
 2,580
Total$118
 $297
 $—
 $1,285
 $2,179
 $—
 $3,879


Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings Ltd.), meaning that they are considered to have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or ratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification.

An insignificant portion of the investing and tenant notes receivables set forth above were past due, which we define as being delinquent by more than three months from the due date.

When we believe that collection of interest income on an investing or tenant note receivable is not probable, we place the receivable on nonaccrual status, meaning interest income is recognized when payments are received rather than on an accrual basis. We had a tenant note receivable on nonaccrual status as of March 31, 2020 and December 31, 2019 with an amortized cost basis of $97,000, which was fully reserved as of each date. We did not recognize any interest income during the three months ended March 31, 2020 on receivables on nonaccrual status.

We write off receivables when we believe the facts and circumstances indicate that continued pursuit of collection is no longer warranted. When cash is received in connection with receivables for which we have previously recognized credit losses, we recognize reductions in our credit loss expense.

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, permitsprior 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. The Company froze additional entry into the plan effective December 31, 2019.  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 and totaled $4.2$2.3 million as of June 30, 2019, andMarch 31, 2020, is included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets.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 includedreported in the line entitled “other liabilities” on COPT’s consolidated balance sheets.sheet. 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


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 June 30, 2019,March 31, 2020, 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 valuesvalue 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 June 30, 2019March 31, 2020 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 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 $4,212
 $—
 $—
 $4,212
 $2,260
 $—
 $—
 $2,260
Other 25
 —
 —
 25
 19
 —
 —
 19
Interest rate derivatives (1) —
 120
 —
 120
Mutual funds (1) 10
 —
 —
 10
Total assets $4,237
 $120
 $—
 $4,357
 $2,289
 $—
 $—
 $2,289
Liabilities:  
  
  
  
  
  
  
  
Deferred compensation plan liability (2) $—
 $4,237
 $—
 $4,237
 $—
 $2,279
 $—
 $2,279
Interest rate derivatives —
 23,547
 —
 23,547
 —
 63,232
 —
 63,232
Total liabilities $—
 $27,784
 $—
 $27,784
 $—
 $65,511
 $—
 $65,511

(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.



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 June 30, 2019March 31, 2020 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 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 (1) $—
 $120
 $—
 $120
Mutual funds (1) $10
 $—
 $—
 $10
Liabilities:  
  
  
  
  
  
  
  
Interest rate derivatives $—
 $23,547
 $—
 $23,547
 $—
 $63,232
 $—
 $63,232


(1) Included in the line entitled “prepaid expenses and other assets, net” on COPLP’s consolidated balance sheet.

4.    Properties, Net
 
Operating properties, net consisted of the following (in thousands): 
June 30,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
Land$460,138
 $503,274
$489,744
 $472,976
Buildings and improvements3,208,558
 3,241,894
3,359,908
 3,306,791
Less: Accumulated depreciation(949,111) (897,903)(1,035,703) (1,007,120)
Operating properties, net$2,719,585
 $2,847,265
$2,813,949
 $2,772,647


Properties we had in development or held for future development consisted of the following (in thousands):
 June 30,
2019		 December 31,
2018
Land$296,809
 $207,760
Development in progress, excluding land177,978
 195,601
Projects in development or held for future development$474,787
 $403,361


As of June 30, 2019, we were under contract to sell controlling interests in two data center shell properties in Virginia; we expect this sale to occur in the fourth quarter of 2019. The table below sets forth the components of assets held for sale on our consolidated balance sheet as of June 30, 2019 for these properties (in thousands):
Properties, net$53,386
Deferred rent receivable1,028
Deferred leasing costs, net34
Assets held for sale, net$54,448




2019 Dispositions

On June 20, 2019, through a series of transactions, we sold a 90% interest in seven data center shell properties in Virginia based on an aggregate property value of $265.0 million and retained a 10% interest in the properties through BREIT COPT DC JV LLC (“BREIT-COPT”), a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $238.5 million. We account for our interest in the joint venture using the equity method of accounting as described further in Note 6. We recognized a gain on sale of $84.5 million.

2019 Construction2020 Development Activities

During the sixthree months ended June 30, 2019, March 31, 2020, we placed into service 777,000230,000 square feet in seven newly-constructed properties (including two partially-operational properties) and 10,000 in one partially-operational property under redevelopment.1 newly-developed property. As of June 30, 2019,March 31, 2020, we had 13 properties under construction (including two partially-operational properties),development, or which we were contractually committed to construct,develop, that we estimate will total 2.12.2 million square feet upon completion and one1 partially-operational property under redevelopment that we estimate will total 106,000 square feet upon completion.

5.    Leases

Lessor arrangementsArrangements

We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of June 30, 2019,March 31, 2020, these leases, which may encompass all, or a portion of, a property, had remaining 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.

Most of ourOur lease revenue is comprised of: fixed lease revenue, including contractual rent billings under leases recognized on a straight-line basis over lease terms and amortization of lease incentives and above- and below- market lease intangibles; and variable lease revenue, including tenant expense recoveries, lease termination revenue and other revenue from tenants that is not 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 paymentsrevenue (in thousands):
Lease revenue For the Three Months Ended June 30, 2019 For the Six Months Ended June 30, 2019
Fixed contractual payments $104,768
 $210,103
Variable lease payments 26,647
 52,215
  $131,415
 $262,318
  For the Three Months Ended March 31,
Lease revenue 2020 2019
Fixed $104,109
 $104,644
Variable 26,903
 26,259
  $131,012
 $130,903




Fixed contractual payments due under our property leases were as follows (in thousands):
Year Ending December 31, June 30, 2019 December 31, 2018 March 31, 2020 December 31, 2019
2019 (1) $201,662
 $400,617
2020 356,626
 337,646
2020 (1) $301,914
 $388,310
2021 299,046
 280,369
 357,747
 336,482
2022 262,281
 246,329
 319,239
 299,356
2023 211,966
 194,888
 264,865
 245,661
2024 214,797
 195,246
Thereafter 586,076
 523,932
 548,049
 474,741
 $1,917,657
 $1,983,781
 $2,006,611
 $1,939,796

(1) As of June 30, 2019,March 31, 2020, represents the sixnine months ending December 31, 2019.2020.

Lessee arrangements

We lease from third parties land underlying certain properties that we are operating or developing.developing from third parties. These ground leases have long durations with remaining terms ranging from 3029 years (excluding extension options) to 9796 years. As of June 30, 2019,March 31, 2020, our balance sheet included $67.9$68.2 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-year96-year remaining term, and we possess a bargain purchase option that we expect to exercise in 2020;
$10.410.3 million for land underlying operating office properties in Washington, DC under two2 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 3029 years and an option to renew for an additional 4849 years that was included in the term used in determining the asset balance;
$6.76.6 million for land in a research park in College Park, Maryland under four4 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 years63 to 7574 years;
$4.24.8 million for land in a business park in Huntsville, Alabama under nine9 leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 4443 to 50 years and options to renew for an additional 25 years that were not included in the term used in determining the asset balance; and
$2.3 million for other land underlying operating properties in our Fort Meade/BW Corridor sub-segment under two2 leases with remaining terms of approximately 4948 years, all of the rent on which was previously paid.

As of June 30, 2019, our balance sheet also included right-of-use lease assets totaling $1.3 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 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 June 30, 2019
Right-of-use assets    
Operating leases - Property Property - operating right-of-use assets $27,434
Finance leases    
Property Property - finance right-of-use assets 40,476
Vehicles and office equipment Prepaid expenses and other assets, net 1,272
Total finance lease right-of-use assets   41,748
     
Total right-of-use assets   $69,182


Leases Balance Sheet Location March 31, 2020 December 31, 2019
Right-of-use assets      
Operating leases - Property Property - operating right-of-use assets $27,793
 $27,864
Finance leases - Property Property - finance right-of-use assets 40,450
 40,458
Total right-of-use assets   $68,243
 $68,322

Lease liabilities consisted of the following (in thousands):
Leases Balance Sheet Location June 30, 2019 Balance Sheet Location March 31, 2020 December 31, 2019
Lease liabilities      
Operating leases - Property Property - operating lease liabilities $16,640
 Property - operating lease liabilities $17,365
 $17,317
Finance leases Other liabilities 1,228
  
Finance leases - Property Other liabilities 702
 702
Total lease liabilities $17,868
 $18,067
 $18,019




The table below sets forth the weighted average terms and discount rates of our leases as of June 30, 2019:March 31, 2020:
Weighted average remaining lease term  
Operating leases 6968 years
Finance leases 2 years< 1 year
Weighted average discount rate  
Operating leases 7.357.33%
Finance leases 3.123.62%


The table below presents our total lease cost (in thousands):
 For the Three Months Ended March 31,
Lease cost Statement of Operations Location For the Three Months Ended June 30, 2019 For the Six Months Ended June 30, 2019 Statement of Operations Location 2020 2019
Operating lease cost        
Property leases Property operating expenses $413
 $826
 Property operating expenses $431
 $413
Vehicles and office equipment General, administrative and leasing expenses 18
 35
Finance lease cost        
Amortization of vehicles and office equipment right-of-use assets General, administrative and leasing expenses 116
 229
Amortization of property right-of-use assets Property operating expenses 12
 12
 Property operating expenses 9
 —
Interest on lease liabilities Interest expense 3
 7
 $562
 $1,109
 $440
 $413

The table below presents the effect of lease payments on our consolidated statementstatements of cash flows (in thousands):
 For the Three Months Ended March 31,
Supplemental cash flow information For the Six Months Ended June 30, 2019 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:      
Operating cash flows for operating leases $550
 $311
 $228
Operating cash flows for financing leases $7
Financing cash flows for financing leases $110
 $—
 $52


Payments on leases as of June 30,March 31, 2020 and December 31, 2019 were due as follows (in thousands):
 As of March 31, 2020 As of December 31, 2019
Year Ending December 31,  Operating leases Finance leases Total  Operating leases Finance leases Total  Operating leases Finance leases Total
2019 (1) $554
 $118
 $672
2020(1) 1,126
 862
 1,988
 $826
 $674
 $1,500
 $1,092
 $674
 $1,766
2021 1,111
 202
 1,313
 1,138
 14
 1,152
 1,138
 14
 1,152
2022 1,129
 64
 1,193
 1,162
 14
 1,176
 1,162
 14
 1,176
2023 1,134
 —
 1,134
 1,167
 —
 1,167
 1,167
 —
 1,167
2024 1,173
 —
 1,173
 1,173
 —
 1,173
Thereafter 99,187
 —
 99,187
 100,609
 —
 100,609
 100,609
 —
 100,609
Total lease payments 104,241
 1,246
 105,487
 106,075
 702
 106,777
 106,341
 702
 107,043
Less: Amount representing interest (87,601) (18) (87,619) (88,710) —
 (88,710) (89,024) —
 (89,024)
Lease liability $16,640
 $1,228
 $17,868
 $17,365
 $702
 $18,067
 $17,317
 $702
 $18,019

(1) RepresentsAs of March 31, 2020, represents the sixnine 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
 —
 83,373
Total lease payments $88,912
 1,296
 90,208
Less: Amount representing interest N/A
 (24) (24)
Total N/A
 $1,272
 $90,184

2020.



6.    Real Estate Joint Ventures

Consolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of June 30, 2019March 31, 2020 (dollars in thousands):
   Nominal Ownership %   June 30, 2019 (1)     March 31, 2020 (1)
 Date Acquired Total Assets Encumbered Assets Total Liabilities Date Acquired Nominal Ownership % Total Assets Encumbered Assets Total Liabilities
Entity Nominal Ownership %Location  Location 
LW Redstone Company, LLC 3/23/2010 85%Huntsville, Alabama $198,389
 $74,977
 $69,841
 3/23/2010 85% Huntsville, Alabama $285,673
 $111,839
 $100,415
M Square Associates, LLC 6/26/2007 50%College Park, Maryland 80,912
 46,159
 44,295
 6/26/2007 50% College Park, Maryland 91,205
 63,318
 56,396
Stevens Investors, LLC 8/11/2015 95% Washington, DC 99,436
 98,979
 30,718
 8/11/2015 95% Washington, DC 135,861
 135,175
 64,621
   $378,737
 $220,115
 $144,854
   $512,739
 $310,332
 $221,432
(1)Excludes amounts eliminated in consolidation.

In March 2020, the LW Redstone Company, LLC joint venture agreement was amended to change the distribution terms to allow the venture to distribute financing proceeds to satisfy our partner’s cumulative preferred return and to provide our partner a priority preferred return on its invested capital.

Unconsolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):
 Date Acquired Nominal Ownership % Number of Properties Carrying Value of Investment (1) Date Acquired Nominal Ownership % Number of Properties Carrying Value of Investment (1)
Entity June 30, 2019 December 31, 2018 March 31, 2020 December 31, 2019
GI-COPT DC Partnership LLC 7/21/2016 50% 6
 $38,790
 $39,845
 7/21/2016 50% 6
 $37,275
 $37,816
BREIT COPT DC JV LLC 6/20/2019 10% 7
 26,546
 —
 6/20/2019 10% 9
 13,945
 14,133
   13
 $65,336
 $39,845
   15
 $51,220
 $51,949
(1) Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.

