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OFC Corporate Office Properties Trust

Filed: 12 Feb 21, 4:40pm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K 
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number 1-14023 (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 TrustMaryland 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, MD
21046
(Address of principal executive offices)(Zip Code)

 Registrant’s telephone number, including area code:  (443) 285-5400

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
    Corporate Office Properties Trust Yes   No
    Corporate Office Properties, L.P. Yes   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
    Corporate Office Properties Trust Yes   No
    Corporate Office Properties, L.P. Yes   No

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 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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

Corporate Office Properties, L.P.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
    Corporate Office Properties Trust
    Corporate Office Properties, L.P.     

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
    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

The aggregate market value of the voting and nonvoting shares of common stock held by non-affiliates of Corporate Office Properties Trust was approximately $2.2 billion, as calculated using the closing price of such shares on the New York Stock Exchange as of and the number of outstanding shares as of June 30, 2020. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of Corporate Office Properties Trust’s outstanding common shares, $0.01 par value. At January 22, 2021, 112,181,219 of Corporate Office Properties Trust’s common shares were outstanding.

The aggregate market value of the voting and nonvoting common units of limited partnership interest held by non-affiliates of Corporate Office Properties, L.P. was approximately $24.2 million, as calculated using the closing price of the common shares of Corporate Office Properties Trust (into which common units not held by Corporate Office Properties Trust are exchangeable) on the New York Stock Exchange as of June 30, 2020 and the number of outstanding units as of June 30, 2020.

Portions of the proxy statement of Corporate Office Properties Trust for its 2021 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 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 December 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-K. 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.

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. 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 annual reports on Form 10-K 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 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 9, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries;
Note 13, Equity of COPT and subsidiaries;
Note 14, Equity of COPLP and subsidiaries; and
Note 19, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and
“Item 7: 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 II, Item 9A. 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-K

 

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Forward-looking Statements


This Form 10-K 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. Additionally, documents we subsequently file with the SEC and incorporated by reference will contain forward-looking statements.

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. We caution readers that forward-looking statements reflect our opinion only as of the date on which they were made. You should not place undue reliance on forward-looking statements. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

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 and uncertainties regarding the impact of the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, the real estate industry 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, whether as a result of new information, future events or otherwise. For further information on these and other factors that could affect us and the statements contained herein, you should refer to the section below entitled “Item 1A. Risk Factors.”

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PART I
Item 1. Business

OUR COMPANY
General. 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 December 31, 2020, our properties included the following:
181 properties totaling 21.0 million square feet comprised of 16.2 million square feet in 155 office properties and 4.7 million square feet in 26 single-tenant data center shell properties (“data center shells”). We owned 17 of these data center shells through unconsolidated real estate joint ventures;
a wholesale data center with a critical load of 19.25 megawatts;
11 properties under development (nine office properties and two data center shells), including three partially-operational properties, that we estimate will total approximately 1.5 million square feet upon completion; and
approximately 830 acres of land controlled for future development that we believe could be developed into approximately 10.4 million square feet and 43 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 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 December 31, 2020, COPT owned 98.6% of the outstanding COPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT common shareholders.

COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

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.

We believe that COPT is organized and has operated in a manner that satisfies the requirements for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and we intend to continue to operate COPT in such a manner. If COPT continues to qualify for taxation as a REIT, it generally will not be subject to Federal income tax on its taxable income (other than that of its TRS entities) that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its annual taxable income to its shareholders.

Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our telephone number is (443) 285-5400.

Our Internet address is www.copt.com. We make available on our Internet website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably possible after we file such material with the Securities and Exchange Commission (the “SEC”). In addition, we have made available on our Internet website under the heading “Corporate Governance” the charters for our Board of Trustees’
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Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not part of this report.

The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov.

Business and Growth Strategies

Our primary goal is to create value and deliver attractive and competitive total returns to our shareholders. This section sets forth key components of our business and growth strategies that we have in place to support this goal.

Defense/IT Locations Strategy: We specialize in serving the unique requirements of tenants in our Defense/IT Locations properties. These properties are primarily occupied by the USG and contractor tenants engaged in what we believe are high priority security, defense and IT missions. These tenants’ missions pertain more to knowledge- and technology-based activities (i.e., cyber security, research and development and other highly technical defense and security areas) than to force structure (i.e., troops) and weapon system mass production. Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, which as of December 31, 2020 accounted for 171 of the portfolio’s 181 properties, representing 87.1% of its annualized rental revenue, and we control developable land to accommodate future growth in this portfolio. These properties generally have higher tenant renewal rates than is typical in commercial office space due in large part to: their proximity to defense installations or other key demand drivers; the ability of many of these properties to meet Anti-Terrorism Force Protection (“ATFP”) requirements; and significant investments often made by tenants for unique needs such as Secure Compartmented Information Facility (“SCIF”), critical power supply and operational redundancy.

In recent years, data center shells have been a significant growth driver for our Defense/IT Locations. Data center shells are properties leased to tenants to be operated as data centers in which we provide tenants with only the core building and basic power, while the tenants fund the costs for the critical power, fiber connectivity and data center infrastructure. From 2013 through 2020, we placed into service 26 data center shells totaling 4.7 million square feet, and we had an additional two under development totaling 420,000 square feet as of December 31, 2020.  We enter into long-term leases for these properties prior to commencing development, with triple-net structures and multiple extension options and rent escalators to provide future growth. Additionally, our tenants’ funding of the costs to fully power and equip these properties significantly enhances the value of these properties and creates high barriers to exit for such tenants.

We believe that our properties and team collectively complement our Defense/IT Locations strategy due to our:

properties’ proximity to defense installations and other knowledge- and technology-based government demand drivers. Such proximity is generally preferred and often required for our tenants to execute their missions. Specifically, our:
office properties are proximate to such mission-critical facilities as Fort George G. Meade (which houses over 100 Department of Defense organizations and agencies, including ones engaged in signals intelligence, such as U.S. Cyber Command and Defense Information Systems Agency) and Redstone Arsenal (one of the largest defense installations in the United States, housing priority missions such as Army procurement, missile defense, space exploration, and research and development, testing and engineering of advanced weapons systems); and
data center shells located in Northern Virginia, proximate to the MAE-East Corridor, which is a major Network Access Point in the United States for interconnecting traffic between Internet service providers;
well-established relationships with the USG and its contractors;
extensive experience in developing:
high quality, highly-efficient office properties;
secured, specialized space, with the ability to satisfy the USG’s unique needs (including SCIF and ATFP requirements); and
data center shells to customer specifications within very condensed timeframes to accommodate time-sensitive tenant demand; and
depth of knowledge, specialized skills and credentialed personnel in operating highly-specialized properties with unique security-oriented requirements.

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Regional Office Strategy: While Defense/IT Locations are our primary focus, we also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region due to our strong market knowledge in that region. We believe that these submarkets possess the following favorable characteristics: (1) mixed-use, lifestyle oriented locations with a robust residential and retail base; (2) proximity to public transportation and major transportation routes; (3) an educated workforce; and (4) a diverse employment base. As of December 31, 2020, we owned eight Regional Office properties, representing 12.5% 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; four Northern Virginia properties proximate to existing or future Washington Metropolitan Area Metrorail stations and major interstates; and a newly-developed property in Washington, D.C.’s central business district.

Asset Management Strategy: We aggressively manage our portfolio to maximize the value and operating performance of each property through: (1) proactive property management and leasing; (2) maximizing tenant retention in order to minimize space downtime and additional capital associated with space rollover; (3) increasing rental rates where market conditions permit; (4) leasing vacant space; (5) achievement of operating efficiencies by increasing economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (6) redevelopment when we believe property conditions and market demand warrant. We also continuously evaluate our portfolio and consider dispositions when properties no longer meet our strategic objectives, or when capital markets and the circumstances pertaining to such holdings otherwise warrant, in order to maximize our return on invested capital or support our property development and capital strategy.

We aim to sustainably develop and operate our portfolio to create healthier work environments and reduce consumption of resources by: (1) developing new buildings designed to use resources with a high level of efficiency and low impact on human health and the environment during their life cycles through our participation in the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) program; (2) investing in energy systems and other equipment that reduce energy consumption and operating costs; (3) adopting select LEED for Building Operations and Maintenance (“LEED O+M: Existing Buildings”) prerequisites for much of our portfolio, including guidelines pertaining to cleaning and recycling practices and energy reduction; and (4) participating in the annual Global Real Estate Sustainability Benchmark (“GRESB”) survey, which is widely recognized for measuring the environmental, social and governance (“ESG”) performance of real estate companies and funds. We earned an overall score of “Green Star” on the GRESB survey in each of the last six years, representing the highest quadrant of achievement on the survey.

Property Development and Acquisition Strategy: We expand our operating portfolio primarily through property developments in support of our Defense/IT Locations strategy, and we have significant land holdings that we believe can further support that growth while serving as a barrier against competitive supply. We pursue development activities as market conditions and leasing opportunities support favorable risk-adjusted returns on investment, and therefore typically prefer properties to be significantly leased prior to commencing development. To a lesser extent, we may also pursue growth through acquisitions, seeking to execute such transactions at attractive yields and below replacement cost.

Capital Strategy: Our capital strategy is aimed at maintaining continuous access to capital irrespective of market conditions in the most cost-effective manner by:

maintaining an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks;
using secured nonrecourse debt from institutional lenders and banks;
managing our debt by monitoring, among other things: (1) the relationship of certain measures of earnings to our debt level and to certain capital costs; (2) the timing of debt maturities to ensure that maturities in any one year do not exceed levels that we believe we can refinance; (3) our exposure to changes in interest rates; and (4) our total and secured debt levels relative to our overall capital structure;
raising equity through issuances of common shares in COPT and common units in COPLP, joint venture structures for certain investments and, to a lesser extent, issuances of preferred shares in COPT and preferred units in COPLP;
monitoring capacity available under revolving credit facilities and equity offering programs to provide liquidity to fund investment activities;
paying dividends at a level that is at least sufficient for us to maintain our REIT status;
recycling proceeds from sales of interests in properties to fund our investment activities and/or reduce overall debt; and
continuously evaluating the ability of our capital resources to accommodate our plans for growth.

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Industry Segments
As of December 31, 2020, our operations included the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center; and Other. Our Defense/IT Locations segment included the following sub-segments:

Fort George G. Meade and the Baltimore/Washington Corridor (referred to herein as “Fort Meade/BW Corridor”);
Northern Virginia Defense/IT Locations;
Lackland Air Force Base in San Antonio, Texas;
locations serving the U.S. Navy (referred to herein as “Navy Support Locations”). Properties in this sub-segment as of December 31, 2020 were proximate to the Washington Navy Yard in Washington, D.C., the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia;
Redstone Arsenal in Huntsville, Alabama; and
data center shells in Northern Virginia (including 17 owned through unconsolidated real estate joint ventures).

As of December 31, 2020, Defense/IT Locations comprised 171 of our office and data center shell portfolio’s properties, representing 89.4% of its square feet in operations, while Regional Office comprised eight of the portfolio’s properties, or 9.9% of its square feet in operations. Our Wholesale Data Center segment is comprised of one property in Manassas, Virginia.
For information relating to our segments, refer to Note 17 to our consolidated financial statements, which is included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1.
Human Capital

Our Workforce: As of December 31, 2020, our workforce was comprised of 406 employees based in Maryland, where we are headquartered, Texas, Virginia, Alabama and Washington, D.C. Our workforce has varying expertise, and includes:

Building Technicians (175 employees): Skilled trades professionals, who perform mechanical maintenance, maintain our operating systems and service our buildings overall.
Operations Management (70 employees): Property managers and support staff who support our tenant customer needs.
Asset Management and Leasing (11 employees): Customer-facing leaders who drive the financial performance of our assets.
Development and Construction (30 employees): Project managers and support staff who drive our development pipeline and interior design.
Finance and Accounting (65 employees): Professionals who manage our financial activities.
Company Support Functions (42 employees): Includes Human Resources, Investor Relations, Investments, Legal, Marketing, Information Technology, Facility Security and Corporate Administrative Support.
Senior Leadership (13 employees): Our business line and Company leaders, including our Named Executive Officers, who interface with our Board of Trustees and shareholders and manage our business strategy, functional activities, risk and overall success.

In support of our Defense/IT Locations strategy, approximately one-third of our employees carry government credentials.

We operate in markets in which we compete for human capital. We rely on our employees to drive our success and we support them with a variety of programs to enhance their workplace engagement and job fulfillment.

Culture and Workforce Engagement: We develop and reinforce our culture by emphasizing our core values, illustrated by the actiiVe acronym. actiiVe stands for: Accountability, Commitment, Teamwork, Integrity, Innovation, Value Creation and Excellence. These values are intended to serve as a compass to our workforce to inform behavior and fuel our success.

We believe in equal opportunity, engagement and ethics. All employees must adhere to our Code of Business Conduct. We survey our workforce annually to measure engagement, use the feedback to enhance engagement and believe that this has helped us achieve annual “best workplace” honors for over a decade.

Compensation Program: Our compensation philosophy is driven by accountability, which results in a pay-for-performance structure. Our compensation program includes: base salary; an annual cash bonus program based on the achievement of individual, business unit and company objectives; health and welfare benefits; a retirement savings plan with a company match;
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financially supported learning programs; and employee recognition programs. We also grant common equity to all new full-time employees and provide our senior leadership and high performers with the ability to earn additional grants to align their interests with those of our shareholders and to incent retention.

Wellbeing and Safety: We view wellbeing as including five pillars: Physical, Emotional, Career, Financial and Community. We design programs to support each of these pillars. We directly incent wellbeing behaviors through a points-driven program each year. Employees who achieve the points threshold receive reductions in medical premiums or funds towards their health savings accounts. We believe this program enhances employee wellbeing and reduces medical costs.

Safety is a key part of our employee wellbeing, largely weighted in the Physical pillar. Recognizing this, we conduct job-tailored safety training on an ongoing basis. We also monitor our workers’ compensation claims to measure the effectiveness of our safety program.

With wellbeing and safety in mind, during the COVID-19 pandemic in 2020, we:

consulted with medical experts in developing an approach to safely operate our properties and workplaces;
required our on-site property operations staff to use COPT-provided personal protective equipment, such as masks, gloves and hand sanitizer, and implement other procedural changes to enhance separation and minimize spread;
instituted enhanced cleaning measures, particularly for high touch areas and flat surfaces;
provided signage promoting proper social distancing practices and hand sanitizer stations for property common areas; and
had most of our employees (other than on-site property operations staff) work from home from mid-March until the end of May, when most began reporting to their normal work locations on a bi-weekly rotational basis.

Talent Development: We aim to attract, retain and develop our top talent throughout the employment cycle in order to enhance our talent pool. During 2020, our workforce grew to support the business’ overall growth and we hired 39 employees. In 2020, 27 employees departed the Company, resulting in a 6.75% attrition rate.

We offer robust learning programs to all employees, including educational assistance for college-level and vocational degree programs, and cover all expenses for licenses and certifications, management and leadership courses, key skills training and industry and professional conferences. Further, we offer internship and mentorship programs to facilitate teaching and learning from others.

Community Engagement: We encourage employee engagement with our communities to facilitate personal growth and connection and to enhance our citizenship within our communities. We provide a platform for employees to engage with communities by contributing time, effort, money and expertise, which includes providing employees eight hours of paid time per year to engage in volunteer activities to serve our community directly, in a company-organized, team or individual format. Our employees select community non-profits for Corporate giving grants and for volunteer time contributions. We empower our employees to become involved and fuel our success in community partnerships.

Competition
The commercial real estate market is highly competitive. Numerous commercial landlords compete with us for tenants. Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rents. We also compete with our own tenants, many of whom have the right to sublease their space. The competitive environment for leasing is affected considerably by a number of factors including, among other things, changes in economic conditions and supply of and demand for space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to produce acceptable operating cash flows.
We occasionally compete for the acquisition of land and commercial properties with many entities, including other publicly-traded commercial REITs. Competitors for such acquisitions may have substantially greater financial resources than ours. In addition, our competitors may be willing to accept lower returns on their investments or may be willing to incur higher leverage.
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We also compete with many entities, including other publicly-traded commercial office REITs, for capital. This competition could adversely affect our ability to raise capital we may need to fulfill our capital strategy.

In addition, we compete with many entities for talent. If there is an increase in the costs for us to retain employees or if we otherwise fail to attract and retain such employees, our business and operating results could be adversely effected.

Item 1A. Risk Factors

Set forth below are risks and uncertainties relating to our business and the ownership of our securities. These risks and uncertainties may lead to outcomes that could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our equityholders. You should carefully consider each of these risks and uncertainties, along with all of the information in this Annual Report on Form 10-K and its Exhibits, including our consolidated financial statements and notes thereto for the year ended December 31, 2020 included in a separate section at the end of this report beginning on page F-1.

Risks Associated with the Real Estate Industry and Our Properties

Our performance and asset value are subject to risks associated with our properties and with the real estate industry. Real estate investments are subject to various risks and fluctuations in value and demand, many of which are beyond our control.  Our performance and the value of our real estate assets may decline due to conditions in the general economy and the real estate industry which, in turn, could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. These conditions include, but are not limited to:

downturns in national, regional and local economic environments, including increases in the unemployment rate and inflation or deflation;
competition from other properties;
trends in office real estate that may adversely affect future demand, including telecommuting and flexible workplaces;
deteriorating local real estate market conditions, such as oversupply, reduction in demand and decreasing rental rates;
declining real estate valuations;
adverse developments concerning our tenants, which could affect our ability to collect rents and execute lease renewals;
adverse changes resulting from the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, the real estate industry and national, regional and local economic conditions;
government actions and initiatives, including risks associated with the impact of prolonged government shutdowns and budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;
increasing operating costs, including insurance, utilities, real estate taxes and other expenses, some of which we may not be able to pass through to tenants;
increasing vacancies and the need to periodically repair, renovate and re-lease space;
increasing interest rates and unavailability of financing on acceptable terms or at all;
unavailability of financing for potential purchasers of our properties;
adverse changes in taxation or zoning laws;
potential inability to secure adequate insurance;
adverse consequences resulting from civil disturbances, natural disasters, terrorist acts or acts of war; and
potential liability under environmental or other laws or regulations.

Our business may be affected by adverse economic conditions. Our business may be affected by adverse economic conditions in the United States economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the impact of high unemployment and constrained credit. Adverse economic conditions could increase the likelihood of tenants encountering financial difficulties, including bankruptcy, insolvency or general downturn of business, and as a result could increase the likelihood of tenants defaulting on their lease obligations to us. Such conditions could also decrease our likelihood of successfully renewing tenants at favorable terms or leasing vacant space in existing properties or newly-developed properties. In addition, such conditions could increase the level of risk that we may not be able to obtain new financing for development activities, refinancing of existing debt, acquisitions or other capital requirements at reasonable terms, if at all.

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We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue from renting our properties. Certain of our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This means that these costs will not necessarily decline and may increase even if our revenues decline.

For new tenants or upon expiration of existing leases, we generally must make improvements and pay other leasing costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants may not reimburse us.

If our properties do not generate revenue sufficient to meet our operating expenses and capital costs, we may need to borrow additional amounts to cover these costs. In such circumstances, we would likely have lower profits or possibly incur losses. We may also find in such circumstances that we are unable to borrow to cover such costs, in which case our operations could be adversely affected.

In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes due to economic factors such as supply and demand. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meet our short-term capital needs.

We rely on the ability of our tenants to pay rent and would be harmed by their inability to do so. Our performance depends on the ability of our tenants to fulfill their lease obligations by paying their rental payments in a timely manner. As a result, we would be harmed if one or more of our major tenants, or a number of our smaller tenants, were to experience financial difficulties, including bankruptcy, insolvency, prolonged government shutdown or general downturn of business.

We may be adversely affected by developments concerning our major tenants or the USG and its contractors, including prolonged shutdowns of the government and actual, or potential, reductions in government spending targeting knowledge- and technology-based activities. As of December 31, 2020, our 10 largest tenants accounted for 62.7% of our total annualized rental revenue, the three largest of these tenants accounted for 48.8%, and the USG, our largest tenant, accounted for 34.1%. We calculate annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio as of December 31, 2020; with regard to properties owned through unconsolidated real estate joint ventures, we include the portion of annualized rental revenue allocable to our ownership interest. For additional information regarding our tenant concentrations, refer to the section entitled “Concentration of Operations” within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Most of our leases with the USG provide for a series of one-year terms. The USG may terminate its leases if, among other reasons, the United States Congress fails to provide funding. We would be harmed if any of our largest tenants fail to make rental payments to us over an extended period of time, including as a result of a prolonged government shutdown, or if the USG elects to terminate some or all of its leases and the space cannot be re-leased on satisfactory terms.

As of December 31, 2020, 87.1% of our office and data center shell properties’ total annualized rental revenue was from Defense/IT Locations, and we expect to maintain a similarly high revenue concentration from properties in these locations. A reduction in government spending targeting the activities of the government and its contractors (such as knowledge- and technology-based defense and security activities) in these locations could adversely affect our tenants’ ability to fulfill lease obligations, renew leases or enter into new leases and limit our future growth from properties in these locations. Moreover, uncertainty regarding the potential for future reduction in government spending targeting such activities could also decrease or delay leasing activity from tenants engaged in these activities.

Our future ability to fuel growth and raise capital through data center shell development may be adversely affected should we suffer a loss of future development opportunities with our data center shell customer. Data center shells have been a significant growth driver for us in recent years, enabling us to develop and place into service fully-occupied, single-tenant properties, with long-term leases and rent escalators for future growth. These properties have garnered the interest of outside investors, enabling us to raise capital by selling ownership interests through joint venture structures in recent years at favorable profit margins, and to apply the proceeds towards other development opportunities. Our data center shell activity is concentrated with one customer. If that customer no longer chooses to allocate development opportunities to us, we may have limited opportunities to continue to use data center shells as a growth driver and possible source of future capital.

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We may suffer economic harm in the event of a decline in the real estate market or general economic conditions in the Mid-Atlantic region, particularly in the Greater Washington, DC/Baltimore region, or in particular business parks. Most of our properties are located in the Mid-Atlantic region of the United States, particularly in the Greater Washington, DC/Baltimore region. Our properties are also often concentrated in business parks in which we own most of the properties. Consequently, our portfolio of properties is not broadly distributed geographically. As a result, we would be harmed by a decline in the real estate market or general economic conditions in the Mid-Atlantic region, the Greater Washington, DC/Baltimore region or the business parks in which our properties are located.

We would suffer economic harm if we were unable to renew our leases on favorable terms. When leases expire, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a property, we can expect to experience a vacancy for some period of time, as well as incur higher leasing costs than we would likely incur if a tenant renews. As a result, we may be harmed if we experience a high volume of tenant departures at the end of their lease terms.

We may be adversely affected by trends in the office real estate industry. Businesses are increasingly permitting employee telecommuting, flexible work schedules, open workplaces and teleconferencing. There has also been a trend of businesses utilizing shared office and co-working spaces. These practices enable businesses to reduce their space requirements. These trends, some of which could potentially accelerate as a result of changes in work practices during the COVID-19 pandemic, could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations.

We may encounter a significant decline in the value of our real estate. The value of our real estate could be adversely affected by general economic and market conditions connected to a specific property, a market or submarket, a broader economic region or the office real estate industry. Examples of such conditions include a broader economic recession, declining demand and decreases in market rental rates and/or market values of real estate assets. If our real estate assets significantly decline in value, it could result in our recognition of impairment losses. Moreover, a decline in the value of our real estate could adversely affect the amount of borrowings available to us under future credit facilities and other loans.