These joint ventures operate triple-net leased, single-tenant data center shell properties in Virginia.

As described further in Note 4, on June 20, 2019, we sold a 90% interest in seven triple-net leased, single-tenant data center shell properties in Virginia and retained a 10% interest in the properties through BREIT-COPT, a newly-formed joint venture. We concluded that the joint venture is a variable interest entity. Under the terms of the joint venture agreement, we and our partner receive returns in proportion to our investments, and our maximum exposure to losses is limited to our investment, subject to certain indemnification obligations with respect to nonrecourse debt secured by the properties. The nature of our involvement in the activities of the joint venture does not give us power over decisions that significantly affect its economic performance. 



7.    Investing Receivables
 
Investing receivables including accrued interest thereon, consisted of the following (in thousands):
 
June 30,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
Notes receivable from the City of Huntsville$56,563
 $53,961
$60,699
 $59,427
Other investing loans receivable14,093
 3,021
14,096
 14,096
$70,656
 $56,982
Amortized cost basis74,795
 73,523
Allowance for credit losses(3,598) ��
Investing receivables, net$71,197
 $73,523

 
The balances above include accrued interest receivable, net of allowance for credit losses, of $433,000 as of March 31, 2020 and $4.7 million as of December 31, 2019.

Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6) and carry an interest rate of 9.95%. Our other investing loans receivable carry an interest rate of 8.0%.

We did not have an allowance for credit losses in connection with our investing receivables as of June 30, 2019 or December 31, 2018.  The fair value of these receivables was approximately $74$75 million as of June 30, 2019March 31, 2020 and $58$74 million as of December 31, 2018.2019.



8.    Prepaid Expenses and Other Assets, Net
 
Prepaid expenses and other assets, net consisted of the following (in thousands):
 
June 30,
2019		 December 31,
2018		March 31,
2020		 December 31,
2019
Lease incentives, net$23,487
 $21,258
$29,026
 $28,433
Construction contract costs incurred in excess of billings12,629
 3,189
Prepaid expenses12,482
 18,835
Furniture, fixtures and equipment, net (1)8,252
 8,630
7,620
 7,823
Construction contract costs in excess of billings, net7,463
 17,223
Non-real estate equity investments6,023
 5,940
6,714
 6,705
Prepaid expenses5,855
 25,658
Restricted cash4,452
 3,884
3,826
 3,397
Deferred financing costs, net (2)(1)4,190
 4,733
3,351
 3,633
Deferred tax asset, net (3)(2)2,164
 2,084
2,279
 2,328
Interest rate derivatives120
 5,617
Other assets4,771
 6,337
5,375
 4,639
Total for COPLP and subsidiaries71,943
 87,330
78,136
 93,016
Marketable securities in deferred compensation plan4,237
 3,868
2,279
 3,060
Total for COPT and subsidiaries$76,180
 $91,198
$80,415
 $96,076


(1) Includes $1.3 million in finance right-of-use assets as of June 30, 2019.
(2) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
(3)(2) Includes a valuation allowance of $2.1 million$480,000 as of June 30, 2019March 31, 2020 and $2.7 million as of December 31, 2018.2019.



9.    Debt, Net
 
Our debt consisted of the following (dollars in thousands):
 Carrying Value (1) as of  Carrying Value (1) as of 
 June 30,
2019		 December 31,
2018		 June 30, 2019 March 31,
2020		 December 31,
2019		 March 31, 2020
 Stated Interest Rates Scheduled Maturity Stated Interest Rates Scheduled Maturity
Mortgage and Other Secured Debt:  
  
      
  
    
Fixed rate mortgage debt (2) $145,285
 $147,141
 3.82% - 7.87% (3) 2019-2026 $142,581
 $143,430
 3.82% - 4.62% (3) 2023-2026
Variable rate secured debt (4) 34,514
 23,282
 LIBOR + 1.85% to 2.35% (5) 2020-2022 100,003
 68,055
 LIBOR + 1.45% to 2.35% (5) 2020-2026
Total mortgage and other secured debt 179,799
 170,423
     242,584
 211,485
    
Revolving Credit Facility(6) 163,000
 213,000
 LIBOR + 0.775% to 1.45% (6) March 2023 (7) 242,000
 177,000
 LIBOR + 0.775% to 1.45% (7) March 2023 (6)
Term Loan Facility (8) 248,490
 248,273
 LIBOR + 0.85% to 1.65% (9) 2022 397,863
 248,706
 LIBOR + 1.00% to 1.65% (9) 2022
Unsecured Senior Notes          
3.600%, $350,000 aggregate principal 348,207
 347,986
 3.60% (10) May 2023
5.250%, $250,000 aggregate principal 247,391
 247,136
 5.25% (11) February 2024
3.700%, $300,000 aggregate principal 299,068
 298,815
 3.70% (12) June 2021
5.000%, $300,000 aggregate principal 297,304
 297,109
 5.00% (13) July 2025
3.60%, $350,000 aggregate principal 348,544
 348,431
 3.60% (10) May 2023
5.25%, $250,000 aggregate principal 247,785
 247,652
 5.25% (11) February 2024
3.70%, $300,000 aggregate principal 299,454
 299,324
 3.70% (12) June 2021
5.00%, $300,000 aggregate principal 297,605
 297,503
 5.00% (13) July 2025
Unsecured note payable 1,103
 1,167
 0% (14) May 2026 1,004
 1,038
 0% (14) May 2026
Total debt, net $1,784,362
 $1,823,909
     $2,076,839
 $1,831,139
    

(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $6.3$6.6 million as of June 30, 2019March 31, 2020 and $7.2$5.8 million as of December 31, 2018.2019.
(2)  Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $248,000$202,000 as of June 30, 2019March 31, 2020 and $281,000$217,000 as of December 31, 2018.2019.
(3)The weighted average interest rate on our fixed rate mortgage debt was 4.17%4.16% as of June 30, 2019.March 31, 2020.
(4)Includes a construction loan with $87.4$55.9 million in remaining borrowing capacity as of June 30, 2019.March 31, 2020.
(5) The weighted average interest rate on our variable rate secured debt was 4.66%3.77% as of June 30, 2019.March 31, 2020.
(6)The weighted average interest rate on the Revolving Credit Facility was 3.52% as of June 30, 2019.
(7)The facility matures in March 2023, with the ability for us to further extend such maturity by two2 six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period.
(8)  As of June 30, 2019, we have the ability to borrow an additional $150.0 million in the aggregate under In connection with this facility, provided that there is no default under the facility and subject to the approval of the lenders. In addition, in connection with our Revolving Credit Facility, we also have the ability to borrow up to $500.0 million under new term loans from the facility’s lender group provided that there is no default under the facility and subject to the approval of the lenders.
(7)The weighted average interest rate on the Revolving Credit Facility was 1.74% as of March 31, 2020.
(8)   On March 6, 2020, we amended this loan facility to increase the loan amount by $150.0 million and change the interest terms.
(9) 
The interest rate on this loan was 3.69%2.37% as of June 30, 2019.
March 31, 2020.
(10)
The carrying value of these notes reflects an unamortized discount totaling $1.2$1.0 million as of June 30, 2019March 31, 2020 and $1.4$1.1 million as of December 31, 20182019.  The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%. 
(11)
The carrying value of these notes reflects an unamortized discount totaling $2.4$2.0 million as of June 30, 2019March 31, 2020 and $2.6$2.1 million as of December 31, 20182019.  The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%. 
(12)
The carrying value of these notes reflects an unamortized discount totaling $741,000$429,000 as of June 30, 2019March 31, 2020 and $943,000$534,000 as of December 31, 20182019.  The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%. 
(13) The carrying value of these notes reflects an unamortized discount totaling $2.3$2.0 million as of June 30, 2019March 31, 2020 and $2.4$2.1 million as of December 31, 2018.2019.  The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%.
(14) 
This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates.  The carrying value of this note reflects an unamortized discount totaling $258,000207,000 as of June 30, 2019March 31, 2020 and $294,000223,000 as of December 31, 20182019.
 
All debt is owed by COPLP. While COPT is not directly obligated by any debt, it has guaranteed COPLP’s Revolving Credit Facility, Term Loan Facilities and Unsecured Senior Notes.

Certain of our debt instruments require that we comply with a number of restrictive financial covenants.  As of June 30, 2019,March 31, 2020, we were within the compliance requirements ofcompliant with these financial covenants.

We capitalized interest costs of $2.4$3.4 million in the three months ended June 30, 2019, $1.4March 31, 2020 and $2.0 million in the three months ended June 30, 2018, $4.4 million in the six months ended June 30, 2019 and $2.8 million in the six months ended June 30, 2018.March 31, 2019.



The following table sets forth information pertaining to the fair value of our debt (in thousands): 
June 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
Carrying Amount Fair Value Carrying Amount Fair ValueCarrying Amount Fair Value Carrying Amount Fair Value
Fixed-rate debt 
  
  
  
 
  
  
  
Unsecured Senior Notes$1,191,970
 $1,226,750
 $1,191,046
 $1,219,603
$1,193,388
 $1,223,259
 $1,192,910
 $1,227,441
Other fixed-rate debt146,388
 148,395
 148,308
 147,106
143,585
 142,201
 144,468
 149,907
Variable-rate debt446,004
 450,417
 484,555
 486,497
739,866
 747,039
 493,761
 495,962
$1,784,362
 $1,825,562
 $1,823,909
 $1,853,206
$2,076,839
 $2,112,499
 $1,831,139
 $1,873,310
 

10.    Interest Rate Derivatives
 
The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was designated as a cash flow hedge of interest rate risk (dollars in thousands):
  
 
 
Fair Value at   
 
 
Fair Value at
Notional AmountNotional Amount Fixed Rate
Floating Rate Index
Effective Date
Expiration Date
June 30,
2019
December 31,
2018		Notional Amount Fixed Rate
Floating Rate Index
Effective Date
Expiration Date
March 31,
2020
December 31,
2019
$100,000

1.7300%
One-Month LIBOR
9/1/2015
8/1/2019
$58

$472
12,336
(1)1.390% One-Month LIBOR 10/13/2015 10/1/2020 $(57) $23
12,637
(1)1.3900% One-Month LIBOR 10/13/2015 10/1/2020 62
 239
100,000100,000
 1.9013% One-Month LIBOR 9/1/2016 12/1/2022 (975) 1,968
100,000
 1.901% One-Month LIBOR 9/1/2016 12/1/2022 (4,297) (1,028)
100,000100,000
 1.9050% One-Month LIBOR 9/1/2016 12/1/2022 (985) 1,967
100,000
 1.905% One-Month LIBOR 9/1/2016 12/1/2022 (4,307) (1,037)
50,00050,000
 1.9079% One-Month LIBOR 9/1/2016 12/1/2022 (499) 971
50,000
 1.908% One-Month LIBOR 9/1/2016 12/1/2022 (2,157) (524)
11,20011,200
(2)1.678% One-Month LIBOR 8/1/2019 8/1/2026 (778) (20)
150,000150,000
 0.498% One-Month LIBOR 4/1/2020 12/31/2020 (125) —
23,00023,000
(3)0.573% One-Month LIBOR 4/1/2020 3/26/2025 (174) —
75,00075,000
 3.1760% Three-Month LIBOR 6/30/2020 6/30/2030 (7,965) (2,676)75,000
 3.176% Three-Month LIBOR 6/30/2020 6/30/2030 (18,132) (8,640)
75,00075,000
 3.1920% Three-Month LIBOR 6/30/2020 6/30/2030 (8,074) (2,783)75,000
 3.192% Three-Month LIBOR 6/30/2020 6/30/2030 (18,249) (8,749)
75,00075,000
 2.7440% Three-Month LIBOR 6/30/2020 6/30/2030 (5,049) —
75,000
 2.744% Three-Month LIBOR 6/30/2020 6/30/2030 (14,956) (5,684)

  
 
 
 
$(23,427)
$158
  
 
 
 
$(63,232)
$(25,659)

(1)The notional amount of this instrument is scheduled to amortize to $12.1 million.
(2)The notional amount of this instrument is scheduled to amortize to $10.0 million.
(3)The notional amount of this instrument is scheduled to amortize to $22.1 million.

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):
 Fair Value at Fair Value at
Derivatives Balance Sheet Location June 30,
2019		 December 31, 2018 Balance Sheet Location March 31,
2020		 December 31, 2019
Interest rate swaps designated as cash flow hedges Prepaid expenses and other assets, net $120
 $5,617
 Prepaid expenses and other assets, net $—
 $23
Interest rate swaps designated as cash flow hedges Interest rate derivatives (liabilities) $(23,547) $(5,459) Interest rate derivatives (liabilities) $(63,232) $(25,682)

 
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
 Amount of (Loss) Gain Recognized in AOCL on Derivatives Amount of Gain (Loss) Reclassified from AOCL into Interest Expense on Statement of Operations Amount of Loss Recognized in AOCL on Derivatives Amount of (Loss) Gain Reclassified from AOCL into Interest Expense on Statement of Operations
 For the Three Months Ended June 30, For the Six Months Ended June 30, For the Three Months Ended June 30, For the Six Months Ended June 30, For the Three Months Ended March 31, For the Three Months Ended March 31,
Derivatives in Hedging Relationships 2019 2018 2019 2018 2019 2018 2019 2018 2020 2019 2020 2019
Interest rate derivatives $(13,545) $1,912
 $(22,390) $6,588
 $557
 $47
 $1,127
 $(198) $(37,705) $(8,845) $(131) $570


OverBased on the next 12 months,fair value of our derivatives as of March 31, 2020, we estimate that approximately $1.6$6.0 million inof losses will be reclassified from accumulated other comprehensive loss (“AOCL”) as an increase to interest expense.expense over the next 12 months.