We may not be able to compete successfully with other entities that operate in our industry. The commercial real estate market is highly competitive. Numerous commercial properties compete with our properties for tenants; some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rates than are acceptable to us. In addition, we compete for the acquisition of land and commercial properties with many entities, including other publicly traded commercial office REITs; competitors for such acquisitions may have substantially greater financial resources than ours, or may be willing to accept lower returns on their investments or incur higher leverage.

Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions, including real estate lending conditions, are not favorable. Such illiquidity could limit our ability to fund capital needs or quickly change our portfolio of properties in response to changes in economic or other conditions. Moreover, under certain circumstances, the Internal Revenue Code imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year.

We may be unable to execute our plans to develop additional properties. Although the majority of our investments are in operating properties, we also develop and redevelop properties, including some that are not fully pre-leased. When we develop and redevelop properties, we assume the risk of actual costs exceeding our budgets, conditions occurring that delay or preclude project completion and projected leasing not occurring. In addition, we may find that we are unable to successfully execute plans to obtain financing to fund property development activities.

We may suffer adverse effects from acquisitions of commercial real estate properties. We may pursue acquisitions of existing commercial real estate properties as part of our property development and acquisition strategy. Acquisitions of commercial properties entail risks, such as the risk that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and/or that such acquisitions fail to perform as expected.

We may pursue selective acquisitions of properties in regions where we have not previously owned properties. These acquisitions may entail risks in addition to those we face with acquisitions in more familiar regions, such as our not sufficiently anticipating conditions or trends in a new market and therefore not being able to operate the acquired property profitably.
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In addition, we may acquire properties that are subject to liabilities in situations where we have no recourse, or only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it. Examples of unknown liabilities with respect to acquired properties include, but are not limited to:

liabilities for remediation of disclosed or undisclosed environmental contamination;
claims by tenants, vendors or other persons dealing with the former owners of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

Our wholesale data center may become obsolete. Wholesale data centers are much more expensive investments on a per square foot basis than office properties due to the level of infrastructure required to operate the centers. At the same time, technology, industry standards and service requirements for wholesale data centers are rapidly evolving and, as a result, the risk of investments we make in our wholesale data center becoming obsolete is higher than other commercial real estate properties. Our wholesale data center may become obsolete due to the development of new systems to deliver power to, or eliminate heat from, the servers housed in the properties, or due to other technological advances. In addition, we may not be able to efficiently upgrade or change power and cooling systems to meet new demands or industry standards without incurring significant costs that we may not be able to pass on to our tenants.

Data center space in certain of our office properties may be difficult to reposition for alternative uses. Certain of our office properties contain data center space, which is highly specialized space containing extensive electrical and mechanical systems that are uniquely designed to run and maintain banks of computer servers. Data centers are subject to obsolescence risks. In the event that we needed to reposition such space for another use, the renovations required to do so could be difficult and costly, and we may, as a result, deem such renovations to be impractical.

We may be subject to possible environmental liabilities. We are subject to various Federal, state and local environmental laws, including air and water quality, hazardous or toxic substances and health and safety. These laws can impose liability on current and prior property owners or operators for the costs of removal or remediation of hazardous substances released on a property, even if the property owner was not responsible for, or even aware of, the release of the hazardous substances. Costs resulting from environmental liability could be substantial. The presence of hazardous substances on our properties may also adversely affect occupancy and our ability to sell or borrow against those properties. In addition to the costs of government claims under environmental laws, private plaintiffs may bring claims for personal injury or other reasons. Additionally, various laws impose liability for the costs of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances at such a facility is potentially liable under such laws.

Although most of our properties have been subject to varying degrees of environmental assessment, many of these assessments are limited in scope and may not include or identify all potential environmental liabilities or risks associated with the property.  Identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to us.

We may be adversely affected by natural disasters and the effects of climate change. Natural disasters, including earthquakes and severe storms could adversely impact our properties. The potential consequences of climate change could also adversely impact our properties, particularly those located in Baltimore City near the waterfront, and, over time, could adversely affect demand for space and our ability to operate the properties effectively and result in additional operating costs.

Terrorist attacks or incidents related to social unrest may adversely affect the value of our properties, our financial position and cash flows. We have significant investments in properties located in large metropolitan areas or near military installations. Future terrorist attacks or incidents related to social unrest could directly or indirectly damage our properties or cause losses that materially exceed our insurance coverage. After such an attack or incident, tenants in these areas may choose to relocate their businesses to areas of the United States that may be perceived to be less likely targets of future terrorist activity or unrest, and fewer customers may choose to patronize businesses in these areas. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease space on less favorable terms.
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We may be subject to other possible liabilities that would adversely affect our financial position and cash flows. Our properties may be subject to other risks related to current or future laws, including laws relating to zoning, development, fire and life safety requirements and other matters. These laws may require significant property modifications in the future and could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other catastrophic events, including acts of war or, as mentioned above, terrorism.

We may be subject to increased costs of insurance and limitations on coverage. Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies. These policies include coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing structure may increase the cost of insuring our properties and decrease the scope of insurance coverage. Most of our loan agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs, or at all, in the future. In addition, if lenders insist on greater coverage than we are able to obtain, it could adversely affect our ability to finance and/or refinance our properties and execute our growth strategies.

We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other investments. We may invest in certain entities in which we are not the exclusive investor or principal decision maker. Investments in such entities may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that the other parties to these investments might become bankrupt or fail to fund their share of required capital contributions. Our partners in these entities may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also lead to impasses on major decisions, such as whether or not to sell a property, because neither we nor the other parties to these investments may have full control over the entity. In addition, we may in certain circumstances be liable for the actions of the other parties to these investments.
Our business could be adversely affected by a negative audit by the USG. Agencies of the USG, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The USG also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the USG. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

Risks Associated with Financing and Other Capital-Related Matters

We are dependent on external sources of capital for growth. Because COPT is a REIT, it must distribute at least 90% of its annual taxable income to its shareholders. Due to this requirement, we are not able to significantly fund our investment activities using retained cash flow from operations. Therefore, our ability to fund these activities is dependent on our ability to access debt or equity capital. Such capital could be in the form of new debt, common shares, preferred shares, common and preferred units in COPLP, joint venture funding or sales of interests in properties. These capital sources may not be available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject us to covenants that restrict management’s flexibility in directing our operations. Our inability to obtain capital when needed could have a material adverse effect on our ability to expand our business and fund other cash requirements.

We often use our Revolving Credit Facility to initially finance much of our investing activities and certain financing activities. Our lenders under this and other facilities could, for financial hardship or other reasons, fail to honor their commitments to fund our requests for borrowings under these facilities. If lenders default under these facilities by not being able or willing to fund a borrowing request, it would adversely affect our ability to access borrowing capacity under these facilities.

We may suffer adverse effects as a result of the indebtedness that we carry and the terms and covenants that relate to this debt. Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay
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distributions to COPT’s shareholders required to maintain COPT’s qualification as a REIT. We are also subject to the risks that:

we may not be able to refinance our existing indebtedness, or may only be able to do so on terms that are less favorable to us than the terms of our existing indebtedness;
in the event of our default under the terms of our Revolving Credit Facility, COPLP could be restricted from making cash distributions to COPT unless such distributions are required to maintain COPT’s qualification as a REIT, which could result in reduced distributions to our equityholders or the need for us to incur additional debt to fund such distributions; and
if we are unable to pay our debt service on time or are unable to comply with restrictive financial covenants for certain of our debt, our lenders could foreclose on our properties securing such debt and, in some cases, other properties and assets that we own.

Most of our unsecured debt is cross-defaulted, which means that failure to pay interest or principal on the debt above a threshold value will create a default on certain of our other debt.
If interest rates were to rise, our debt service payments on debt with variable interest rates would increase.

As of December 31, 2020, we had $2.1 billion in debt, the future maturities of which are set forth in Note 10 to our consolidated financial statements. Our operations likely will not generate enough cash flow to repay all of this debt without additional borrowings, equity issuances and/or property sales. If we cannot refinance, extend the repayment date of, or otherwise raise funds required to repay, our debt by its maturity date, we would default on such debt.

Our organizational documents do not limit the amount of indebtedness that we may incur. Therefore, we may incur additional indebtedness and become more highly leveraged, which could harm our financial position.

We may suffer adverse effects from changes in the method of determining LIBOR or the replacement of LIBOR with an alternative interest rate. Our variable-rate debt and interest rate swaps use as a reference rate the London Interbank Offered Rate (“LIBOR”), as calculated for the U.S. dollar (“USD-LIBOR”). In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. 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.

A downgrade in our credit ratings would materially adversely affect our business and financial condition. COPLP’s Senior Notes are currently rated investment grade by the three major rating agencies. These credit ratings are subject to ongoing evaluation by the credit rating agencies and can change. Any downgrades of our ratings or a negative outlook by the credit rating agencies would have a materially adverse impact on our cost and availability of capital and also could have a materially adverse effect on the market price of COPT’s common shares. In addition, since the variable interest rate spread and facility fees on certain of our debt, including our Revolving Credit Facility and a term loan facility, is determined based on our credit ratings, a downgrade in our credit ratings would increase the payments required on such debt.

We have certain distribution requirements that reduce cash available for other business purposes. Since COPT is a REIT, it must distribute at least 90% of its annual taxable income, which limits the amount of cash that can be retained for other business purposes, including amounts to fund development activities and acquisitions. Also, due to the difference in time between when we receive revenue or pay expenses and when we report such items for distribution purposes, it is possible that we may need to borrow funds for COPT to meet the 90% distribution requirement.

We may issue additional common or preferred shares/units that dilute our equityholders’ interests. We may issue additional common and preferred shares/units without shareholder approval. Similarly, COPT may cause COPLP to issue its
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common or preferred units for contributions of cash or property without approval by the limited partners of COPLP or COPT’s shareholders. Our existing equityholders’ interests could be diluted if such additional issuances were to occur.

A number of factors could cause our security prices to decline. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our equity security issuances. These conditions include, but are not limited to:

market perception of REITs in general and office REITs in particular;
market perception regarding our major tenants and sector concentrations;
the level of institutional investor interest in COPT;
general economic and business conditions;
prevailing interest rates;
our financial performance;
our underlying asset value;
market perception of our financial condition, performance, dividends and growth potential; and
adverse changes in tax laws.

We may be unable to continue to make distributions to our equityholders at expected levels. We expect to make regular quarterly cash distributions to our equityholders. However, our ability to make such distributions depends on a number of factors, some of which are beyond our control. Some of our loan agreements contain provisions that could, in the event of default, restrict future distributions unless we meet certain financial tests or such payments or distributions are required to maintain COPT’s qualification as a REIT. Our ability to make distributions at expected levels is also dependent, in part, on other matters, including, but not limited to:

continued property occupancy and timely receipt of rent from our tenants;
the amount of future capital expenditures and expenses relating to our properties;
our leasing activity and future rental rates;
the strength of the commercial real estate market;
our ability to compete;
governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses;
our costs of compliance with environmental and other laws;
our corporate overhead levels;
our amount of uninsured losses; and
our decision to reinvest in operations rather than distribute available cash.

In addition, we can make distributions to the holders of our common shares/units only after we make preferential distributions to holders of any outstanding preferred shares/units.

Our ability to pay distributions may be limited, and we cannot provide assurance that we will be able to pay distributions regularly. Our ability to pay distributions will depend on a number of things discussed elsewhere herein, including our ability to operate profitably and generate cash flow from our operations. We cannot guarantee that we will be able to pay distributions on a regular quarterly basis in the future. Additionally, the terms of some of COPLP’s debt may limit its ability to make some types of payments and other distributions to COPT in the event of certain default situations. This in turn may limit our ability to make some types of payments, including payment of distributions on common or preferred shares/units, unless we meet certain financial tests or such payments or distributions are required to maintain COPT’s qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay distributions in one or more periods. Furthermore, any new common or preferred shares/units that may be issued in the future for raising capital, financing acquisitions, share-based compensation arrangements or otherwise will increase the cash required to continue to pay cash distributions at current levels.