We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of June 30, 2019,March 31, 2020, we arewere not in default with any of these provisions. As of June 30, 2019,March 31, 2020, the fair value of interest rate derivatives in a liability position related to these agreements was $23.6$63.4 million, excluding the effects of accrued interest and credit valuation adjustments. As of June 30, 2019,March 31, 2020, we had not


posted any collateral related to these agreements.  If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value, which was $23.5$63.5 million as of June 30, 2019.March 31, 2020.

11.    Redeemable Noncontrolling Interests

Our partners in two2 real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC, (discussed further in Note 6), have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
 For the Six Months Ended June 30, For the Three Months Ended March 31,
 2019 2018 2020 2019
Beginning balance $26,260
 $23,125
 $29,431
 $26,260
Contributions from noncontrolling interests —
 143
Distributions to noncontrolling interests (876) (711) (11,578) (349)
Net income attributable to noncontrolling interests 1,544
 1,229
 958
 675
Adjustment to arrive at fair value of interests 2,875
 758
 4,101
 799
Ending balance $29,803
 $24,544
 $22,912
 $27,385


We determine the fair value of the interests based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partners from the properties underlying the respective joint ventures. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancy projections and estimated operating and development expenditures.

12.    Equity
 
COPT issued 1.6 million common shares under its forward equity sale agreements for net proceeds of $46.5 million on March 27, 2019, after which it had no remaining capacity under the agreements. COPT contributed the net proceeds from this issuance to COPLP in exchange for an equal number of units in COPLP.Common Shares/Units

As of June 30, 2019,March 31, 2020, COPT had remaining capacity under its at-the-market stock offering program equal to an aggregate gross sales price of $300 million in common share sales.

During the sixthree months ended June 30, 2019,March 31, 2020, certain COPLP limited partners converted 5,50012,009 common units in COPLP for an equal number of common shares in COPT.

We declared dividends per COPT common share and distributions per COPLP common unit of $0.275 in the three months ended June 30, 2019March 31, 2020 and 2018 and $0.55 in the six months ended June 30, 2019 and 2018.2019.

See Note 15 for disclosure of COPT common share and COPLP common unit activity pertaining to our share-based compensation plans.



13.    Information by Business Segment

We have the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. We also report on Defense/IT Locations sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort(“Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations; Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support Locations”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville); and data center shells (properties leased to tenants to be operated as data centers in which the tenants generally fund the costs for the power, fiber connectivity and data center infrastructure).

We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”). Amounts reported for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.





The table below reports segment financial information for our reportable segments (in thousands): 
Operating Property Segments      Operating Property Segments      
Defense/Information Technology Locations        Defense/Information Technology Locations        
Fort Meade/BW Corridor Northern Virginia Defense/IT Lackland Air Force Base Navy Support Locations Redstone Arsenal Data Center Shells Total Defense/IT Locations Regional Office Wholesale
Data Center		 Other TotalFort Meade/BW Corridor Northern Virginia Defense/IT Lackland Air Force Base Navy Support Locations Redstone Arsenal Data Center Shells Total Defense/IT Locations Regional Office Wholesale
Data Center		 Other Total
Three Months Ended June 30, 2019 
  
  
    
  
    
  
  
  
Three Months Ended March 31, 2020 
  
  
    
  
    
  
  
  
Revenues from real estate operations$61,659
 $13,912
 $12,104
 $8,185
 $3,968
 $8,624
 $108,452
 $15,018
 $8,560
 $741
 $132,771
$64,438
 $13,678
 $12,076
 $8,341
 $4,676
 $5,577
 $108,786
 $15,460
 $7,172
 $698
 $132,116
Property operating expenses(19,344) (4,694) (6,648) (3,286) (1,599) (759) (36,330) (7,590) (3,618) (348) (47,886)(21,222) (5,185) (6,795) (3,285) (1,847) (657) (38,991) (7,537) (3,233) (238) (49,999)
UJV NOI allocable to COPT—
 —
 —
 —
 —
 1,251
 1,251
 —
 —
 —
 1,251
—
 —
 —
 —
 —
 1,713
 1,713
 —
 —
 —
 1,713
NOI from real estate operations$42,315
 $9,218
 $5,456
 $4,899
 $2,369
 $9,116
 $73,373
 $7,428
 $4,942
 $393
 $86,136
$43,216
 $8,493
 $5,281
 $5,056
 $2,829
 $6,633
 $71,508
 $7,923
 $3,939
 $460
 $83,830
Additions to long-lived assets$7,499
 $1,703
 $—
 $928
 $536
 $—
 $10,666
 $4,870
 $95
 $34
 $15,665
$7,675
 $2,691
 $—
 $1,758
 $170
 $—
 $12,294
 $3,357
 $878
 $65
 $16,594
Transfers from non-operating properties$1,338
 $20
 $1,833
 $—
 $5,576
 $92,844
 $101,611
 $—
 $—
 $—
 $101,611
$538
 $256
 $15
 $—
 $1,136
 $56,232
 $58,177
 $—
 $—
 $—
 $58,177
Three Months Ended June 30, 2018 
  
  

 
  
  
    
  
  
  
Segment assets at March 31, 2020$1,275,601
 $395,108
 $145,363
 $183,054
 $138,797
 $334,102
 $2,472,025
 $390,352
 $200,891
 $3,677
 $3,066,945
Three Months Ended March 31, 2019 
  
  
    
  
    
  
  
  
Revenues from real estate operations$61,993
 $13,118
 $12,382
 $8,127
 $3,652
 $5,955
 $105,227
 $15,296
 $8,105
 $534
 $129,162
$62,683
 $14,831
 $11,561
 $8,155
 $3,939
 $7,354
 $108,523
 $14,833
 $7,871
 $763
 $131,990
Property operating expenses(20,099) (4,909) (7,494) (3,431) (1,509) (799) (38,241) (7,169) (4,150) 114
 (49,446)(22,335) (5,292) (5,959) (3,404) (1,539) (353) (38,882) (7,416) (2,838) (309) (49,445)
UJV NOI allocable to COPT—
 —
 —
 —
 —
 1,202
 1,202
 —
 —
 —
 1,202
—
 —
 —
 —
 —
 1,219
 1,219
 —
 —
 —
 1,219
NOI from real estate operations$41,894
 $8,209
 $4,888
 $4,696
 $2,143
 $6,358
 $68,188
 $8,127
 $3,955
 $648
 $80,918
$40,348
 $9,539
 $5,602
 $4,751
 $2,400
 $8,220
 $70,860
 $7,417
 $5,033
 $454
 $83,764
Additions to long-lived assets$8,151
 $1,186
 $—
 $1,450
 $351
 $—
 $11,138
 $5,361
 $81
 $188
 $16,768
$3,935
 $1,447
 $—
 $5,017
 $300
 $—
 $10,699
 $3,989
 $156
 $10
 $14,854
Transfers from non-operating properties$3,035
 $352
 $—
 $3
 $26
 $29,675
 $33,091
 $—
 $1,133
 $—
 $34,224
$5,040
 $4,509
 $6,503
 $—
 $3,635
 $19,788
 $39,475
 $—
 $—
 $—
 $39,475
Six Months Ended June 30, 2019 
  
  
    
  
    
  
  
  
Revenues from real estate operations$124,342
 $28,743
 $23,665
 $16,340
 $7,907
 $15,978
 $216,975
 $29,851
 $16,431
 $1,504
 $264,761
Property operating expenses(41,679) (9,986) (12,607) (6,690) (3,138) (1,112) (75,212) (15,006) (6,456) (657) (97,331)
UJV NOI allocable to COPT—
 —
 —
 —
 —
 2,470
 2,470
 —
 —
 —
 2,470
NOI from real estate operations$82,663
 $18,757
 $11,058
 $9,650
 $4,769
 $17,336
 $144,233
 $14,845
 $9,975
 $847
 $169,900
Additions to long-lived assets$11,434
 $3,150
 $—
 $5,945
 $836
 $—
 $21,365
 $8,859
 $251
 $44
 $30,519
Transfers from non-operating properties$6,378
 $4,529
 $8,336
 $—
 $9,211
 $112,632
 $141,086
 $—
 $—
 $—
 $141,086
Segment assets at June 30, 2019$1,274,336
 $398,586
 $146,475
 $187,172
 $115,222
 $307,676
 $2,429,467
 $393,110
 $209,787
 $3,776
 $3,036,140
Six Months Ended June 30, 2018 
  
  
    
  
    
  
  
  
Revenues from real estate operations$124,775
 $25,679
 $23,825
 $15,997
 $7,285
 $11,786
 $209,347
 $30,580
 $16,182
 $1,331
 $257,440
Property operating expenses(41,703) (9,632) (14,092) (6,735) (2,949) (1,593) (76,704) (15,047) (8,408) (238) (100,397)
UJV NOI allocable to COPT—
 —
 —
 —
 —
 2,401
 2,401
 —
 —
 —
 2,401
NOI from real estate operations$83,072
 $16,047
 $9,733
 $9,262
 $4,336
 $12,594
 $135,044
 $15,533
 $7,774
 $1,093
 $159,444
Additions to long-lived assets$15,272
 $3,126
 $—
 $2,558
 $430
 $—
 $21,386
 $9,245
 $117
 $315
 $31,063
Transfers from non-operating properties$20,221
 $693
 $—
 $—
 $470
 $30,789
 $52,173
 $—
 $2,145
 $—
 $54,318
Segment assets at June 30, 2018$1,269,525
 $396,139
 $126,956
 $190,537
 $106,374
 $330,622
 $2,420,153
 $396,847
 $221,239
 $4,213
 $3,042,452
Segment assets at March 31, 2019$1,279,983
 $400,741
 $145,697
 $189,192
 $110,195
 $370,447
 $2,496,255
 $394,001
 $213,993
 $3,904
 $3,108,153




The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Segment revenues from real estate operations$132,771
 $129,162
��$264,761
 $257,440
$132,116
 $131,990
Construction contract and other service revenues42,299
 17,581
 59,249
 44,779
13,681
 16,950
Total revenues$175,070
 $146,743
 $324,010
 $302,219
$145,797
 $148,940

 
The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
UJV NOI allocable to COPT$1,251
 $1,202
 $2,470
 $2,401
$1,713
 $1,219
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense(830) (828) (1,657) (1,652)(1,270) (827)
Add: Equity in loss of unconsolidated non-real estate entities(1) (1) (2) (3)(2) (1)
Equity in income of unconsolidated entities$420
 $373
 $811
 $746
$441
 $391

 
As previously discussed, we provide real estate services such as property management, development and construction and development services primarily for our properties but also for third parties.  The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities.  Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue.  We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Construction contract and other service revenues$42,299
 $17,581
 $59,249
 $44,779
$13,681
 $16,950
Construction contract and other service expenses(41,002) (16,941) (57,328) (43,157)(13,121) (16,326)
NOI from service operations$1,297
 $640
 $1,921
 $1,622
$560
 $624




The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
NOI from real estate operations$86,136
 $80,918
 $169,900
 $159,444
$83,830
 $83,764
NOI from service operations1,297
 640
 1,921
 1,622
560
 624
Interest and other income1,849
 1,439
 4,135
 2,798
1,205
 2,286
Credit loss expense(689) —
Gain on sales of real estate84,469
 (23) 84,469
 (27)5
 —
Equity in income of unconsolidated entities420
 373
 811
 746
441
 391
Income tax benefit (expense)176
 (63) (18) (118)
Income tax expense(49) (194)
Depreciation and other amortization associated with real estate operations(34,802) (33,190) (69,598) (66,702)(32,596) (34,796)
General, administrative and leasing expenses(9,386) (7,628) (18,137) (14,920)(7,486) (8,751)
Business development expenses and land carry costs(870) (1,234) (1,983) (2,848)(1,118) (1,113)
Interest expense(18,475) (18,945) (37,149) (37,729)(16,840) (18,674)
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities(1,251) (1,202) (2,470) (2,401)(1,713) (1,219)
Net income$109,563
 $21,085
 $131,881
 $39,865
$25,550
 $22,318

 
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
 
June 30,
2019		 June 30,
2018		March 31,
2020		 March 31,
2019
Segment assets$3,036,140
 $3,042,452
$3,066,945
 $3,108,153
Operating properties lease liabilities included in segment assets16,502
 —
17,365
 16,342
Non-operating property assets523,801
 431,661
658,978
 485,911
Other assets227,026
 138,249
311,169
 165,453
Total COPT consolidated assets$3,803,469
 $3,612,362
$4,054,457
 $3,775,859

 
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements.  In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, gain on sales of real estate and equity in income of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management.  We also did not allocate general, administrative and leasing expenses, business development expenses and land carry costs, interest and other income, credit loss expense, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.

14.     Construction Contract and Other Service Revenues

We disaggregate our construction contract and other service revenues by compensation arrangement and by service type as we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and other service revenues by compensation arrangement (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Construction contract revenues:       
Construction contract revenue:   
Guaranteed maximum price$25,792
 $9,539
 $38,148
 $30,025
$5,044
 $12,356
Firm fixed price1,335
 6,288
 3,660
 12,723
5,072
 2,325
Cost-plus fee14,969
 1,496
 17,029
 1,554
3,309
 2,060
Other203
 258
 412
 477
256
 209
$42,299
 $17,581
 $59,249
 $44,779
$13,681
 $16,950



The table below reports construction contract and other service revenues by service type (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Construction contract revenues:       
Construction contract revenue:   
Construction$42,010
 $16,668
 $58,499
 $42,583
$12,883
 $16,489
Design86
 655
 338
 1,719
542
 252
Other203
 258
 412
 477
256
 209
$42,299
 $17,581
 $59,249
 $44,779
$13,681
 $16,950


We recognized an increase (decrease) in revenue of $(14,000) and $10,000$32,000 in the three months ended June 30,March 31, 2019 and 2018, respectively, and $18,000 and $319,000 in the six months ended June 30, 2019 and 2018, respectively, from performance obligations satisfied (or partially satisfied) in previous periods.

Accounts receivable related to our construction contract services is included in accounts receivable, net on our consolidated balance sheets. The beginning and ending balances of accounts receivable related to our construction contracts were as follows (in thousands):
For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Beginning balance$6,701
 $4,577
$12,378
 $6,701
Ending balance$34,837
 $4,805
$10,852
 $6,569


The increase in the accounts receivable balance reported above for the six months ended June 30, 2019 was due primarily to significant amounts billed near the end of the period.

Contract assets, which we refer to herein as construction contract costs in excess of billings, net are included in prepaid expenses and other assets, net reported on our consolidated balance sheets. The beginning and ending balances of our contract assets were as follows (in thousands):
For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 20182020 2019
Beginning balance$3,189
 $4,884
$17,223
 $3,189
Ending balance$12,629
 $4,158
$7,463
 $14,834


Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):
 For the Six Months Ended June 30,
 2019 2018
Beginning balance$568
 $27,402
Ending balance$156
 $515
Portion of beginning balance recognized in revenue during:   
Three months ended June 30$6
 $7,999
Six months ended June 30$445
 $27,296
 For the Three Months Ended March 31,
 2020 2019
Beginning balance$1,184
 $568
Ending balance$1,417
 $1,005
Portion of beginning balance recognized in revenue during period$646
 $439


The change in the contract liabilities balance reported above for the six months ended June 30, 2018 was due primarily to our satisfaction of performance obligations during the period on a contract on which we previously received advance payments from a customer.

Revenue allocated to the remaining performance obligations under existing contracts as of June 30, 2019March 31, 2020 that will be recognized as revenue in future periods was $48.4$74.1 million, approximately $41$26 million of which we expect to recognize during the remainder of 2019.2020.

We haveincurred no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues and had no impairment lossessignificant credit loss expense on construction contracts receivable or unbilled construction revenue in the three or six months ended June 30, 2019March 31, 2020 and 2018.


2019.



15.    Share-Based Compensation
 
Restricted Shares
 
During the sixthree months ended June 30, 2019,March 31, 2020, certain employees and non-employee members of our Board of Trustees (“Trustees”) were granted a total of 171,520133,335 restricted common shares with an aggregate grant date fair value of $4.5$3.4 million (weighted average of $26.22($25.34 per share).  Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. Restricted shares granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. During the sixthree months ended June 30, 2019,March 31, 2020, forfeiture restrictions lapsed on 171,028132,703 previously issued common shares; these shares had a weighted average grant date fair value of $28.03$28.13 per share, and the aggregate intrinsic value of the shares on the vesting dates was $4.5$3.4 million.

Deferred Share Awards

During the six months ended June 30, 2019, certain non-employee Trustees were granted a total of 3,432 deferred share awards with an aggregate grant date fair value of $95,000 ($27.60 per share). Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date elected by the Trustee (generally upon cessation of being a Trustee). During the six months ended June 30, 2019, we issued 3,097 common shares in settlement of deferred share awards; these shares had a grant date fair value of $26.77 per share, and the aggregate intrinsic value of the shares on the settlement date was $86,000.

Performance Share Awards (“PSUs”)
 
We issued 44,75723,181 common shares on January 18, 201913, 2020 to executives in settlement of PSUs granted in 2016,2017, representing 157%53% of the target awardawards for those PSUs.

PIUsProfit Interest Units (“PIUs”)

Commencing in 2019,For 2020, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred share awards and PSUs). PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes. Our, and our executives and certain of our Trustees selected PIUs as their form of share-based compensation for their 2019 grants.PIUs. We granted two2 forms of PIUs: time-based PIUs (“TB-PIUs”); and performance-based PIUs (“PB-PIUs”). TB-PIUs are subject to forfeiture restrictions until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are subject to a market condition in that the number of earned awards are determined at the end of the performance period (as described further below) and then settled in vested PIUs. Vested PIUs carry substantially the same rights to redemption and distributions as non-PIU common units.

TB-PIUs

During the sixthree months ended June 30, 2019,March 31, 2020, our executives and certain non-employee Trustees were granted a total of 61,82067,081 TB-PIUs with an aggregate grant date fair value of $1.6$1.7 million (weighted average of $26.01($25.34 per TB-PIU). TB-PIUs granted to executives vest in equal one-third increments over a three-year period beginning on the first anniversary of the date of grant. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights. During the


three months ended March 31, 2020, 20,622 TB-PIUs awarded to our former Executive Vice President and Chief Operating Officer were forfeited upon his resignation. During the three months ended March 31, 2020, forfeiture restrictions lapsed on 18,318 previously issued TB-PIUs; these TB-PIUs had a grant date fair value of $25.81 per unit, and the aggregate intrinsic value of the TB-PIUs on the vesting date was $464,000.

PB-PIUs

On January 1, 2019,2020, we granted our executives 193,682176,758 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 20212022 or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event.  The number of earned awards at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return (“TSR”) relative to a peer group of companies, as set forth in the following schedule:
Percentile Rank Earned Awards Payout %
75th or greater 100% of PB-PIUs granted
50th (target) 50% of PB-PIUs granted
25th 25% of PB-PIUs granted
Below 25th 0% of PB-PIUs granted


If the percentile rank exceeds the 25th percentile and is between two2 of the percentile ranks set forth in the table above, then the percentage of the earned awards will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles.  If COPT’s TSR during the measurement period is negative, the maximum number of earned awards will be limited to the target level payout percentage.  During the performance period, PB-PIUs carry rights to distributions equal to 10% of the distribution rights of non-PIU common units but carry no redemption rights.



At the end of the performance period, we will settle the award by issuing vested PIUs equal to the number of earned awards in settlement of the award plan and paying cash equal to the excess, if any, of: the aggregate distributions that would have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such vested PIUs been issued on the grant date; over the aggregate distributions made on the PB-PIUs during the performance period. If a performance period ends due to a sale event or qualified termination, the number of earned awards is prorated based on the portion of the three-year performance period that has elapsed.  If employment is terminated by the employee or by us for cause, all PB-PIUs are forfeited.

These PB-PIUsPB-PIU grants had an aggregate grant date fair value of $2.4$2.9 million ($12.4716.36 per PB-PIU) which is being recognized over the performance period. The grant date fair value was computed using a Monte Carlo model that included the following assumptions: baseline common share value of $21.03;$29.38; expected volatility for common shares of 21.0%18.0%; and a risk-free interest rate of 2.51%1.65%.  

During the three months ended March 31, 2020, 73,184 PB-PIUs awarded to our former Executive Vice President and Chief Operating Officer were forfeited upon his resignation.

16.    Earnings Per Share (“EPS”) and Earnings Per Unit (“EPU”)
 
COPT and Subsidiaries EPS

We present both basic and diluted EPS.  We compute basic EPS by dividing net income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common shares outstanding during the period.  Our computation of diluted EPS is similar except that:
 
the denominator is increased to include: (1) the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into common shares were converted; and (2) the effect of dilutive potential common shares outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation using the treasury stock or if-converted methods; and
the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common shares that we add to the denominator.



Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Numerator: 
  
     
  
Net income attributable to COPT$106,791
 $19,434
 $127,650
 $36,584
$24,054
 $20,859
Income attributable to share-based compensation awards(364) (117) (413) (234)(105) (86)
Numerator for basic EPS on net income attributable to COPT common shareholders106,427
 19,317
 127,237
 36,350
23,949
 20,773
Preferred unit distributions165
 —
 —
 —
Redeemable noncontrolling interests902
 —
 66
 —
Common units in the Operating Partnership—
 —
 1,515
 —
Income attributable to share-based compensation awards18
 —
 22
 —
8
 —
Numerator for diluted EPS on net income attributable to COPT common shareholders$107,512
 $19,317
 $128,840
 $36,350
$23,957
 $20,773
Denominator (all weighted averages): 
  
     
  
Denominator for basic EPS (common shares)111,557
 101,789
 110,759
 101,397
111,724
 109,951
Dilutive convertible preferred units176
 —
 —
 —
Dilutive effect of common units—
 —
 1,329
 —
Dilutive effect of share-based compensation awards310
 119
 289
 131
239
 267
Dilutive effect of redeemable noncontrolling interests1,062
 —
 130
 —
Denominator for diluted EPS (common shares)113,105
 101,908
 112,507
 101,528
111,963
 110,218
Basic EPS$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19
Diluted EPS$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19

 


Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods (in thousands):
Weighted Average Shares Excluded from DenominatorWeighted Average Shares Excluded from Denominator
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Conversion of common units1,327
 3,197
 —
 3,208
1,226
 1,331
Conversion of redeemable noncontrolling interests—
 —
 907
 —
1,011
 1,013
Conversion of Series I preferred units—
 176
 176
 176
176
 176

 
The following securities were also excluded from the computation of diluted EPS because their effect was antidilutive:

weighted average shares related to COPT’s forward equity sale agreements for the three months ended June 30, 2018March 31, 2019 of 6.8 million, and for the six months ended June 30, 2019 and 2018 of 758,000 and 7.1 million, respectively;1.5 million;
weighted average restricted shares and deferred share awards for the three months ended June 30,March 31, 2020 and 2019 of 440,000 and 2018 of 425,000 and 458,000, respectively, and for the six months ended June 30, 2019 and 2018 of 444,000 and 451,000,463,000, respectively;
weighted average options for the three months ended June 30,March 31, 2019 and 2018 of 17,000 and 47,000, respectively, and for the six months ended June 30, 2019 and 2018 of 23,000 and 53,000, respectively;30,000; and
weighted average unvested PIUs of 59,000 and 39,000TB-PIUs for the three and six months ended June 30,March 31, 2020 and 2019 of 75,000 and 19,000, respectively.

COPLP and Subsidiaries EPU

We present both basic and diluted EPU.  We compute basic EPU by dividing net income available to common unitholders allocable to unrestricted common units under the two-class method by the weighted average number of unrestricted common units outstanding during the period.  Our computation of diluted EPU is similar except that:
 
the denominator is increased to include: (1) the weighted average number of potential additional common units that would have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive


potential common units outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation using the treasury stock or if-converted methods; and
the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common units that we add to the denominator.

Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in thousands, except per unit data):
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Numerator: 
  
     
  
Net income attributable to COPLP$108,295
 $20,207
 $129,576
 $38,066
$24,418
 $21,281
Preferred unit distributions(165) (165) (330) (330)(77) (165)
Income attributable to share-based compensation awards(438) (117) (494) (234)(121) (93)
Numerator for basic EPU on net income attributable to COPLP common unitholders107,692
 19,925
 128,752
 37,502
Redeemable noncontrolling interests902
 —
 66
 —
Income attributable to share-based compensation awards18
 —
 22
 —
Dilutive effective of preferred units165
 —
 —
 —
Numerator for diluted EPU on net income attributable to COPLP common unitholders$108,777
 $19,925
 $128,840
 $37,502
Numerator for basic and diluted EPU on net income attributable to COPLP common unitholders$24,220
 $21,023
Denominator (all weighted averages): 
  
     
  
Denominator for basic EPU (common units)112,884
 104,986
 112,088
 104,605
112,950
 111,282
Dilutive convertible preferred units176
 —
 —
 —
Dilutive effect of redeemable noncontrolling interests1,062
 —
 130
 —
Dilutive effect of share-based compensation awards310
 119
 289
 131
239
 267
Denominator for diluted EPU (common units)114,432
 105,105
 112,507
 104,736
113,189
 111,549
Basic EPU$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19
Diluted EPU$0.95
 $0.19
 $1.15
 $0.36
$0.21
 $0.19

 


Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPU for the respective periods (in thousands):
Weighted Average Shares Excluded from DenominatorWeighted Average Shares Excluded from Denominator
For the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended March 31,
2019 2018 2019 20182020 2019
Conversion of redeemable noncontrolling interests—
 —
 907
 —
1,011
 1,013
Conversion of Series I preferred units—
 176
 176
 176
176
 176


The following securities were also excluded from the computation of diluted EPU because their effect was antidilutive:

weighted average shares related to COPT’s forward equity sale agreements for the three months ended June 30, 2018March 31, 2019 of 6.8 million, and for the six months ended June 30, 2019 and 2018 of 758,000 and 7.1 million, respectively;1.5 million;
weighted average restricted units and deferred share awards for the three months ended June 30,March 31, 2020 and 2019 of 440,000 and 2018 of 425,000 and 458,000, respectively, and463,000, respectively;
weighted average options for the sixthree months ended June 30,March 31, 2019 and 2018 of 444,00030,000; and 451,000, respectively;
•
weighted average options for the three months ended June 30, 2019 and 2018 of 17,000 and 47,000, respectively, and for the six months ended June 30, 2019 and 2018 of 23,000 and 53,000, respectively; and
weighted average unvested PIUs of 59,000 and 39,000TB-PIUs for the three and six months ended June 30,March 31, 2020 and 2019 of 75,000 and 19,000, respectively.