We may experience significant losses and harm to our financial condition if financial institutions holding our cash and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur significant losses and harm to our financial condition in the future if we were holding large sums of cash in any of these financial institutions at a time when they filed for bankruptcy protection.

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Risks Associated with COVID-19

We may suffer further adverse effects from the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread. Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide. In an effort to control its spread, governments and other authorities imposed restrictive measures affecting freedom of movement and business operations, such as shelter-in-place orders and business closures. Strong restrictive measures were put into place in much of the United States beginning in March 2020, bringing many businesses to a halt while forcing others to change the way in which they conduct their operations, with much of the workforce working from their homes to the extent they were able. States and local governments began easing these measures to varying extents in late April 2020, with some lifting restrictive measures entirely, while others chose a more gradual, extended easing approach. While the easing of these measures enabled many businesses to gradually resume normal operations, most businesses continue to be hindered to varying extents by either measures still in effect, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. As of the date of this filing, COVID-19 spread continues world- and nation-wide, and is expected to continue until vaccinations have been administered to much of the population, which is not expected to occur in the United States until at least mid- to late 2021. As a result, there continues to be significant uncertainty regarding the duration and extent of this pandemic. The outbreak significantly disrupted financial and economic markets worldwide, as well as in the United States at a national, regional and local level. These conditions could continue or further deteriorate as businesses feel the prolonged effects of stalled or reduced operations and uncertainty regarding the pandemic continues.

COVID-19, and any similar pandemics should they occur, along with measures instituted to prevent spread, may adversely affect us in many ways, including, but not limited to:

disruption of 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;
shortages in supply of products or services from our and our tenants’ vendors that are needed for us and our tenants to operate effectively, and which could lead to increased costs for such products and services;
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;
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; and
an increase in the pace of businesses implementing remote work arrangements over the long-term, which would adversely effect demand for office space.

The extent of the effect on our operations, financial condition, cash flows and ability to make expected distributions to shareholders will be dependent on future developments, including the duration of the pandemic and any future resurgence or variants thereof, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict. Moreover, some of the risks described in other risk factors set forth in this Annual Report on Form 10-K may be more likely to impact us as a result of COVID-19 and the responses to curb its spread, including, but not limited to: downturns in national, regional and local economic environments; deteriorating local real estate market conditions; and declining real estate valuations.

Other Risks

Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise. We face risks associated with security breaches and other significant disruptions of our information technology networks and related systems, which are essential to our business operations. Such breaches and disruptions may occur through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization. Because of our concentration on serving the USG and its contractors with a general focus on national security and information technology, we may be more likely to be targeted by cyber attacks, including by governments, organizations or persons hostile to the USG.  We have preventative, detective and responsive measures in place to maintain the security and integrity of our networks and related systems that have to date enabled us to
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avoid breaches and disruptions that were individually, or in the aggregate, material. We also have insurance coverage in place in the event of significant future losses from breaches and disruptions. However, despite our activities to maintain the security and integrity of our networks and related systems, there can be no absolute assurance that these activities will be effective in mitigating these risks. A security breach involving our networks and related systems could disrupt our operations in numerous ways, including compromising the confidential information of our tenants, customers, vendors and employees, which could damage our relationships with such parties, and disrupting the proper functioning of our networks and systems on which much of our operations depend.

COPT’s ownership limits are important factors. COPT’s Declaration of Trust limits ownership of its common shares by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding common shares, whichever is more restrictive. COPT’s Declaration of Trust also limits ownership by any single shareholder of our common and preferred shares in the aggregate to 9.8% of the aggregate value of our outstanding common and preferred shares. We call these restrictions the “Ownership Limit.” COPT’s Declaration of Trust allows our Board of Trustees to exempt shareholders from the Ownership Limit. The Ownership Limit and the restrictions on ownership of our common shares may delay or prevent a transaction or a change of control that might involve a premium price for our common shares/units or otherwise be in the best interest of our equityholders.

COPT’s Declaration of Trust includes other provisions that may prevent or delay a change of control. Subject to the requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine, which could also delay or prevent a change in control.

The Maryland business statutes impose potential restrictions that may discourage a change of control of our company. Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to equityholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisions applicable to us.

COPT’s failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds available to make distributions to our equityholders. We believe that COPT has qualified for taxation as a REIT for Federal income tax purposes since 1992. We plan for COPT to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of COPT’s gross income must come from certain sources that are specified in the REIT tax laws. COPT is also required to distribute to shareholders at least 90% of its annual taxable income. The fact that COPT holds most of its assets through COPLP and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize COPT’s REIT status. Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations and the courts might issue new rulings that make it more difficult or impossible for COPT to remain qualified as a REIT.

If COPT fails to qualify as a REIT, it would be subject to Federal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, COPT would remain disqualified as a REIT for four years following the year it first fails to qualify. If COPT fails to qualify as a REIT, it would have to pay significant income taxes and would therefore have less money available for investments or for distributions to our equityholders. In addition, if COPT fails to qualify as a REIT, it would no longer be required to pay distributions to shareholders. As a result of all these factors, COPT’s failure to qualify as a REIT could impair our ability to expand our business and raise capital and would likely have a significant adverse effect on the value of our shares/units.

We may be adversely impacted by changes in tax laws. At any time, U.S. federal tax laws or the administrative interpretations of those laws may be changed. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be issued. In addition, while REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that future legislation could result in REITs having fewer tax advantages, and therefore becoming a less attractive investment alternative. As a result, changes in U.S. federal tax laws could negatively impact our operating results, financial condition and business operations, and adversely impact our equityholders.

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Occasionally, changes in state and local tax laws or regulations are enacted that may result in an increase in our tax liability. Shortfalls in tax revenues for states and municipalities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets, revenue or income.

Our tenants and contractual counterparties could be designated “Prohibited Persons” by the Office of Foreign Assets Control.  The Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit us from conducting business or engaging in transactions with Prohibited Persons. If a tenant or other party with whom we conduct business is placed on the OFAC list or is otherwise a party with whom we are prohibited from doing business, we would be required to terminate the lease or other agreement. 

Item 1B. Unresolved Staff Comments
None

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Item 2. Properties

The following table provides certain information about our operating property segments as of December 31, 2020 (dollars and square feet in thousands, except per square foot amounts):
SegmentNumber of PropertiesRentable Square Feet or Megawatts (“MW”)Occupancy (1)Annualized Rental Revenue (2)Annualized Rental Revenue per Occupied Square
Foot (2)(3)
Office and Data Center Shell Portfolio
Defense/IT Locations:
Fort Meade/BW Corridor:  
National Business Park (Annapolis Junction, MD)31 3,821 91.7 %$141,020 $40.26 
Howard County, MD35 2,857 89.5 %71,930 28.09 
Other23 1,679 92.2 %46,816 30.09 
Fort Meade/BW Corridor Subtotal / Average89 8,357 91.0 %259,766 34.10 
Northern Virginia Defense/IT13 1,992 88.1 %61,334 34.96 
Lackland Air Force Base953 100.0 %53,402 53.57 
Navy Support Locations21 1,241 97.2 %34,556 28.65 
Redstone Arsenal15 1,454 99.4 %30,439 20.96 
Data Center Shells:
Consolidated Properties1,990 100.0 %32,349 16.26 
Unconsolidated Joint Venture Properties (4)17 2,749 100.0 %3,842 13.97 
Defense/IT Locations Subtotal / Average171 18,736 94.5 %475,688 31.05 
Regional Office2,066 92.5 %68,086 35.51 
Other Properties157 68.4 %2,623 24.37 
Total Office and Data Center Shell Portfolio181 20,959 94.1 %546,397 $31.50 
Wholesale Data Center1 19.25 MW86.7 %24,638 N/A
Total Operating Properties$571,035 
Total Consolidated Operating Properties$567,193 

(1)This percentage is based upon all rentable square feet or megawatts under lease terms that were in effect as of December 31, 2020.
(2)Annualized rental revenue is the monthly contractual base rent as of December 31, 2020 (ignoring free rent then in effect) multiplied by 12, plus the estimated annualized expense reimbursements under existing leases. With regard to properties owned through unconsolidated real estate joint ventures, we include the portion of annualized rental revenue allocable to our ownership interest. 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 does contain such fluctuations. We find the measure particularly useful for leasing, tenant and segment analysis.
(3)Annualized rental revenue per occupied square foot is a property’s annualized rental revenue divided by that property’s occupied square feet as of December 31, 2020. Our computation of annualized rental revenue excludes the effect of lease incentives. The annualized rent per occupied square foot, including the effect of lease incentives, was $31.11 for our total office and data center shell portfolio, $33.66 for the Fort Meade/BW Corridor (our largest Defense/IT Location sub-segment) and $34.85 for our Regional Office portfolio.
(4)Represents properties owned through unconsolidated real estate joint ventures. The amounts reported above reflect 100% of the properties’ square footage but only reflect the portion of Annualized Rental Revenue that was allocable to our ownership interest.

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The following table provides certain information about office and data center shell properties that were under development, or otherwise approved, as of December 31, 2020 (dollars and square feet in thousands):
Property and LocationEstimated Rentable Square Feet Upon CompletionPercentage LeasedCalendar Quarter Anticipated to be OperationalCosts Incurred to Date (1)Estimated Costs to Complete (1)
Under Development
Fort Meade/BW Corridor:
4600 River Road (2)
College Park, Maryland
102 54 %4Q 21$24,024 $6,710 
610 Guardian Way
Annapolis Junction, Maryland
107 100 %1Q 2222,043 45,307 
Subtotal / Average209 78 %46,067 52,017 
NoVA Defense/IT:
NoVA Office C
Chantilly, Virginia
348 100 %4Q 2159,91446,305 
Lackland Air Force Base:
Project EL
San Antonio, Texas
107 100 %4Q 2115,40939,841 
Navy Support:
Expedition VII
St. Mary’s County, Maryland
30 60 %4Q 221,5676,622 
Redstone Arsenal:
6000 Redstone Gateway (2)
Huntsville, Alabama
42 100 %3Q 218,639 1,157 
8000 Rideout Road
Huntsville, Alabama
100 %1Q 2216,242 10,485 
7100 Redstone Gateway
Huntsville, Alabama
46 100 %1Q 219,100 2,066 
Subtotal / Average188 52 %33,981 13,708 
Data Center Shells:
Parkstone A
Northern Virginia
227 100 %2Q 235,199 60,401 
Parkstone B
Northern Virginia
193 100 %2Q 244,421 50,579 
Subtotal / Average420 100 %9,620 110,980 
Regional Office:
2100 L Street (2)
Washington, D.C.
190 56 %2Q 21157,81319,187 
Total Under Development1,49284 %$324,371 $288,660 

(1)Includes land, development, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
(2)This property had occupied square feet in service as of December 31, 2020. Therefore, the property and its occupied square feet are included in our operating property statistics, including the information set forth on the previous page.

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The following table provides certain information about land that we owned or controlled as of December 31, 2020, including properties under ground lease to us (square feet in thousands):
SegmentAcres Estimated Developable Square Feet
Defense/IT Locations:    
Fort Meade/BW Corridor:
National Business Park (Annapolis Junction, MD)1751,999 
Howard County, MD19290 
Other1261,338 
Total Fort Meade/BW Corridor3203,627 
Northern Virginia Defense/IT Locations291,136 
Lackland Air Force Base19410 
Navy Support Locations3864 
Redstone Arsenal (1)3583,125 
Data Center Shells531,180 
Total Defense/IT Locations8179,542 
Regional Office10900 
Total land owned/controlled for future development82710,442 
Other land owned/controlled43638 
Total Land Owned/Controlled870 11,080 

(1)This land is owned by the USG and is controlled under a long-term master lease agreement to a consolidated joint venture. As this land is developed in the future, the joint venture will execute site-specific leases under the master lease agreement. Rental payments will commence under the site-specific leases as cash rents under tenant leases commence at the respective properties.


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Lease Expirations

The following table provides a summary schedule of lease expirations for leases in place at our operating properties as of December 31, 2020 based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles (dollars and square feet in thousands, except per square foot amounts):
Year of Lease ExpirationSquare Footage of Leases ExpiringAnnualized Rental Revenue of Expiring Leases (1)Percentage of Total Annualized Rental Revenue Expiring (1)Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot
2021: Office and Data Center Shells1,485 $51,342 9.0 %$34.56 
Wholesale Data CenterN/A15,011 2.6 %N/A
2022: Office and Data Center Shells2,311 73,574 12.9 %31.81 
Wholesale Data CenterN/A2,493 0.4 %N/A
2023: Office and Data Center Shells1,868 64,560 11.3 %34.53 
Wholesale Data CenterN/A1,694 0.3 %N/A
2024: Office and Data Center Shells2,538 67,288 11.8 %32.85 
Wholesale Data CenterN/A10 — %N/A
2025: Office and Data Center Shells2,978 110,868 19.4 %38.59 
Wholesale Data CenterN/A5,168 0.9 %N/A
2026: Office and Data Center Shells1,481 38,332 6.7 %35.61 
2027: Office and Data Center Shells970 20,901 3.7 %32.51 
Wholesale Data CenterN/A29 — %N/A
2028: Office and Data Center Shells1,181 21,245 3.7 %29.63 
Wholesale Data CenterN/A233 — %N/A
2029: Office and Data Center Shells1,405 29,072 5.1 %26.45 
2030: Office and Data Center Shells817 12,775 2.2 %23.76 
2031: Office and Data Center Shells657 11,601 2.0 %17.66 
2032: Office and Data Center Shells21 576 0.1 %27.95 
2033: Office and Data Center Shells255 9,236 1.6 %36.21 
2034: Office and Data Center Shells369 4,187 0.7 %11.34 
2035: Office and Data Center Shells497 9,570 1.7 %19.24 
2036: Office and Data Center Shells748 14,462 2.5 %19.34 
2037: Office and Data Center Shells102 6,061 1.1 %58.30 
2038: Office and Data Center Shells39 618 0.1 %15.92 
2063: Office and Data Center Shells (2)— 129 — %N/A
Total Operating Properties19,722 $571,035 100.0 %N/A
Total Office and Data Center Shells19,722 $546,397 100.0 %$31.50 

(1)Refer to definition provided on first page of Item 2 of this Annual Report on Form 10-K.
(2)Includes only ground leases.

With regard to office and data center shell property leases expiring in 2021, we believe that the weighted average annualized rental revenue per occupied square foot for such leases as of December 31, 2020 was, on average, approximately 1.5% to 3.5% higher than estimated current market rents for the related space, with specific results varying by market.


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Item 3. 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 4. Mine Safety Disclosures
Not applicable.

PART II
 
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
COPT’s common shares trade on the New York Stock Exchange (“NYSE”) under the symbol “OFC.” The number of holders of record of COPT’s common shares was 462 as of January 22, 2021. This number does not include shareholders whose shares were held of record by a brokerage house or clearing agency, but does include any such brokerage house or clearing agency as one record holder.

There is no established public trading market for COPLP’s partnership units. Quarterly common unit distributions per unit were the same as quarterly common dividends per share declared by COPT. As of January 22, 2021, there were 28 holders of record of COPLP’s common units.

Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended December 31, 2020, COPT issued 2,000 common shares in exchange for 2,000 COPLP common units 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.

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COPT’s Common Shares Performance Graph

The graph and the table set forth below assume $100 was invested on December 31, 2015 in COPT’s common shares. The graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a $100 investment at that time in the S&P 500 Index or the All Equity REIT Index of the National Association of Real Estate Investment Trusts (“Nareit”):
ofc-20201231_g1.jpg
Period Ended
Index12/31/1512/31/1612/31/1712/31/1812/31/1912/31/20
Corporate Office Properties Trust$100.00 $148.61 $143.77 $108.05 $156.91 $145.75 
S&P 500 Index$100.00 $111.96 $136.40 $130.42 $171.49 $203.04 
FTSE Nareit All Equity REIT Index$100.00 $108.63 $118.05 $113.28 $145.75 $138.28 

Item 6. Selected Financial Data

Omitted pursuant to our election to apply rules adopted by the SEC effective February 10, 2021 to eliminate Item 301 of Regulation S-K.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

You should refer to our consolidated financial statements and the notes thereto and our Selected Financial Data table 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 and uncertainties regarding the impact of the COVID-19 pandemic, and similar pandemics, along with restrictive measures instituted to prevent spread, on our business, the real estate industry 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.
 
Overview

While 2020 will most likely be remembered for the COVID-19 pandemic, including the restrictive measures instituted to prevent spread and the resulting economic uncertainty, we do not believe that the pandemic significantly affected our ability to execute our business strategy due primarily to our portfolio’s significant concentration in Defense/IT Locations. The tenants in most of these properties were designated as “essential businesses,” and therefore exempt from use and occupancy restrictions that otherwise affected much of the commercial real estate industry. Furthermore, since the tenants in these properties continued to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations was not significantly disrupted. As a result, while COVID-19 affected the manner in which we conducted our operations and adversely impacted certain of our other tenants and property types, we do not believe that it significantly affected our financial condition, results of operations and cash flows in 2020. Please refer to the section below entitled “Effects of COVID-19” for additional related disclosure.
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We ended 2020 with higher leased and occupancy percentages for our office and data center shell portfolio both portfolio-wide and for our Same Properties and, notably, our highest year end portfolio-wide occupancy since 2001. We ended 2020 with our office and data center shell portfolio 94.8% leased (compared to 94.4% as of December 31, 2019) while our Same Properties were 93.1% leased (compared to 93.0% as of December 31, 2019). Our year end portfolio-wide office and data center shell occupancy was 94.1% (compared to 92.9% as of December 31, 2019) and Same Properties occupancy was 92.1% (compared to 91.1% as of December 31, 2019). Our wholesale data center was 86.7% leased as of year end (compared to 76.9% as of December 31, 2019). Please refer to the section below entitled “Occupancy and Leasing” for additional related disclosure.

The higher occupancy and leased percentages in our office and data center shell portfolio were attributable primarily to our placing into service an annual record 1.8 million square feet in 11 newly-developed properties, expansions of three fully-operational properties and one redeveloped property that were 99.5% leased as of December 31, 2020. These properties were predominantly Defense/IT Locations in our data center shells or Redstone Arsenal sub-segments. Other noteworthy 2020 leasing activity in our operating portfolio included:

renewal leasing of 2.2 million square feet, resulting in a portfolio-wide tenant retention rate of 80.6% (81.6% for our Defense/IT Locations), one of our highest annual rates on record. This leasing included the effect of large early renewals of leases previously scheduled to expire in 2021. Strong tenant retention is key to our asset management strategy in order to maximize revenue (by avoiding downtime) and minimize leasing capital; and
vacant space leasing of 416,000 square feet, which fell short of our beginning of 2020 expectations due to the impact of restrictive measures and the economic uncertainty caused by the pandemic.

As of December 31, 2020, our scheduled lease expirations in 2021, representing 7.5% of our total occupied square feet, included a high concentration of space in what we believe to be mission-critical Defense/IT Locations. This space included only two leases of 100,000 square feet or more that are with the USG and expected to be renewed.

We had 1.0 million square feet of development leasing in 2020, representing our fourth highest annual volume. Nearly half of this leasing was for data center shells, and we also leased new property space in four of our five other Defense/IT Locations sub-segments. We ended the year with 1.5 million square feet in properties under development that were 84% leased in aggregate, which included new properties in each of our named office and data center shell segments and sub-segments. Most of these properties were 100% leased and all but one were more than half leased (the one being a property built on a speculative basis in Redstone Arsenal in order to keep pace with what we believe to be very strong demand, illustrated by that sub-segment’s 99.4% year-end occupancy rate). For further disclosure regarding our development underway as of year end, please refer to Item 2 of this Annual Report on Form 10-K.

We believe that our 2020 leasing greatly benefited from a continued:

healthy defense spending environment, with bipartisan support for funding our national defense. We believe that successive increases in defense spending since 2016, including, most recently, in the National Defense Authorization Act for Fiscal Year 2021, have enhanced the USG and defense contractor tenants’ ability to invest in facility planning. This environment has helped fuel leasing demand, as has continued prioritization of spending allocations towards technology and innovation programs benefiting our Defense/IT Locations, including cyber, space, unmanned systems and artificial intelligence; and
demand for data center shells. Our leasing included two new data center shells in Northern Virginia, the largest data center market in the world, and represented further expansion of our relationship with an existing customer. As of year end, we held land that would accommodate an additional 1.2 million square feet in future data center shell development.

With respect to financing activities, we:

amended an existing term loan facility to increase the loan amount by $150.0 million and reduce the LIBOR interest rate spread on the facility. We used the resulting loan proceeds to repay borrowings under our Revolving Credit Facility that funded development costs;
refinanced unsecured senior notes due to mature in June 2021 with a new note issuance on September 17, 2020 by:
issuing $400.0 million of 2.25% Notes at an initial offering price of 99.416% of their face value. The proceeds from this issuance, after deducting underwriting discounts but before other offering expenses, were approximately $395.3 million; and
purchased or redeemed $300.0 million of 3.70% Notes for $306.9 million plus accrued interest.
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We used the remaining proceeds from the 2.25% Notes issuance to repay borrowings under our Revolving Credit Facility and for general corporate purposes, which included the cash settlement of three forward-starting interest rate swaps and accrued interest thereon for $53.1 million;
raised equity by selling interests in single tenant data center shells in Northern Virginia, including proceeds of approximately:
$81 million on October 30, 2020 from our sale of a 90% interest in two data center shell properties based on an aggregate property value of $89.7 million. We retained a 10% interest in the properties through B RE COPT DC JV II LLC (“B RE COPT”), a newly-formed joint venture. We recognized a gain on sale of $30.0 million; and
$60 million on December 22, 2020 from our sale, through a series of transactions, of 80% of our 50% interests in LLCs holding six properties and associated mortgage debt that we owned through GI-COPT DC Partnership LLC, an unconsolidated joint venture. We retained a 10% interest in the LLCs through B RE COPT, and recognized a gain of $29.4 million on the sale of interests.
We used most of these sale proceeds to repay borrowings under our Revolving Credit Facility; and
redeemed COPLP’s Series I Preferred Units from the third party unitholder at the units’ aggregate liquidation preference of $8.8 million ($25.00 per unit), plus accrued and unpaid distributions of return thereon up to the date of redemption.

These activities enabled us to fund $344.4 million in development costs in 2020, while ending the year with: no debt maturing in 2021; no remaining preferred equity; and $657.0 million in borrowing capacity available to us under our Revolving Credit Facility.

Net income in 2020 was $97.1 million lower than in 2019 due primarily to a: $53.2 million loss on interest rate derivatives in 2020 recognized when we consummated the 2.25% Notes issuance; and $45.6 million decrease in gains from sales of real estate interests due to lower sales volume in 2020. Net operating income (“NOI”) from real estate operations, our segment performance measure discussed further below, increased $6.8 million from 2019 to 2020, due primarily to: a $20.5 million increase from properties newly placed into service; offset in part by a net decrease of $9.7 million from dispositions due to our sales of property interests in 2019 and 2020. NOI from our Same Properties only changed marginally, increasing $0.8 million, or 0.3%. Additional disclosure comparing our 2020 and 2019 results of operations is provided below.

We discuss significant factors contributing to changes in our net income between 2020 and 2019 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.

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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, amounts disclosed include total information pertaining to properties owned through unconsolidated real estate joint ventures except for amounts reported for annualized rental revenue, which represent the portion attributable to our ownership interest.