17.    Commitments and Contingencies
 
Litigation and Claims
 
In the normal course of business, we are subject to legal actions and other claims.  We record losses for specific legal proceedings and claims when we determine that a loss is probable and the amount of loss can be reasonably estimated.  ManagementAs of March 31, 2020, management believes that it is reasonably possible that we could recognize a loss of up to $3.1 million for certain municipal tax claims. While we do not believe this loss would materially affect our financial position or liquidity, it could be material to our results of operations. Management believes that it is also reasonably possible that we could incur losses pursuant to other such claims but do not believe such losses would materially affect our financial position, liquidity or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
 
Environmental
 
We are subject to various Federal, state and local environmental regulations related to our property ownership and operation.  We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.

In connection with a lease and subsequent sale in 2008 and 2010 of three3 properties in Dayton, New Jersey, we agreed to provide certain environmental indemnifications limited to $19 million in the aggregate. We have insurance coverage in place to mitigate much of any potential future losses that may result from these indemnification agreements.
 
Tax Incremental Financing Obligation
 
Anne Arundel County, Maryland issued tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as the National Business Park.  These bonds had a remaining principal balance of approximately $35$34 million as of June 30, 2019.March 31, 2020. The real estate taxes on increases in assessed values post-bond issuance of properties in development districts encompassing the National Business Park are transferred to a special fund pledged to the repayment of the bonds. While we are obligated to fund, through a special tax, any future shortfalls between debt service of the bonds and real estate taxes available to repay the bonds, as of June 30, 2019,March 31, 2020, we do not expect any such future fundings will be required.significant.

Contractual ObligationsEffects of COVID-19
Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide and throughout the United States. As of May 8, 2020, there continued to be significant uncertainty regarding the duration of COVID-19’s spread, and the potential, once its spread subsides, for the virus to reoccur on


We had amounts remaininga significant scale in the future. The COVID-19 outbreak has prompted governments and other authorities around the world, including federal, state and local authorities in the United States, to be incurred under various contractual obligationsimpose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The outbreak has significantly disrupted economic markets worldwide, as well as in the United States at a national, regional and local level, and created significant volatility in financial markets. Furthermore, conditions could potentially continue to deteriorate as a result of June 30, 2019the pandemic.

COVID-19 and measures instituted to prevent spread, may adversely affect us in many ways, including by disrupting:

our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities;
the supply of products or services from our and our tenants’ vendors that includedare needed for us and our tenants to operate effectively; and
our and our tenants’ ability to continue or complete planned development, including the following (excluding amounts incurred and therefore reflected as liabilities reportedpotential for delays in the supply of materials or labor necessary for development.

The extent of COVID-19’s effect on our consolidated balance sheets):

developmentoperational and redevelopment obligationsfinancial performance is dependent on future developments, including the duration, spread and intensity of $174.0 million;
tenantthe outbreak, all of which are uncertain and other capital improvementsdifficult to predict. Due to the speed with which the effects of $51.8 million;
third party construction obligationsCOVID-19 have developed, we are unable at this time to estimate the magnitude of $15.4 million;the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and
other obligations of $1.7 million.

 cash flows could be material.


Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
During the sixthree months ended June 30, 2019:March 31, 2020, we: 

we finished the period with our office and data center shell portfolio 92.7% occupied;93.7% occupied and 94.9% leased;
we placed into service 787,000230,000 square feet in seven newly-constructed properties and one redevelopednewly-developed data center shell property that werewas 100.0% leased as of June 30, 2019;March 31, 2020; and
we sold a 90% interest in seven data center shell properties based onamended an aggregate property value of $265.0existing term loan facility to increase the loan amount by $150.0 million and retained a 10%reduce the LIBOR interest inrate spread on the properties through BREIT-COPT, a newly-formed joint venture. Our partner infacility. We used the joint venture acquired the 90% interest from us for $238.5 million, most of which was used by us to repay borrowings under our Revolving Credit Facility that funded development costs; and
COPT issued 1.6 million common shares under its forward equity sale agreements for netresulting loan proceeds of $46.5 million. COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP. The proceeds were used primarily to repay borrowings under our Revolving Credit Facility that funded development costs.

In addition, effective March 16, 2020, Paul R. Adkins resigned from his position as Executive Vice President and Chief Operating Officer. We commenced a search for candidates to replace Mr. Adkins and, in the interim, have senior level employees handling his responsibilities.

We refer to the measure “annualized rental revenue” in various sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Quarterly Report on Form 10-Q. Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time (ignoring free rent then in effect). Our computation of annualized rental revenue excludes the effect of lease incentives, although the effect of this exclusion is not material. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis.

With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Quarterly Report on Form 10-Q, amounts disclosed include information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for Annualized Rental Revenue,annualized rental revenue, which represent the portion attributable to our ownership interest.

We discuss significant factors contributing to changes in our net income in the section below entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no material differences in the results of operations between the two reporting entities.

In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:

how we expect to generate cash for short and long-term capital needs; and
our commitments and contingencies.
 
You should refer to our consolidated financial statements and the notes thereto as you read this section.
 
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. 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 we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we 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;


risks associated with uncertainties regarding the impact of the COVID-19 pandemic on our business and national, regional and local economic conditions;
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 our strategic customers;
our 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 our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
changes in our 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;


our 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;
our ability to achieve projected results;
security breaches relating to cyber attacks, cyber intrusions or other factors; and
environmental requirements.

We undertake no obligation to publicly update or supplement forward-looking statements.
 
Effects of COVID-19

Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide and throughout the United States. As of the date of this filing, there continued to be significant uncertainty regarding the duration of COVID-19’s spread, and the potential, once its spread subsides, for the virus to reoccur on a significant scale in the future. The COVID-19 outbreak has prompted governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of movement and business operations, such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The outbreak has significantly disrupted economic markets worldwide, as well as in the United States at a national, regional and local level, and created significant volatility in financial markets. Furthermore, conditions could potentially continue to deteriorate as a result of the pandemic.

COVID-19 has significantly affected the operations of much of the commercial real estate industry as tenants’ operations, including the ability to use space and run businesses, has been disrupted, which has adversely affected their ability to sustain their businesses, as well as their ability, or willingness, to fulfill their lease obligations. The industry has also been significantly impacted by the economic disruption that COVID-19 has triggered, which has adversely impacted the ability to lease space in most property types to new and existing tenants at favorable terms. As result, the commercial real estate industry is facing enhanced risk for adverse impacts in its operations, financial conditions and cash flows from COVID-19.

Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, representing 162 of the portfolio’s 171 properties, or 87.7%, of our annualized rental revenue as of March 31, 2020. These properties are primarily occupied by the USG and contractor tenants engaged in what we believe are high-priority security, defense and IT missions. As a result, most of these properties are designated as “essential businesses,” and are therefore exempt from many of the restrictions that have otherwise affected much of the commercial real estate industry. Furthermore, since the tenants in these properties are mostly the USG, or contractors of the USG who will continue to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations will not be significantly disrupted. Our Defense/IT Locations do include several tenants serving as amenities to business parks housing our properties (such as restaurant, retail and personal service providers); while these tenants’ operations have been significantly disrupted by COVID-19, our annualized rental revenue from these tenants is not significant.

As of March 31, 2020, we owned seven Regional Office properties, representing 11.8% of our office and data center shell portfolio’s annualized rental revenue; these properties were comprised of: three high-rise Baltimore City properties proximate to the city’s waterfront; and four Northern Virginia properties. While these properties include tenants in the financial services, health care and public health sectors, which, as “essential businesses,” are exempt from restrictions on operations, they also include a number of non essential business tenants. These properties are more subject to traditional office fundamentals than our Defense/IT Locations and therefore face much of the enhanced risk in adverse impacts from COVID-19 described above.



In terms of the effect of COVID-19 on our results of operations for the three months ended March 31, 2020, we:

concluded that the economic disruption resulting from COVID-19 constituted a significant adverse change in the business climate that could affect the value of our Regional Office properties, which are dependent on commercial office tenants and could suffer increased vacancy as a result. Accordingly, we concluded that these circumstances constituted an indicator of impairment. We performed recovery analyses for each Regional Office property’s asset group and concluded that the carrying values of each asset group was recoverable from its respective estimated undiscounted future cash flows. As a result, no impairment loss was recognized; and
maintained operational service level at our properties, with our property-level building technicians and maintenance employees working on site (with personal protective equipment, social distancing and more frequent cleaning), while most of our corporate headquarters-based employees worked from home.

While we do not currently expect that COVID-19 will significantly affect our results of operations, we believe that the effect will ultimately be dependent on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Nevertheless, we believe at this time that there is more inherent risk associated with the operations of our Regional Office properties than our Defense/IT Locations.

We believe that COVID-19 has delayed our ability to complete several leases that we previously thought were on track for completion by March 31, 2020. The inability for us to physically show space to prospective tenants due to COVID-19 related restrictions also serves as an impediment to initiate new leasing activity. Overall, we believe that COVID-19 could: impede our ability to complete leasing for our Defense/IT Locations at the pace that we were previously expecting, though we still expect such leasing to advance; and potentially create more significant challenges for leasing space in our Regional Office properties.

For our development activity, the 13 properties that were under development as of March 31, 2020 face minimal operational risk as they were 78% leased as of April 30, 2020. However, COVID-19 does enhance the risk of us being able to stay on pace to complete development and begin operations on schedule due to the potential for delays from: factories’ ability to provide materials; possible labor quarantines; and jurisdictional permitting and inspections. These types of issues have not significantly affected us to date but could in the future, depending on future COVID-19 related developments.

COVID-19’s effects on economic and financial markets could impede our ability, or willingness based on terms available, to obtain unsecured, fixed rate debt or raise equity through issuances of COPT common shares. Due to the potential for further financial market instability, we borrowed under our Revolving Credit Facility in late March of 2020 in order to pre-fund our short-term capital needs. While we expect to spend approximately $220 million on development costs and approximately $70 million on improvements and leasing costs for operating properties during the remainder of 2020, as of March 31, 2020, we had $159 million in cash and cash equivalents on hand, $558.0 million in available borrowing capacity under our Revolving Credit Facility and minimal debt maturities for the remainder of 2020. In addition, we believe that we have the ability to raise equity by selling interests in data center shells through joint ventures.



Occupancy and Leasing
 
Office and Data Center Shell Portfolio
 
The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:
June 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
Occupancy rates at period end 
  
 
  
Total92.7% 93.0%93.7% 92.9%
Defense/IT Locations:      
Fort Meade/BW Corridor90.8% 91.1%92.4% 92.4%
Northern Virginia Defense/IT87.6% 91.3%85.5% 82.4%
Lackland Air Force Base100.0% 100.0%100.0% 100.0%
Navy Support Locations90.9% 90.5%94.0% 92.5%
Redstone Arsenal98.7% 99.0%99.7% 99.3%
Data Center Shells100.0% 100.0%100.0% 100.0%
Total Defense/IT Locations93.3% 93.6%94.2% 93.7%
Regional Office89.3% 89.2%91.4% 88.1%
Other72.1% 77.2%64.6% 73.0%
Average contractual annual rental rate per square foot at period end (1)$29.32
 $30.04
$31.42
 $31.28

(1) Includes estimated expense reimbursements.
Rentable
Square Feet
 
Occupied
Square Feet
Rentable
Square Feet
 
Occupied
Square Feet
(in thousands)(in thousands)
December 31, 201818,094
 16,821
December 31, 201919,173
 17,816
Vacated upon lease expiration (1)—
 (483)—
 (62)
Occupancy for new leases (2)—
 472
—
 180
Constructed or redeveloped787
 787
Developed or redeveloped230
 230
Other changes64
 (37)(25) (3)
June 30, 201918,945
 17,560
March 31, 202019,378
 18,161

(1)Includes lease terminations and space reductions occurring in connection with lease renewals.
(2)Excludes occupancy of vacant square feet acquired or developed.