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Effects of COVID-19

Pandemic Overview

Since first being declared a pandemic by the World Health Organization in early March 2020, the coronavirus, or COVID-19, has spread worldwide. In an effort to control its spread, governments and other authorities imposed restrictive measures affecting freedom of movement and business operations, such as shelter-in-place orders and business closures. Strong restrictive measures were put into place in much of the United States beginning in March 2020, bringing many businesses to a halt while forcing others to change the way in which they conduct their operations, with much of the workforce working from their homes to the extent they were able. States and local governments began easing these measures to varying extents in late April 2020, with some lifting restrictive measures entirely, while others chose a more gradual, extended easing approach. While the easing of these measures enabled many businesses to gradually resume normal operations, most businesses continue to be hindered to varying extents by either measures still in effect, operational challenges resulting from social distancing requirements/expectations and/or a reluctance by much of the population to engage in certain activities while the pandemic is still active. As of the date of this filing, COVID-19 spread continues world- and nation-wide, and is expected to continue until vaccinations have been administered to much of the population, which is not expected to occur in the United States until at least mid- to late 2021. As a result, there continues to be significant uncertainty regarding the duration and extent of this pandemic. The outbreak has significantly disrupted financial and economic markets worldwide, as well as in the United States at a national, regional and local level. These conditions could continue or further deteriorate as businesses feel the prolonged effects of stalled or reduced operations and uncertainty regarding the pandemic continues.

Effect on Real Estate Industry

COVID-19 has significantly affected the operations of much of the commercial real estate industry as certain tenants’ operations, including the ability to use space and run businesses, have been disrupted. This has adversely affected tenants’ ability to sustain their businesses, including 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 affected the ability to lease space in many property types to new and existing tenants at favorable terms. Key demand drivers for office space, such as employment levels, business confidence and corporate profits, have been adversely affected. In addition, after months of businesses operating in significant part through remote work arrangements out of necessity, the pace of such arrangements becoming more prevalent long-term could accelerate, adversely affecting office space demand, although that effect may be offset by a slowing in the trend toward adoption of shared office and open workplace structures due to greater social distancing concerns. As a result, the commercial real estate industry, including office real estate, has suffered adverse impacts in its operations, financial conditions and cash flows due to the COVID-19 pandemic and faces the potential for future effects.

Effect on the Company

Our office and data center shell portfolio is significantly concentrated in Defense/IT Locations, representing 171 of the portfolio’s 181 properties, or 87.1% of our annualized rental revenue as of December 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 were designated as “essential businesses,” and therefore exempt from many of the restrictions that otherwise have 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 continue to be compensated by the USG for their services, we believe that their ability, and willingness, to fulfill their lease obligations have not been disrupted. Our Defense/IT Locations do include 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 December 31, 2020, we owned eight Regional Office properties, representing 12.5% 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; four Northern Virginia properties; and a newly-developed property in Washington, D.C.’s central business district. While these properties include tenants in the financial services, health care and public health sectors, which, as “essential businesses,” have been 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.

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The pandemic has affected the manner in which we conduct our operations in the following ways:

for the operations of our properties:
we consulted with medical experts in developing an approach to safely operate our properties during the pandemic;
we use manufacturer recommended heating and air conditioning filters to ensure appropriate outside air distribution;
we proactively engaged our tenants to help them through unknowns as pandemic concerns heightened and restrictive measures were being instituted, and maintained that engagement to ensure communication regarding steps we were taking in our business operations, any changes in tenant operations (such as office closures or revised work schedules) and the existence of any actual or presumed COVID-19 cases in properties;
our on-site property operations staff have been required to use personal protective equipment, such as masks, gloves and hand sanitizer, and implement other procedural changes to enhance separation and minimize spread;
we instituted enhanced cleaning measures, particularly for high touch areas and flat surfaces, and conducted special deep cleanings in properties potentially affected by actual or presumed COVID-19 cases;
we provided signage promoting proper social distancing practices and hand sanitizer stations for property common area lobbies; and
for properties that were not being used by tenants due to office closures or work from home arrangements, we locked down public (non-tenant) access to the properties for security purposes and instituted other measures aimed at managing costs;
for our employees:
our staff deemed to be essential, including our executives, select other members of our leadership team and most of our property management team, have continued to report to their normal work locations; and
most of our other staff worked from home from mid-March until the end of May, when most began reporting to their normal work locations on a bi-weekly rotational basis; and
for our leasing activities:
we continued active engagement for lease transactions already in progress while business closures were in place;
during periods of time in which we were unable to physically show space to prospective tenants (from mid-March until late May to mid-June), we showed space to new prospective tenants using a combination of virtual technology and pre-recorded video tours; and
we implemented new advertising strategies to promote space availability.

As of the date of this filing, we believe that COVID-19 has not significantly affected our results of operations. Our:

same property NOI from real estate operations increased 0.3% for the year ended December 31, 2020 relative to 2019. Included in this increase were offsets associated with a $2.8 million increase in provisions for collectability losses and a $1.9 million decrease in parking revenue for the year ended December 31, 2020 relative to 2019. Substantially all of the increase in collectability losses was attributable to tenants whose operations were significantly disrupted by the pandemic (including primarily tenants serving as amenities to Defense/IT Location properties);
other lease revenue collections were not significantly affected by the pandemic. However, we have agreed to deferred payment arrangements for approximately $2.6 million in lease receivables to be repaid in most cases by 2021 with primarily Regional Office tenants and tenants serving as amenities to Defense/IT Location properties whose operations were significantly disrupted;
office and data center shell portfolio was 94.1% occupied (compared to 92.9% at December 31, 2019) and 94.8% leased (compared to 94.4% at December 31, 2019) and our Same Properties portfolio was 92.1% occupied (compared to 91.1% at December 31, 2019) and 93.1% leased (compared to 93.0% at December 31, 2019);
operating expenses included the effect of higher cleaning and maintenance related costs, which were partially offset by higher tenant expense reimbursements; and
leadership team 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 value of each asset group was recoverable from the respective estimated undiscounted future cash flows. As a result, no impairment loss was recognized.

While we do not currently expect that COVID-19 will significantly affect our future results of operations, financial condition or cash flows, we believe that the impact of the pandemic will be dependent on future developments, including the duration of the pandemic, the prevalence, strength and duration of restrictive measures and the resulting effects on our tenants, potential future tenants, the commercial real estate industry and the broader economy, all of which are uncertain and difficult to predict.
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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 led to several leases being executed later than we previously expected, and the inability for us to physically show space to prospective tenants for a period of time due to restrictive measures served as an impediment to initiating new and progressing active leasing transactions. While we do not believe that our development leasing and ability to renew leases scheduled to expire have been significantly affected by the pandemic, we do believe that the impact of the restrictive measures and the economic uncertainty caused by the pandemic has impacted our timing and volume of vacant space leasing, and may continue to do so in the future.

For our development activity, we have delivered space in ten newly-developed properties and expansions of three fully-operational properties on schedule since March 2020, and the 11 properties that were under development as of December 31, 2020 face minimal operational risk as they were 84% leased as of the date of this filing. COVID-19 enhances 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: jurisdictional permitting and inspections; factories’ ability to provide materials; and possible labor quarantines. These types of issues have not significantly affected us to date but could in the future, depending on COVID-19 related developments.

We do not expect that we will be required to incur significant additional capital expenditures on existing properties as a result of COVID-19.

In March 2020, due to the potential for financial market instability from the pandemic, we borrowed under our Revolving Credit Facility in order to pre-fund our short-term capital needs. As the capital markets remained stable in the second quarter of 2020, we repaid much of these borrowings in June 2020. We subsequently completed an issuance of $400.0 million in unsecured senior notes in September 2020, which enabled us to refinance $300.0 million in notes maturing in 2021, and we have no other significant debt maturities until 2022.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our consolidated financial statements. The following section is a summary of certain aspects of those accounting policies involving estimates and assumptions that (1) require our most difficult, subjective or complex judgments in accounting for uncertain matters or matters that are susceptible to change and (2) materially affect our reported operating performance or financial condition. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements. While reviewing this section, refer to Note 2 to our consolidated financial statements, including terms defined therein.

Assessment of Lease Term

As discussed above, a significant portion of our portfolio is leased to the USG, and the majority of those leases consist of a series of one-year renewal options, and/or provide for early termination rights. In addition, certain other leases in our portfolio provide early termination rights to tenants. Applicable accounting guidance requires us to recognize minimum rental payments on a straight-line basis over the term of each lease. The term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease end date, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Factors we consider in making this assessment include the uniqueness of the purpose or location of the property, the availability of a comparable replacement property, the relative importance or significance of the property to the continuation of the lessee’s line of business and the existence of tenant leasehold improvements or other assets whose value would be impaired by the lessee vacating or discontinuing use of the leased property. For most of our leases with the USG, we have determined, based on the factors above, that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably certain as it relates to the expected lease end date. Changes in these lease term assessments could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we incurred related to these leases.
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Impairment of Long-Lived Assets

We assess the asset groups associated with each of our properties, including operating properties, properties in development, land held for future development, related intangible assets, right-of-use assets, deferred rents receivable and lease liabilities, for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired.  If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis for such asset groups. For properties to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over, in most cases, a ten-year holding period.  If we believe it is more likely than not that we will dispose of the properties earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over the various possible holding periods.  If the analysis indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the property’s asset group is written down to the property’s estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses of such property’s asset group to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans.

Property fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses or comparable sales analyses. Estimated cash flows used in our impairment analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets. Determining the appropriate capitalization or discount rate also requires significant judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality and location of the property. Changes in the estimated future cash flows due to changes in our plans for a property (especially our expected holding period), views of market and economic conditions and/or our ability to obtain development rights could result in recognition of impairment losses which could be substantial.

Asset groups associated with properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Accordingly, decisions to sell certain properties will result in impairment losses if the carrying values of the specific properties’ asset groups classified as held for sale exceed such properties’ estimated fair values less costs to sell. The estimates of fair value consider matters such as recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with prospective purchasers. These estimates are subject to revision as market conditions, and our assessment of such conditions, change.

Revenue Recognition on Tenant Improvements

Most of our leases provide for some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets. If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense over the shorter of the useful life of the assets or the term of the lease and recognize any payments from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. Our determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue recognition in connection with a lease.

In determining whether improvements constitute landlord or tenant assets, we consider numerous factors that may require subjective or complex judgments, including, whether the economic substance of the lease terms is properly reflected and whether the improvements: have value to us as real estate; are unique to the tenant or reusable by other tenants; may be altered or removed by the tenant without our consent or without compensating us for any lost fair value; are owned, and remain, with us or the tenant at the end of the lease term.

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Concentration of Operations

Customer Concentration of Property Operations

The table below sets forth the 20 largest tenants in our portfolio of operating properties (including our office and data center shell properties and wholesale data center) based on percentage of annualized rental revenue:
Percentage of Annualized Rental
Revenue of Operating Properties
for 20 Largest Tenants as of December 31,
Tenant202020192018
USG34.1 %34.6 %32.7 %
Fortune 100 Company9.1 %7.9 %8.9 %
General Dynamics Corporation (1)5.6 %4.9 %4.7 %
The Boeing Company (1)3.0 %3.2 %3.8 %
CACI International Inc2.4 %2.5 %2.4 %
Northrop Grumman Corporation (1)2.3 %2.2 %2.3 %
CareFirst Inc.2.0 %2.1 %2.2 %
Booz Allen Hamilton, Inc.2.0 %2.1 %2.0 %
Wells Fargo & Company (1)1.2 %1.3 %1.3 %
AT&T Corporation (1)1.1 %1.3 %0.7 %
Miles and Stockbridge, PC1.0 %1.1 %1.1 %
Morrison & Foerster, LLP1.0 %N/AN/A
Raytheon Technologies Corporation (1)1.0 %1.0 %1.1 %
Yulista Holding, LLC1.0 %N/AN/A
Science Applications International Corp. (1)0.9 %1.0 %1.3 %
Jacobs Engineering Group Inc0.9 %1.0 %N/A
Transamerica Life Insurance Company0.9 %0.9 %0.9 %
University of Maryland0.9 %1.2 %1.4 %
The MITRE Corporation0.8 %0.7 %0.8 %
Mantech International Corp.0.8 %0.7 %N/A
Peraton Inc.N/A0.9 %N/A
Kratos Defense and Security Solutions (1)N/A1.0 %1.0 %
KEYW CorporationN/AN/A1.0 %
International Business Machines Corp.N/AN/A0.7 %
Accenture Federal Services, LLCN/AN/A0.7 %
Subtotal of 20 largest tenants72.0 %71.6 %71.0 %
All remaining tenants28.0 %28.4 %29.0 %
Total100.0 %100.0 %100.0 %
Total annualized rental revenue$571,035 $525,338 $522,898 
(1)Includes affiliated organizations.

The USG’s concentration decreased from 2019 to 2020 due primarily to new properties placed in service in which it is not a tenant.

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Concentration of Office and Data Center Shell Properties by Segment

The table below sets forth the segment allocation of our annualized rental revenue of office and data center shell properties as of the end of the last three calendar years:
Percentage of Annualized Rental Revenue of Office and Data Center Shell Properties as of December 31,Number of Properties as of December 31,
Region202020192018202020192018
Defense/IT Locations:
Fort Meade/BW Corridor47.5 %51.3 %49.5 %89 88 87 
Northern Virginia Defense/IT11.2 %10.9 %12.0 %13 13 13 
Lackland Air Force Base9.8 %10.5 %10.3 %
Navy Support Locations6.3 %6.5 %6.3 %21 21 21 
Redstone Arsenal5.6 %3.5 %2.8 %15 10 
Data Center Shells6.6 %5.3 %7.0 %26 22 18 
Total Defense/IT Locations87.0 %87.9 %87.9 %171 161 154 
Regional Office12.5 %11.5 %11.5 %
Other0.5 %0.6 %0.6 %
100.0 %100.0 %100.0 %181 170 163 

For the changes in revenue concentration reflected above between year end 2019 and 2020, the increase in Redstone Arsenal, Data Center Shells and Regional Office was due to new, fully-occupied properties being placed in service, while the decrease in Fort Meade/BW Corridor was due to the effect of increases in other segments coupled with a decrease in that segment’s occupancy.

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:
December 31,
202020192018
Occupancy rates at period end  
Total94.1 %92.9 %93.0 %
Defense/IT Locations:
Fort Meade/BW Corridor91.0 %92.4 %91.1 %
Northern Virginia Defense/IT88.1 %82.4 %91.3 %
Lackland Air Force Base100.0 %100.0 %100.0 %
Navy Support Locations97.2 %92.5 %90.5 %
Redstone Arsenal99.4 %99.3 %99.0 %
Data Center Shells100.0 %100.0 %100.0 %
Total Defense/IT Locations94.5 %93.7 %93.6 %
Regional Office92.5 %88.1 %89.2 %
Other68.4 %73.0 %77.2 %
Average contractual annualized rental rate per square foot at year end (1)$31.50 $31.28 $30.41 

(1)Includes estimated expense reimbursements.
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Rentable
Square Feet
Occupied
Square Feet
 (in thousands)
December 31, 201919,173 17,816 
Vacated upon lease expiration (1)— (463)
Occupancy for new leases— 567 
Developed or redeveloped1,823 1,802 
Other changes(37)— 
December 31, 202020,959 19,722 

(1)Includes lease terminations and space reductions occurring in connection with lease renewals.

With regard to changes in occupancy from December 31, 2019 to December 31, 2020:

Total: Increase was due primarily to placing into service 1.8 million square feet in space that was 99.5% leased as of December 31, 2020;
Fort Meade/BW Corridor: Decrease was due primarily to vacated space, resulting in a 70.8% retention rate in 2020;
Northern Virginia Defense/IT, Navy Support Locations and Regional Office: Increases each due to vacant space leasing; and
Other: Included two properties totaling 157,000 square feet in Aberdeen, Maryland.

In 2020, we leased 3.6 million square feet, including 1.0 million square feet of development and redevelopment space discussed in further detail above.

In 2020, we renewed leases on 2.2 million square feet, representing 80.6% of the square footage of our lease expirations (including the effect of early renewals). The annualized rents of these renewals (totaling $28.35 per square foot) decreased on average by approximately 2.1% and the GAAP rents (totaling $28.45 per square foot) increased on average by approximately 6.5% relative to the leases previously in place for the space. The renewed leases had a weighted average lease term of approximately 4.2 years, with average rent escalations per year of 2.4%, and the per annum average estimated tenant improvements and lease costs associated with completing the leasing was approximately $2.03 per square foot. The decrease in average rents on renewals was attributable primarily to per annum rent escalation terms of the previous leases that increased rents over the lease terms by amounts exceeding the increases in the applicable market rental rates.

In 2020, we also completed leasing on 416,000 square feet of vacant space. The annualized rents of this leasing totaled $31.32 per square foot and the GAAP rents totaled $32.36 per square foot; these leases had a weighted average lease term of approximately 6.2 years, with average rent escalations per year of 2.8%, and the per annum average estimated tenant improvements and lease costs associated with completing this leasing was approximately $7.33 per square foot.

Wholesale Data Center
 
Our 19.25 megawatt wholesale data center was 86.7% leased as of December 31, 2020 and 76.9% leased as of December 31, 2019, reflecting an increase from our leasing of 3.1 megawatts in April 2020. We have a lease for 11.25 megawatts perpetually renewing that may be terminated by either party with six months’ notice.

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Lease Expirations

The table below sets forth as of December 31, 2020 our scheduled lease expirations based on the non-cancelable term of tenant leases determined in accordance with generally accepted accounting principles for our operating properties by segment/sub-segment in terms of percentage of annualized rental revenue:
Expiration of Annualized Rental Revenue of Operating Properties
20212022202320242025ThereafterTotal
Defense/IT Locations
Fort Meade/BW Corridor4.4 %6.5 %8.4 %7.5 %8.7 %10.1 %45.6 %
Northern Virginia Defense/IT0.4 %0.8 %1.0 %2.4 %1.8 %4.2 %10.6 %
Lackland Air Force Base2.1 %0.0 %0.0 %0.0 %6.9 %0.4 %9.4 %
Navy Support Locations1.5 %0.9 %1.1 %1.0 %0.2 %1.5 %6.2 %
Redstone Arsenal0.0 %1.6 %0.1 %0.3 %0.9 %2.4 %5.3 %
Data Center Shells0.0 %0.0 %0.0 %0.1 %0.0 %6.2 %6.3 %
Regional Office0.5 %3.1 %0.8 %0.4 %0.7 %6.5 %12.0 %
Other0.1 %0.1 %0.0 %0.0 %0.2 %0.0 %0.4 %
Wholesale Data Center2.6 %0.4 %0.3 %0.0 %0.9 %0.0 %4.2 %
Total11.6 %13.4 %11.7 %11.7 %20.3 %31.3 %100.0 %

For our office and data center shell properties, our weighted average lease term as of December 31, 2020 was approximately six years. We believe that the weighted average annualized rental revenue per occupied square foot for our office and data center shell leases expiring in 2021 was, on average, approximately 1.5% to 3.5% higher than estimated current market rents for the related space, with specific results varying by segment. Our wholesale data center had scheduled lease expirations in 2021 for 61% of its annualized rental revenue, which included a lease for 11.25 megawatts perpetually renewing that may be terminated by either party with six months’ notice.

Results of Operations
 
For a discussion of our results of operations comparison for 2019 and 2018, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on February 19, 2020.

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 two years being compared.  We define these as changes from “Same Properties.” For further discussion of the concept of “operational,” refer to the section of Note 2 of the consolidated financial statements entitled “Properties”;
developed or redeveloped and placed into service that were not 100% operational throughout the two years being compared; 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.
 
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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 17 to our consolidated financial statements.

Comparison of Statements of Operations for the Years Ended December 31, 2020 and 2019
 For the Years Ended December 31,
 20202019Variance
 (in thousands)
Revenues   
Revenues from real estate operations$538,725 $527,463 $11,262 
Construction contract and other service revenues70,640 113,763 (43,123)
Total revenues609,365 641,226 (31,861)
Operating expenses   
Property operating expenses203,840 198,143 5,697 
Depreciation and amortization associated with real estate operations138,193 137,069 1,124 
Construction contract and other service expenses67,615 109,962 (42,347)
Impairment losses1,530 329 1,201 
General, administrative and leasing expenses33,001 35,402 (2,401)
Business development expenses and land carry costs4,473 4,239 234 
Total operating expenses448,652 485,144 (36,492)
Interest expense(67,937)(71,052)3,115 
Interest and other income8,574 7,894 680 
Credit loss recoveries933 — 933 
Gain on sales of real estate30,209 105,230 (75,021)
Gain on sale of investment in unconsolidated real estate joint venture29,416 — 29,416 
Loss on early extinguishment of debt(7,306)— (7,306)
Loss on interest rate derivatives(53,196)— (53,196)
Equity in income of unconsolidated entities1,825 1,633 192 
Income tax (expense) benefit(353)217 (570)
Net income$102,878 $200,004 $(97,126)
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NOI from Real Estate Operations
 For the Years Ended December 31,
 20202019Variance
 (Dollars in thousands, except per square foot data)
Revenues   
Same Properties revenues
Lease revenue, excluding lease termination revenue and provision for collectability losses$472,207 $464,619 $7,588 
Lease termination revenue1,451 2,046 (595)
Provision for collectability losses included in lease revenue(3,923)(1,149)(2,774)
Other property revenue2,372 4,764 (2,392)
Same Properties total revenues472,107 470,280 1,827 
Developed and redeveloped properties placed in service34,491 9,186 25,305 
Wholesale data center27,788 29,405 (1,617)
Dispositions4,325 16,334 (12,009)
Other14 2,258 (2,244)
 538,725 527,463 11,262 
Property operating expenses   
Same Properties(182,812)(181,803)(1,009)
Developed and redeveloped properties placed in service(6,413)(1,594)(4,819)
Wholesale data center(14,171)(13,213)(958)
Dispositions(429)(1,457)1,028 
Other(15)(76)61 
 (203,840)(198,143)(5,697)
UJV NOI allocable to COPT
Dispositions4,818 4,851 (33)
Retained interests in newly-formed UJVs2,133 854 1,279 
6,951 5,705 1,246 
NOI from real estate operations   
Same Properties289,295 288,477 818 
Developed and redeveloped properties placed in service28,078 7,592 20,486 
Wholesale data center13,617 16,192 (2,575)
Dispositions, net of retained interests in newly-formed UJVs10,847 20,582 (9,735)
Other(1)2,182 (2,183)
 $341,836 $335,025 $6,811 
Same Properties NOI from real estate operations by segment
Defense/IT Locations$256,432 $257,048 $(616)
Regional Office31,220 29,928 1,292 
Other1,643 1,501 142 
$289,295 $288,477 $818 
Same Properties rent statistics   
Average occupancy rate91.8 %91.0 %0.8 %
Average straight-line rent per occupied square foot (1)$26.31 $26.39 $(0.08)
 
(1)Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the years set forth above.

Our Same Properties pool consisted of 144 properties, comprising 73.0% of our office and data center shell portfolio’s square footage as of December 31, 2020. This pool of properties changed from the pool used for purposes of comparing 2019 and 2018 in our 2019 Annual Report on Form 10-K due to: the addition of five properties placed in service and 100% operational on or before January 1, 2019 and the removal of eight properties in which we sold a 90% interest.
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Regarding the changes in NOI from real estate operations reported above:

our Same Properties pool reflects a net increase due primarily to: increased occupancy and higher expense reimbursements from tenants, partially offset by higher provisions for collectability losses and lower parking revenue (both of which were attributable to the effects of COVID-19);
developed and redeveloped properties placed in service reflects the effect of 20 properties placed in service in 2019 and 2020;
our wholesale data center decreased due primarily to lease termination revenue recognized in the prior year that did not recur in the current year;
dispositions, net of retained interests in newly-formed UJVs reflects the effect of our decrease in ownership of eight data center shells in 2020 and nine data center shells in 2019; and
Other reflects primarily the effect of previously operational properties that we removed from service in mid-2019.