During the sixthree months ended June 30, 2019,March 31, 2020, we completed 2.5 million631,000 square feet of leasing, including: renewed leases on 950,000488,000 square feet, representing 77.8%89.0% of the square footage of our lease expirations (including the effect of early renewals); 1.2 million square feet of development and redevelopment space; and 371,000143,000 square feet of vacant space.

Wholesale Data Center
 
OurAs of March 31, 2020 and December 31, 2019, 14.8 megawatts, or 76.9%, of the 19.25 megawattmegawatts in our wholesale data center was 82.1%were leased. While 1.2 megawatts in known tenant downsizing are expected to occur by July 2020, in April 2020, we leased as3.1 megawatts scheduled to commence in phases from April through November 2020. We are negotiating the renewal of June 30, 2019 and 87.6% leased as of December 31, 2018. Based on recent discussions with certain tenants of this property, we expecta lease for 11.25 megawatts that the leased percentage of this property will declineis scheduled to approximately 77% by December 31, 2019.expire in August 2020.



Results of Operations
 
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure, which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to COPT’s ownership interest (“UJV NOI allocable to COPT”).  We view our NOI from real estate operations as comprising the following primary categories:

office and data center shell properties:
stably owned and 100% operational throughout the current and prior year reporting periods.  We define these as changes from “Same Properties”;
constructed

developed or redeveloped and placed into service that were not 100% operational throughout the current and prior year reporting periods; and
disposed; and
our wholesale data center.

In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities.  The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee.  The operating margins from these activities are small relative to the revenue.  We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
 
Since both of the measures discussed above exclude certain items includable in net income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to net income reported on the consolidated statements of operations of COPT and subsidiaries is provided in Note 13 to our consolidated financial statements.

Comparison of Statements of Operations for the Three Months Ended June 30,March 31, 2020 and 2019 and 2018

For the Three Months Ended June 30,For the Three Months Ended March 31,
2019 2018 Variance2020 2019 Variance
(in thousands)(in thousands)
Revenues 
  
  
 
  
  
Revenues from real estate operations$132,771
 $129,162
 $3,609
$132,116
 $131,990
 $126
Construction contract and other service revenues42,299
 17,581
 24,718
13,681
 16,950
 (3,269)
Total revenues175,070
 146,743
 28,327
145,797
 148,940
 (3,143)
Operating expenses 
  
  
 
  
  
Property operating expenses47,886
 49,446
 (1,560)49,999
 49,445
 554
Depreciation and amortization associated with real estate operations34,802
 33,190
 1,612
32,596
 34,796
 (2,200)
Construction contract and other service expenses41,002
 16,941
 24,061
13,121
 16,326
 (3,205)
General, administrative and leasing expenses9,386
 7,628
 1,758
7,486
 8,751
 (1,265)
Business development expenses and land carry costs870
 1,234
 (364)1,118
 1,113
 5
Total operating expenses133,946
 108,439
 25,507
104,320
 110,431
 (6,111)
Interest expense(18,475) (18,945) 470
(16,840) (18,674) 1,834
Interest and other income1,849
 1,439
 410
1,205
 2,286
 (1,081)
Credit loss expense(689) —
 (689)
Gain on sales of real estate84,469
 (23) 84,492
5
 —
 5
Equity in income of unconsolidated entities420
 373
 47
441
 391
 50
Income tax benefit (expense)176
 (63) 239
Income tax expense(49) (194) 145
Net income$109,563
 $21,085
 $88,478
$25,550
 $22,318
 $3,232



NOI from Real Estate Operations
For the Three Months Ended June 30,For the Three Months Ended March 31,
2019 2018 Variance2020 2019 Variance
(Dollars in thousands, except per square foot data)(Dollars in thousands, except per square foot data)
Revenues          
Same Properties revenues          
Lease revenue, excluding lease termination revenue$113,503
 $113,612
 $(109)$118,259
 $116,390
 $1,869
Lease termination revenue285
 558
 (273)85
 521
 (436)
Other property revenue1,303
 1,216
 87
1,044
 1,042
 2
Same Properties total revenues115,091
 115,386
 (295)119,388
 117,953
 1,435
Constructed and redeveloped properties placed in service5,677
 1,625
 4,052
Developed and redeveloped properties placed in service5,552
 902
 4,650
Wholesale data center8,560
 8,105
 455
7,172
 7,871
 (699)
Dispositions3,437
 3,775
 (338)—
 4,375
 (4,375)
Other6
 271
 (265)4
 889
 (885)
132,771
 129,162
 3,609
132,116
 131,990
 126
Property operating expenses          
Same Properties(43,028) (44,611) 1,583
(45,645) (46,165) 520
Constructed and redeveloped properties placed in service(821) (178) (643)
Developed and redeveloped properties placed in service(1,115) (314) (801)
Wholesale data center(3,618) (4,150) 532
(3,233) (2,838) (395)
Dispositions(422) (577) 155
—
 (138) 138
Other3
 70
 (67)(6) 10
 (16)
(47,886) (49,446) 1,560
(49,999) (49,445) (554)
          
UJV NOI allocable to COPT          
Same Properties1,205
 1,202
 3
1,207
 1,219
 (12)
Other46
 —
 46
Retained interests in UJV formed in 2019506
 —
 506
1,251
 1,202
 49
1,713
 1,219
 494
          
NOI from real estate operations          
Same Properties73,268
 71,977
 1,291
74,950
 73,007
 1,943
Constructed and redeveloped properties placed in service4,856
 1,447
 3,409
Developed and redeveloped properties placed in service4,437
 588
 3,849
Wholesale data center4,942
 3,955
 987
3,939
 5,033
 (1,094)
Dispositions3,015
 3,198
 (183)
Dispositions, net of retained interests in UJV formed in 2019506
 4,237
 (3,731)
Other55
 341
 (286)(2) 899
 (901)
$86,136
 $80,918
 $5,218
$83,830
 $83,764
 $66
          
Same Properties NOI from real estate operations by segment          
Defense/IT Locations$65,454
 $63,264
 $2,190
$66,566
 $65,179
 $1,387
Regional Office7,430
 8,125
 (695)7,923
 7,417
 506
Other384
 588
 (204)461
 411
 50
$73,268
 $71,977
 $1,291
$74,950
 $73,007
 $1,943
          
Same Properties rent statistics          
Average occupancy rate92.0% 90.9% 1.1%92.3% 91.6% 0.7%
Average straight-line rent per occupied square foot (1)$6.49
 $6.47
 $0.02
$6.54
 $6.55
 $(0.01)
 
(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.

Our Same Properties pool consisted of 150152 properties, comprising 86.3%85.5% of our office and data center shell portfolio’s square footage as of June 30, 2019.March 31, 2020. This pool of properties changed from the pool used for purposes of comparing 20182019 and 20172018 in our 20182019 Annual Report on Form 10-K due to the addition of ninefive properties placed in service and 100% operational on or before January 1, 2018 and the removal of six properties in which we sold a 90% interest in June 2019.



Our NOI from constructeddeveloped and redeveloped properties placed in service included 1210 properties and land under a long-term contract placed in service in 20182019 and 2019.2020, while our dispositions included our decrease in ownership in 2019 of nine data center shells.

NOI from Service Operations
 For the Three Months Ended June 30, For the Three Months Ended March 31,
 2019 2018 Variance 2020 2019 Variance
 (in thousands) (in thousands)
Construction contract and other service revenues $42,299
 $17,581
 $24,718
 $13,681
 $16,950
 $(3,269)
Construction contract and other service expenses 41,002
 16,941
 24,061
 (13,121) (16,326) 3,205
NOI from service operations $1,297
 $640
 $657
 $560
 $624
 $(64)

Construction contract and other service revenue and expenses increaseddecreased due primarily to a higherlower volume of construction activity in connection with several of our tenants. Construction contract activity is inherently subject to significant variability depending on the volume and nature of projects undertaken by us (primarilyprimarily on behalf of tenants).tenants. Service operations are an ancillary component of our overall operations that typically contribute an insignificant amount of net income relative to our real estate operations.

General, administrative and leasing expensesInterest Expense

General, administrative and leasing expenses increased in large part due to: higher legal and professional expenses and information technology related expenses; and our adoption of lease accounting guidance in the current period under which we no longer defer recognition of non-incremental leasing costs.

Gain on sales of real estate

The gain on sales of real estate in the current period was due to our sale of a 90% interest in seven data center shell properties.

Comparison of Statements of Operations for the Six Months Ended June 30, 2019 and 2018

 For the Six Months Ended June 30,
 2019 2018 Variance
 (in thousands)
Revenues 
  
  
Revenues from real estate operations$264,761
 $257,440
 $7,321
Construction contract and other service revenues59,249
 44,779
 14,470
Total revenues324,010
 302,219
 21,791
Operating expenses 
  
  
Property operating expenses97,331
 100,397
 (3,066)
Depreciation and amortization associated with real estate operations69,598
 66,702
 2,896
Construction contract and other service expenses57,328
 43,157
 14,171
General, administrative and leasing expenses18,137
 14,920
 3,217
Business development expenses and land carry costs1,983
 2,848
 (865)
Total operating expenses244,377
 228,024
 16,353
Interest expense(37,149) (37,729) 580
Interest and other income4,135
 2,798
 1,337
Gain on sales of real estate84,469
 (27) 84,496
Equity in income of unconsolidated entities811
 746
 65
Income tax expense(18) (118) 100
Net income$131,881
 $39,865
 $92,016



NOI from Real Estate Operations
 For the Six Months Ended June 30,
 2019 2018 Variance
 (Dollars in thousands, except per square foot data)
Revenues     
Same Properties revenues     
Lease revenue, excluding lease termination revenue$227,632
 $225,801
 $1,831
Lease termination revenue806
 1,566
 (760)
Other property revenue2,345
 2,328
 17
Same Properties total revenues230,783
 229,695
 1,088
Constructed and redeveloped properties placed in service10,122
 3,253
 6,869
Wholesale data center16,431
 16,182
 249
Dispositions7,208
 7,784
 (576)
Other217
 526
 (309)
 264,761
 257,440
 7,321
Property operating expenses     
Same Properties(88,213) (90,209) 1,996
Constructed and redeveloped properties placed in service(1,680) (629) (1,051)
Wholesale data center(6,456) (8,408) 1,952
Dispositions(1,023) (1,219) 196
Other41
 68
 (27)
 (97,331) (100,397) 3,066
      
UJV NOI allocable to COPT     
Same Properties2,424
 2,401
 23
Other46
 —
 46
 2,470
 2,401
 69
NOI from real estate operations     
Same Properties144,994
 141,887
 3,107
Constructed and redeveloped properties placed in service8,442
 2,624
 5,818
Wholesale data center9,975
 7,774
 2,201
Dispositions6,185
 6,565
 (380)
Other304
 594
 (290)
 $169,900
 $159,444
 $10,456
      
Same Properties NOI from real estate operations by segment     
Defense/IT Locations$129,352
 $125,435
 $3,917
Regional Office14,847
 15,438
 (591)
Other795
 1,014
 (219)
 $144,994
 $141,887
 $3,107
      
Same Properties rent statistics     
Average occupancy rate92.0% 90.9% 1.1%
Average straight-line rent per occupied square foot (1)$12.98
 $12.89
 $0.09
(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.





Our NOI from constructed and redeveloped properties placed in service included 12 properties and land under a long-term contract placed in service in 2018 and 2019.

NOI from Service Operations
  For the Six Months Ended June 30,
  2019 2018 Variance
  (in thousands)
Construction contract and other service revenues $59,249
 $44,779
 $14,470
Construction contract and other service expenses 57,328
 43,157
 14,171
NOI from service operations $1,921
 $1,622
 $299

Construction contract and other service revenue and expenses increasedInterest expense decreased due primarily to increased capitalized interest resulting from a higher volume of construction activity in connection with several of our tenants.

General, administrative and leasing expenses

General, administrative and leasing expenses increased in large part due to: higher legal and professional expenses and information technology related expenses; and our adoption of lease accounting guidance in the current period under which we no longer defer recognition of non-incremental leasing costs.

Gain on sales of real estate

The gain on sales of real estate in the current period was due to our sale of a 90% interest in seven data center shell properties.active development projects.

Funds from Operations
 
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales and impairment losses of real estate (net of associated income tax) and real estate-related depreciation and amortization. FFO also includes adjustments to net income for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe that we use the National Association of Real Estate Investment Trusts (“Nareit”) definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs.  We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains on sales and impairment losses of real estate (net of associated income tax), and real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods.  In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs.  We believe that net income is the most directly comparable GAAP measure to FFO.
 
Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs.  Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
 
Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to share-based compensation awards.  With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders.  Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions.  We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares.  We believe that net income is the most directly comparable GAAP measure to Basic FFO.  Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
 


Diluted FFO available to common share and common unit holders (“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.  We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below.  We believe that net income is the most directly comparable GAAP measure to Diluted FFO.  Since


Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures.  Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs.  Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
 
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO adjusted to excludeexclude: operating property acquisition costs; gain or loss on early extinguishment of debt; FFO associated with properties securing non-recourse debt on which we have defaulted and which we have extinguished, or expect to extinguish, via conveyance of such properties, including property NOI, interest expense and gains on debt extinguishment; loss on interest rate derivatives; demolition costs on redevelopment and nonrecurring improvements; executive transition costs; issuance costs associated with redeemed preferred shares; allocations of FFO to holders of noncontrolling interests resulting from capital events; and certain other expenses that we believe are not closely correlated with our operating performance.  This measure also includes adjustments for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe 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 we believe are not closely correlated to (or associated with) our operating performance. We believe that net income is the most directly comparable GAAP measure to this non-GAAP measure.  This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
 
Diluted 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.  We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income available to common shareholders.  In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
 
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, 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.  We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results.  We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure.  This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
 
The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.

We adopted, retrospectively effective January 1, 2019, Nareit’s 2018 Whitepaper Restatement, which changed the prior definition of FFO to also exclude gains on sales and impairment losses of properties other than previously depreciated operating properties, net of associated income tax. This adoption affected our reporting for FFO, Basic FFO, Diluted FFO and Diluted FFO per share.


The table below sets forth the computation of the above stated measures for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2019 2018 2019 2018
 
(Dollars and shares in thousands, 
except per share data)
Net income$109,563
 $21,085
 $131,881
 $39,865
Add: Real estate-related depreciation and amortization34,802
 33,190
 69,598
 66,702
Add: Depreciation and amortization on UJV allocable to COPT566
 564
 1,132
 1,127
Less: Gain on sales of real estate(84,469) 23
 (84,469) 27
FFO60,462
 54,862
 118,142
 107,721
Less: Noncontrolling interests-preferred units in the Operating Partnership(165) (165) (330) (330)
Less: FFO allocable to other noncontrolling interests(1,188) (753) (2,159) (1,697)
Basic and diluted FFO allocable to share-based compensation awards(229) (224) (414) (437)
Basic FFO available to common share and common unit holders58,880
 53,720
 115,239
 105,257
Redeemable noncontrolling interests33
 —
 942
 —
Diluted FFO available to common share and common unit holders58,913
 53,720
 116,181
 105,257
Executive transition costs—
 213
 4
 376
Demolition costs on redevelopment and nonrecurring improvements—
 9
 44
 48
Non-comparable professional and legal expenses311
 —
 311
 —
Diluted FFO comparability adjustments allocable to share-based compensation awards(2) (1) (2) (2)
Diluted FFO available to common share and common unit holders, as adjusted for comparability$59,222
 $53,941
 $116,538
 $105,679
        
Weighted average common shares111,557
 101,789
 110,759
 101,397
Conversion of weighted average common units1,327
 3,197
 1,329
 3,208
Weighted average common shares/units - Basic FFO112,884
 104,986
 112,088
 104,605
Dilutive effect of share-based compensation awards310
 119
 289
 131
Redeemable noncontrolling interests136
 —
 1,037
 —
Weighted average common shares/units - Diluted FFO113,330
 105,105
 113,414
 104,736
        
Diluted FFO per share$0.52
 $0.51
 $1.02
 $1.00
Diluted FFO per share, as adjusted for comparability$0.52
 $0.51
 $1.03
 $1.01
        
        
Denominator for diluted EPS113,105
 101,908
 112,507
 101,528
Weighted average common units1,327
 3,197
 —
 3,208
Redeemable noncontrolling interests(926) —
 907
 —
Dilutive convertible preferred units(176) —
 —
 —
Denominator for diluted FFO per share measures113,330
 105,105
 113,414
 104,736

 For the Three Months Ended March 31,
 2020 2019
 
(Dollars and shares in thousands, 
except per share data)
Net income$25,550
 $22,318
Real estate-related depreciation and amortization32,596
 34,796
Depreciation and amortization on UJV allocable to COPT818
 566
Gain on sales of real estate(5) —
FFO58,959
 57,680
Noncontrolling interests-preferred units in the Operating Partnership(77) (165)
FFO allocable to other noncontrolling interests(12,015) (971)
Basic FFO allocable to share-based compensation awards(193) (185)
Basic FFO available to common share and common unit holders46,674
 56,359
Redeemable noncontrolling interests32
 381
Diluted FFO available to common share and common unit holders46,706
 56,740
Executive transition costs—
 4
Demolition costs on redevelopment and nonrecurring improvements43
 44
Dilutive preferred units in the Operating Partnership77
 —
FFO allocation to other noncontrolling interests resulting from capital event11,090
 —
Diluted FFO comparability adjustments allocable to share-based compensation awards(50) —
Diluted FFO available to common share and common unit holders, as adjusted for comparability$57,866
 $56,788
    
Weighted average common shares111,724
 109,951
Conversion of weighted average common units1,226
 1,331
Weighted average common shares/units - Basic FFO per share112,950
 111,282
Dilutive effect of share-based compensation awards239
 302
Redeemable noncontrolling interests110
 1,013
Weighted average common shares/units - Diluted FFO per share113,299
 112,597
Dilutive convertible preferred units176
 —
Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability113,475
 112,597
    
Diluted FFO per share$0.41
 $0.50
Diluted FFO per share, as adjusted for comparability$0.51
 $0.50
    
Denominator for diluted EPS111,963
 110,218
Weighted average common units1,226
 1,331
Redeemable noncontrolling interests110
 1,013
Anti-dilutive EPS effect of share-based compensation awards—
 35
Denominator for diluted FFO per share113,299
 112,597
Dilutive convertible preferred units176
 —
Denominator for diluted FFO per share, as adjusted for comparability113,475
 112,597



Property Additions
 
The table below sets forth the major components of our additions to properties for the sixthree months ended June 30, 2019March 31, 2020 (in thousands):
Construction, development and redevelopment$249,424
Development and redevelopment$95,365
Tenant improvements on operating properties (1)11,567
9,486
Capital improvements on operating properties8,864
2,475
$269,855
$107,326

(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment.
 
Cash Flows
 
Net cash flow from operating activities increased $31.1$7.6 million when comparing the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 due primarily to our paymentan increase in 2018cash flow received from real estate operations, which was affected by the timing of cash receipts, and an increase in cash flow associated with the timing of cash flow from third-party construction costs on a contract that the customer pre-funded to us in prior years.projects.
 
Net cash flow used in investing activities decreased $83.2$6.7 million when comparing the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 due primarily to $237.3our funding of an $11.0 million in proceeds from our sale in 2019 of a 90% interest in properties that was offset in part by a $151.9 increase in cash outlays for construction, development and redevelopmentinvesting receivable in the currentprior period.
 
Net cash flow used in financing activities in the six months ended June 30, 2019 was $59.4 million, and included the following:

dividends and/or distributions to equity holders of $62.2 million; and
net debt repayments of $41.6 million; offset in part by
net proceeds from the issuance of common shares (or units) of $46.4 million.

Net cash flow provided by financing activities in the sixthree months ended June 30, 2018March 31, 2020 was $13.8$197.0 million, and included the following:

net proceeds from debt borrowings of $41.9$245.6 million; offset in part by
dividends and/or distributions to equity holders of $31.2 million.

Net cash flow provided by financing activities in the three months ended March 31, 2019 was $66.3 million, and included the following:

net proceeds from debt borrowings of $51.3 million; and
net proceeds from the issuance of common shares (or units) of $52.3$46.4 million; offset in part by
dividends and/or distributions to equity holders of $58.1 million; and
payments on a capital lease obligation of $15.4$30.8 million.

Liquidity and Capital Resources of COPT

COPLP 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. COPT occasionally issues public equity but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by COPLP. COPT itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of COPLP. COPT’s principal funding requirement is the payment of dividends on its common and preferred shares. COPT’s principal source of funding for its dividend payments is distributions it receives from COPLP.

As of June 30, 2019March 31, 2020, COPT owned 98.6% of the outstanding common units in COPLP; the remaining common units and all of the outstanding preferred units were owned by third parties. As the sole general partner of COPLP, COPT has the full, exclusive and complete responsibility for COPLP’s day-to-day management and control.

The liquidity of COPT is dependent on COPLP’s ability to make sufficient distributions to COPT. The primary cash requirement of COPT is its payment of dividends to its shareholders. COPT also guarantees some of the Operating Partnership’s debt, as discussed further in Note 9 of the notes to consolidated financial statements included herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger COPT’s guarantee obligations, then COPT will be required to fulfill its cash payment commitments under such guarantees. However, COPT’s only significant asset is its investment in COPLP.



As discussed further below, we believe that the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its Revolving Credit Facility, are adequate for it to make its distribution payments to COPT and, in turn, for COPT to make its dividend payments to its shareholders.



COPT’s short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to its shareholders. COPT periodically accesses the public equity markets to raise capital by issuing common and/or preferred shares.

For COPT to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually to at least 90% of its ordinary taxable income. As a result of this distribution requirement, it cannot rely on retained earnings to fund its ongoing operations to the same extent that some other companies can. COPT may need to continue to raise capital in the equity markets to fund COPLP’s working capital needs, development activities and acquisitions.
 
Liquidity and Capital Resources of COPLP
 
COPLP’s primary cash requirements are for operating expenses, debt service, development of new properties and improvements to existing properties and acquisitions, to the extent they are pursued in the future.properties.  We expect COPLP to continue to use cash flow provided by operations as the primary source to meet its short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, distributions to its security holders and improvements to existing properties.  As of June 30, 2019,March 31, 2020, COPLP had $46.3$159.1 million in cash and cash equivalents.
 
COPLP’s senior unsecured debt is currently rated investment grade by the three major rating agencies. We aim to maintain an investment grade rating to enable COPLP to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. COPLP also uses secured nonrecourse debt from institutional lenders and banks for joint venture financing. In addition, COPLP periodically raises equity from COPT when COPT accesses the public equity markets by issuing common and/or preferred shares.
 
COPLP uses its Revolving Credit Facility to initially finance much of its investing activities.  COPLP subsequently pays down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and sales of interests in properties.  The lenders’ aggregate commitment under the facility is $800.0 million, with the ability for COPLP to increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject to the approval of the lenders. The facility matures in March 2023, and may be extended by two six-month periods at COPLP’s option, provided that there is no default under the facility and COPLP pays an extension fee of 0.075% of the total availability under the facility for each extension period. As of June 30, 2019,March 31, 2020, the maximum borrowing capacity under this facility totaled $800.0 million, of which $637.0$558.0 million was available.

COPT has an equitya program in place under which it may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million. Under this program, COPT may also, at its discretion, sell common shares under forward equity sales agreements. The use of a forward equity sales agreement would enable us to lock in a price on a sale of common shares when the agreement is executed but defer receiving the proceeds from the sale until a later date.

We believe that COPLP’s liquidity and capital resources are adequate for its near-term and longer-term requirements without necessitating property sales. However, we were under contract to sell controllingmay dispose of interests in two data center shell properties in Virginia for $67 million; we expect this sale to occur in the fourth quarter of 2019.opportunistically or when capital markets otherwise warrant.


The following table summarizes ourOur contractual obligations as of June 30, 2019March 31, 2020 included the following (in thousands):
For the Periods Ending December 31,  For the Periods Ending December 31,  
2019 2020 2021 2022 2023 Thereafter Total2020 2021 2022 2023 2024 Thereafter Total
Contractual obligations (1) 
  
  
  
  
  
  
 
  
  
  
  
  
  
Debt (2) 
  
  
  
  
  
  
 
  
  
  
  
  
  
Balloon payments due upon maturity$—
 $12,132
 $300,000
 $274,572
 $576,578
 $613,252
 $1,776,534
$12,132
 $300,000
 $456,162
 $655,578
 $277,649
 $367,723
 $2,069,244
Scheduled principal payments (3)2,194
 4,024
 3,875
 4,032
 3,012
 3,633
 20,770
3,002
 3,955
 4,498
 3,553
 2,334
 2,294
 19,636
Interest on debt (3)(4)37,474
 74,590
 67,517
 61,946
 37,125
 27,566
 306,218
56,607
 68,503
 62,560
 38,021
 19,243
 10,190
 255,124
Development and redevelopment obligations (5)(6)159,789
 13,504
 703
 —
 —
 —
 173,996
141,256
 18,398
 501
 —
 —
 —
 160,155
Third-party construction obligations (6)(7)7,585
 7,852
 —
 —
 —
 —
 15,437
Tenant and other capital improvements
(3)(6)(8)
12,926
 29,090
 9,827
 —
 —
 —
 51,843
Finance leases (principal and interest) (3)118
 862
 202
 64
 —
 —
 1,246
Operating leases (3)554
 1,126
 1,111
 1,129
 1,134
 99,187
 104,241
Other obligations (3)124
 192
 178
 178
 178
 800
 1,650
Third-party construction cost obligations (6)(7)11,231
 2,309
 —
 —
 —
 —
 13,540
Tenant and other building improvements (3)(6)22,761
 26,381
 8,757
 —
 —
 —
 57,899
Property finance leases (principal and interest) (3)674
 14
 14
 —
 —
 —
 702
Property operating leases (3)826
 1,138
 1,162
 1,167
 1,173
 100,609
 106,075
Total contractual cash obligations$220,764
 $143,372
 $383,413
 $341,921
 $618,027
 $744,438
 $2,451,935
$248,489
 $420,698
 $533,654
 $698,319
 $300,399
 $480,816
 $2,682,375

(1)The contractual obligations set forth in this table exclude contracts for property operations and certain other contracts that may be terminated with noticeentered into in the normal course of one month or less and also excludebusiness. Also excluded are accruals and payables incurred (with the exclusion of debt) and thereforeinterest rate derivative liabilities, which are reflected in our reported liabilities.liabilities (although debt and lease liabilities are included on the table).
(2)Represents scheduled principal amortization payments and maturities only and therefore excludes net debt discounts and deferred financing costs of $12.9$12.0 million. As of June 30, 2019,March 31, 2020, maturities included $163.0$242.0 million in 2023 that may be extended to 2024, subject to certain conditions.
(3)We expect to pay these items using cash flow from operations.
(4)
Represents interest costs for our outstanding debt as of June 30, 2019March 31, 2020 for the terms of such debt.  For variable rate debt, the amounts reflected above used June 30, 2019March 31, 2020 interest rates on variable rate debt in computing interest costs for the terms of such debt. We expect to pay these items using cash flow from operations.
(5)Represents contractual obligations pertaining to new development and redevelopment activities.
(6)Due to the long-term nature of certain constructiondevelopment and developmentconstruction contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable.
(7)  Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients.  We expect to be reimbursed in full for these costs by our clients.
(8)Represents contractual obligations pertaining to capital expenditures for our operating properties.  We expect to pay these costs primarily using cash flow from operating activities.

We expect to spend approximately $190$220 million on construction and development costs and approximately $45$70 million on improvements and leasing costs for operating properties (including the commitments set forth in the table above) during the remainder of 2019.2020.  We expect to fund the construction and development costs initially using primarily borrowings under our Revolving Credit Facility.  We expect to fund improvements to existing operating properties using cash flow from operating activities.

Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio.  As of June 30, 2019March 31, 2020, we were compliant with these covenants.

Off-Balance Sheet Arrangements
 
 We had no material off-balance sheet arrangements during the sixthree months ended June 30, 2019.March 31, 2020.

Inflation
 
Most of our tenants are obligated to pay their share of a property’s operating expenses to the extent such expenses exceed amounts established in their leases, which are based on historical expense levels.  Some of our tenants are obligated to pay their full share of a building’s operating expenses.  These arrangements somewhat reduce our exposure to increases in such costs resulting from inflation.



Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements for information regarding recent accounting pronouncements.



Item 3.          Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates.  Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable rate debt.  Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.
 
The following table sets forth as of June 30, 2019March 31, 2020 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):
For the Periods Ending December 31,  For the Periods Ending December 31,  
2019 2020 2021 2022 2023 Thereafter Total2020 2021 2022 2023 2024 Thereafter Total
Debt: 
  
    
  
  
  
 
  
    
  
  
  
Fixed rate debt (1)$1,995
 $3,718
 $303,875
 $4,033
 $416,590
 $616,885
 $1,347,096
$2,799
 $303,875
 $4,033
 $416,590
 $279,443
 $337,442
 $1,344,182
Weighted average interest rate4.33% 3.96% 3.70% 3.98% 3.70% 5.00% 4.30%3.96% 3.70% 3.98% 3.70% 5.16% 4.87% 4.30%
Variable rate debt (2)$199
 $12,438
 $—
 $274,571
 $163,000
 $—
 $450,208
$12,336
 $80
 $456,627
 $242,540
 $540
 $32,575
 $744,698
Weighted average interest rate (3)4.29% 4.29% —% 3.79% 3.52% —% 3.71%3.43% 3.03% 2.57% 1.75% 3.46% 3.55% 2.36%

(1)Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $12.9$12.0 million.
(2)As of June 30, 2019,March 31, 2020, maturities included $163.0$242.0 million in 2023 that may be extended to 2024, subject to certain conditions.
(3)The amounts reflected above used interest rates as of June 30, 2019March 31, 2020 for variable rate debt.

The fair value of our debt was $1.8$2.1 billion as of June 30, 2019.March 31, 2020.  If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $51$42 million as of June 30, 2019March 31, 2020.
 
See Note 10 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of June 30, 2019March 31, 2020 and their respective fair values.

Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $1.0 million$620,000 in the sixthree months ended June 30, 2019March 31, 2020 if the applicable LIBOR rate was 1% higher.
 
Item 4.          Controls and Procedures
 
COPT

(a)                                 Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPT’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2019.March 31, 2020.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’s disclosure controls and procedures as of June 30, 2019March 31, 2020 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
(b)                                Change in Internal Control over Financial Reporting
 
No change in the COPT’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
 


COPLP

(a)                                 Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPLP’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of June 30, 2019March 31, 2020.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPLP’s disclosure controls and procedures as of June 30, 2019March 31, 2020 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
(b)                                Change in Internal Control over Financial Reporting
 
No change in the COPLP’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II: OTHER INFORMATION
 
Item 1.          Legal Proceedings
 
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company or the Operating Partnership (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
 
Item 1A.  Risk Factors
 
Other than as set forth below, there have been no material changes to the risks and uncertainties relating to our business and the ownership of our securities as previously set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.

We may suffer adverse effects from changesthe COVID-19 pandemic and measures instituted to prevent its spread. Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide and throughout the United States. As of May 8, 2020, there continued to be significant uncertainty regarding the duration of COVID-19’s spread, and the potential, once its spread subsides, for the virus to reoccur on a significant scale in the methodfuture. The COVID-19 outbreak has prompted governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on freedom of determining LIBOR ormovement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The outbreak has significantly disrupted economic markets worldwide, as well as in the replacement of LIBOR with an alternative interest rate. Our variable-rate debtUnited States at a national, regional and interest rate swaps uselocal level, and created significant volatility in financial markets. Furthermore, conditions could potentially continue to deteriorate as a reference rate the London Interbank Offered Rate (“LIBOR”), as calculated for U.S. dollar (“USD-LIBOR”). The Chief Executiveresult of the United Kingdom's Financial Conduct Authority (“FCA”), which regulates LIBOR, announced the FCA’s intention to cease sustaining LIBOR after 2021. He has also indicated that market participants should expect LIBOR to be subsequently discontinued and should proceed with preparations for transitioning to an alternative reference rate. The Federal Reserve Board convened the Alternative Reference Rates Committee (“ARRC”) to identify a set of alternative reference rates for possible use as market benchmarks. Based on the ARRC’s recommendation, the Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (“SOFR”) and two other alternative rates beginning in April 2018. Since then, certain derivative products and debt securities tied to SOFR have been introduced, and various industry groups are developing transition plans to SOFR as the new market benchmark. While we have been closely monitoring developments in the LIBOR transition, we are not able to predict whether LIBOR will actually cease to be available after 2021 or whether SOFR will become the market benchmark in its place. Any changes announced or adopted by the FCA or other governing bodies in the method used for determining LIBOR rates may result in a sudden or prolonged increase or decrease in reported LIBOR rates. If that were to occur, the level of interest payments we incur may change. In addition, although our variable rate debt and interest rate swaps will likely provide for alternative methods of calculating the interest rate if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if the LIBOR rate were to remain available in its current form.pandemic.

ThereCOVID-19, and similar pandemics, and measures instituted to prevent spread, may adversely affect us in many ways, including by disrupting:

our tenants’ operations, which could adversely affect their ability, or willingness, to sustain their businesses and/or fulfill their lease obligations;
our ability to maintain occupancy in our properties and obtain new leases for unoccupied and new development space at favorable terms or at all;
access to debt and equity capital on attractive terms or at all. Severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our or our tenants’ ability to access capital necessary to fund operations, refinance debt or fund planned investments on a timely basis, and may adversely affect the valuation of financial assets and liabilities;
the supply of products or services from our and our tenants’ vendors that are needed for us and our tenants to operate effectively; and
our and our tenants’ ability to continue or complete planned development, including the potential for delays in the supply of materials or labor necessary for development.



The extent of COVID-19’s effect on our operational and financial performance is dependent on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Due to the speed with which the effects of COVID-19 have been no other material changesdeveloped, we are unable at this time to estimate the magnitude of the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material. Moreover, some of the risks described in the risk factors includedset forth in Item 1A of our 20182019 Annual Report on Form 10-K.10-K may be more likely to impact us as a result of COVID-19 and the responses to curb its spread.
 
Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds
 
(a) 
Not applicableDuring the three months ended March 31, 2020, 12,009 of COPLP’s common units were exchanged for 12,009 COPT common shares in accordance with COPLP’s Third Amended and Restated Limited Partnership Agreement, as amended.  The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

(b)        Not applicable

(c)        Not applicable
 


Item 3.          Defaults Upon Senior Securities
 
(a)         Not applicable
 
(b)        Not applicable
 
Item 4.          Mine Safety Disclosures

Not applicable

Item 5.          Other Information

On September 23, 2004, COPT and TRC Associates Limited Partnership (“TRC”) entered into the Seventeenth Amendment to Second Amended and Restated Limited Partnership Agreement (the “Seventeenth Amendment”) of COPLP.  The Seventeenth Amendment was entered into in connection with the issuance by COPLP to TRC on September 23, 2004 of 352,000 Series I preferred units in COPLP (the “Series I Units”) valued at $8.8 million.  The Series I Units are convertible into common units on a basis of 0.5 common units for each Series I Unit.  TRC was entitled to a priority annual cumulative return equal to 7.5% of their liquidation preference through September 22, 2019, with annual cumulative preferred return increases for each subsequent five-year period, subject to certain maximum limits.  The Series I Units were also redeemable by COPLP at COPLP’s option any time after September 22, 2019.

The COPLP Second Amended and Restated Limited Partnership Agreement, as amended by all amendments thereto including the Seventeenth Amendment, was amended and restated effective December 5, 2018 by the Third Amended and Restated Limited Partnership Agreement of COPLP.  On July 31, 2019, COPT and TRC entered into the First Amendment to the Third Amended and Restated Limited Partnership Agreement (as so amended, the “Amended Agreement”) of COPLP to amend the terms thereof relating to the Series I Units.  The Amended Agreement includes provisions to:

reduce the priority annual cumulative return on the Series I Units from and after September 23, 2019 to 3.5% of their liquidation value and eliminate provisions for future increases;
extend the earliest date that COPLP may redeem the Series I Units. Under the Amended Agreement, the Series I Units are redeemable by COPLP effective on or after January 1, 2020, provided that COPLP provides notice to TRC six months prior to the effective date of the redemption; and
establish that COPLP provide notice to TRC for defined periods of time in advance of COPLP’s sale of a defined property or repayment or refinancing of certain defined debt. Following receipt of such notice, in certain defined instances, TRC will have the ability to require COPLP to redeem the Series I Units at par.

The description of the terms of the Amended Agreement included herein is a summary, which does not purport to be complete and is qualified in its entirety by reference to the copy thereof attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.None.



Item 6.          Exhibits
 
(a)         Exhibits:
 
EXHIBIT
NO.
 DESCRIPTION
   
   
10.1
 
Indenture,Amended and Restated Term Loan Agreement, dated as of April 8, 2019,March 6, 2020, by and among Corporate Office Properties, L.P., as issuer,; Corporate Office Properties Trust, as guarantor,Trust; Capital One, National Association, PNC Capital Markets LLC and U.S.Regions Capital Markets, a division of Regions Bank, PNC Bank, National Association as trusteeand Regions Bank (filed with the Company’s Registration Statement on Form S-3 (Commission File No. 333-230764) and incorporated herein by reference)herewith).
   
10.2
 
First Amendment to Third AmendedSeparation Agreement and Restated Limited Partnership AgreementRelease, dated as of March 16, 2020, by and between Corporate Office Properties, L.P. and Paul R. Adkins (filed with the Company’s Current Report on Form 8-K dated July 31, 2019 (filed herewith)March 16, 2020 and incorporated herein by reference).
   
31.1
 
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
   
31.2
 
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
   
31.3
 
Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
   
31.4
 
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
   
32.1
 
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith).
   
32.2
 
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished herewith).
   
32.3
 
Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith).
   
32.4
 
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished herewith).
   
101.INS XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document (filed herewith).
   
101.SCH Inline XBRL Taxonomy Extension Schema Document (filed herewith).
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
   
101.LAB Inline XBRL Extension Labels Linkbase (filed herewith).
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
 
 CORPORATE OFFICE PROPERTIES TRUST CORPORATE OFFICE PROPERTIES, L.P.
   By: Corporate Office Properties Trust,
   its General Partner
    
 /s/ Stephen E. Budorick /s/ Stephen E. Budorick
 Stephen E. Budorick Stephen E. Budorick
 President and Chief Executive Officer President and Chief Executive Officer
    
    
 /s/ Anthony Mifsud /s/ Anthony Mifsud
 Anthony Mifsud Anthony Mifsud
 Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer
    
Dated:August 5, 2019May 8, 2020Dated:August 5, 2019May 8, 2020

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