NOI from Service Operations
For the Years Ended December 31,
20202019Variance
(in thousands)
Construction contract and other service revenues$70,640 $113,763 $(43,123)
Construction contract and other service expenses(67,615)(109,962)42,347 
NOI from service operations$3,025 $3,801 $(776)

Construction contract and other service revenue and expenses decreased due primarily to a lower 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 primarily on behalf of tenants. Service operations are an ancillary component of our overall operations that typically contribute an insignificant amount of income relative to our real estate operations.

General, Administrative and Leasing Expenses

General, administrative and leasing expenses decreased in large part due to lower professional fees and compensation related expenses in the current period.

We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing development or redevelopment activities. Our capitalized compensation and indirect costs totaled $9.4 million in 2020 and $10.1 million in 2019.

Interest Expense

The table below sets forth components of our interest expense:
 For the Years Ended December 31,
20202019Variance
(in thousands)
Interest on Unsecured Senior Notes$53,534 $53,321 $213 
Interest on mortgage and other secured debt8,658 7,908 750 
Interest on unsecured term debt5,909 8,908 (2,999)
Amortization of deferred financing costs2,538 2,136 402 
Interest expense recognized on interest rate swaps3,726 (1,415)5,141 
Interest on Revolving Credit Facility3,239 8,613 (5,374)
Other interest2,393 2,367 26 
Capitalized interest(12,060)(10,786)(1,274)
Interest expense$67,937 $71,052 $(3,115)

The increase in interest expense recognized on interest rate swaps was attributable to a decrease in applicable LIBOR rates, while these decreased rates and lower borrowings on our Revolving Credit Facility resulted in the decrease in interest on our Revolving Credit Facility.
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Our average outstanding debt was $2.1 billion in 2020 and $1.9 billion 2019, and our weighted average effective interest rate on debt was approximately 3.6% in 2020 and 4.1% in 2019.

Gain on sales of real estate

Gain on sales of real estate included gains from sales of 90% interests in data center shell properties, including two properties in 2020 and nine properties in 2019. We retained 10% interests in these properties through unconsolidated real estate joint ventures.

Gain on sale of investment in unconsolidated real estate joint venture

The gain on sale of investment in unconsolidated real estate joint venture recognized in 2020 was attributable to our decrease in ownership interest in six data center shell properties resulting from the sale of properties from GI-COPT to B RE COPT and subsequent dissolution of GI-COPT described above.

Loss on extinguishment of debt

The loss on early extinguishment of debt recognized in 2020 was attributable to our purchase and redemption of 3.70% Senior Notes due 2021.

Loss on interest rate derivatives

In 2020, we recognized a loss on interest rate swaps previously designated as cash flow hedges of interest expense on forecasted future borrowings following our determination that such borrowings would probably not occur.

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 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 and investments in unconsolidated real estate joint ventures (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) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (3) depreciation and amortization allocable to noncontrolling interests in other consolidated entities, (4) Basic FFO allocable to share-based compensation awards and (5) issuance costs associated with redeemed preferred shares.  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.
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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 exclude 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 (discussed further below); 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 on 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 use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the sum of (a) dividends on unrestricted common shares and (b) distributions to holders of interests in COPLP (excluding unvested
42



share-based compensation awards) and dividends on convertible preferred shares when such distributions and dividends are included in Diluted FFO divided by either (2) FFO, Diluted FFO or Diluted FFO, adjusted for comparability.

The table below sets forth the computation of the above stated measures for 2020 and 2019 and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures: 
For the Years Ended December 31,
 20202019
 (Dollars and shares in thousands, except per share data)
Net income$102,878 $200,004 
Real estate-related depreciation and amortization138,193 137,069 
Depreciation and amortization on UJV allocable to COPT3,329 2,703 
Impairment losses on real estate1,530 329 
Gain on sales of real estate(30,209)(105,230)
Gain on sale of investment in unconsolidated real estate JV(29,416)— 
FFO186,305 234,875 
Noncontrolling interests-preferred units in the Operating Partnership(300)(564)
FFO allocable to other noncontrolling interests(15,705)(5,024)
Basic FFO allocable to share-based compensation awards(719)(905)
Basic FFO available to common shares and common unit holders169,581 228,382 
Redeemable noncontrolling interests147 132 
Diluted FFO available to common shares and common unit holders169,728 228,514 
Loss on early extinguishment of debt7,306 — 
Loss on interest rate derivatives53,196 — 
Demolition costs on redevelopment and nonrecurring improvements63 148 
Executive transition costs— 
Non-comparable professional and legal expenses— 681 
Dilutive preferred units in the Operating Partnership300 — 
FFO allocation to other noncontrolling interests resulting from capital event11,090 — 
Diluted FFO comparability adjustments allocable to share-based compensation awards(327)(3)
Diluted FFO available to common share and common unit holders, as adjusted for comparability$241,356 $229,344 
Weighted average common shares111,788 111,196 
Conversion of weighted average common units1,236 1,299 
Weighted average common shares/units - Basic FFO per share113,024 112,495 
Dilutive effect of share-based compensation awards288 308 
Redeemable noncontrolling interests123 119 
Weighted average common shares/units - Diluted FFO per share113,435 112,922 
Dilutive convertible preferred units171 — 
Weighted average common shares/units - Diluted FFO per share, as adjusted for comparability113,606 112,922 
Diluted FFO per share$1.50 $2.02 
Diluted FFO per share, as adjusted for comparability$2.12 $2.03 
Denominator for diluted EPS112,076 111,623 
Weighted average common units1,236 1,299 
Redeemable noncontrolling interests123 — 
Denominator for diluted FFO per share113,435 112,922 
Dilutive convertible preferred units171 — 
Denominator for diluted FFO per share, as adjusted for comparability113,606 112,922 
Common share dividends - unrestricted shares and deferred shares$123,042 $122,823 
Common unit distributions - unrestricted units1,362 1,405 
Dividends and distributions for FFO and diluted FFO payout ratios124,404 124,228 
Distributions on dilutive preferred units300 — 
Dividends and distributions for other payout ratio$124,704 $124,228 
FFO payout ratio66.8 %52.9 %
Diluted FFO payout ratio73.3 %54.4 %
Diluted FFO payout ratio, as adjusted for comparability51.7 %54.2 %
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Property Additions
 
The table below sets forth the major components of our additions to properties for 2020 and 2019: 
For the Years Ended December 31,
20202019Variance
(in thousands)
Development and redevelopment$345,818 $427,526 $(81,708)
Tenant improvements on operating properties (1)26,071 26,294(223)
Capital improvements on operating properties34,060 26,5987,462 
 $405,949 $480,418 $(74,469)

(1)Tenant improvement costs incurred on newly-developed properties are classified in this table as development and redevelopment.

 Cash Flows
 
Net cash flow from operating activities increased $9.9 million, or 4.3%, from 2019 to 2020 due primarily to the timing of cash outlays for construction contract costs relative to the cash receipts from customers associated with such costs.

Net cash flow used in investing activities increased $187.8 million from 2019 to 2020 due primarily to proceeds from sales of real estate interests of $143.0 million in the current period compared to $309.6 million in the prior period, partially offset by the effect of $53.1 million paid to cash settle interest rate swaps in the current period.

Net cash flow provided by financing activities in 2020 was $91.3 million and included primarily the following:

net proceeds from debt borrowings of $252.0 million, which included $150.0 million in borrowings under a term loan facility and the net increase from our issuance of the 2.25% Notes and the purchase and redemption of the 3.70% Notes; offset in part by
dividends and/or distributions to equity holders of $125.2 million;
distributions paid to redeemable noncontrolling interests of $14.4 million; and
our redemption of the Series I Preferred Units for $8.8 million.

Net cash flow used in financing activities in 2019 was $84.4 million and included primarily the following:

dividends and/or distributions to equity holders of $124.8 million; offset in part by
net proceeds from the issuance of common shares (or units) of $46.4 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 December 31, 2020, COPT owned 98.6% of the outstanding common units in COPLP and there were no preferred units outstanding. 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 10 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.
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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 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.  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 December 31, 2020, COPLP had $18.4 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 primarily for joint venture financings. 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 (net of any related hedging costs), 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 December 31, 2020, the maximum borrowing capacity under this facility totaled $800.0 million, of which $657.0 million was available.

COPT has a 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 may dispose of interests in properties opportunistically or when capital markets otherwise warrant. We believe that we have the ability to raise additional equity by selling interests in data center shells through joint ventures.
45



Our contractual obligations as of December 31, 2020 (in thousands):
 For the Years Ending December 31, 
 20212022202320242025ThereafterTotal
Contractual obligations (1)       
Debt (2)       
Balloon payments due upon maturity$— $482,882 $556,578 $277,649 $322,100 $445,623 $2,084,832 
Scheduled principal payments (3)3,955 4,498 3,552 2,334 1,617 677 16,633 
Interest on debt (3)(4)64,643 63,576 45,913 27,625 18,176 2,543 222,476 
Development and redevelopment obligations (5)(6)100,139 7,302 388 — — — 107,829 
Third-party construction obligations (6)(7)18,823 — — — — — 18,823 
Tenant and other building improvements (3)(6)26,624 24,740 7,992 — — — 59,356 
Property finance leases (principal and interest) (3)14 14 — — — — 28 
Property operating leases (3)3,211 3,332 3,382 3,434 1,780 126,350 141,489 
Total contractual cash obligations$217,409 $586,344 $617,805 $311,042 $343,673 $575,193 $2,651,466 

(1)The contractual obligations set forth in this table exclude contracts for property operations and certain other contracts entered into in the normal course of business. Also excluded are accruals and payables incurred and interest rate derivative liabilities, which are reflected in our reported 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 $14.5 million. As of December 31, 2020, maturities included $143.0 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 December 31, 2020 for the terms of such debt.  For variable rate debt, the amounts reflected above used December 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 development and construction 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.

We expect to spend $275 million to $300 million on development costs and approximately $85 million on improvements and leasing costs for operating properties (including the commitments set forth in the table above) in 2021.  We expect to fund the 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 December 31, 2020, we were compliant with these covenants.
 
Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements during 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.

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Item 7A.          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 December 31, 2020 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):
 For the Years Ending December 31, 
 20212022202320242025ThereafterTotal
Debt:       
Fixed rate debt (1)$3,875 $4,033 $416,590 $279,443 $301,302 $436,140 $1,441,383 
Weighted average interest rate3.97 %3.98 %3.70 %5.16 %4.99 %2.38 %3.86 %
Variable rate debt (2)$80 $483,347 $143,540 $540 $22,415 $10,160 $660,082 
Weighted average interest rate (3)1.60 %1.39 %1.20 %1.66 %1.70 %1.60 %1.37 %

(1)Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $14.5 million.
(2)As of December 31, 2020, maturities included $143.0 million in 2023 that may be extended to 2024, subject to certain conditions.
(3)The amounts reflected above used interest rates as of December 31, 2020 for variable rate debt.

The fair value of our debt was $2.1 billion as of December 31, 2020 and $1.9 billion as of December 31, 2019.  If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $52 million as of December 31, 2020 and $45 million as of December 31, 2019.
 
See Note 11 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of December 31, 2020 and 2019 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 $2.2 million in 2020 and $2.0 million in 2019 if the applicable LIBOR rate was 1% higher.  Interest expense in 2020 was more sensitive to a change in interest rates than 2019 due primarily to our having a higher average variable-rate debt balance in 2020 including the effect of interest rate derivatives in place.

Item 8.    Financial Statements and Supplementary Data

This item is included in a separate section at the end of this report beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

Item 9A. Controls and Procedures
I.Internal Control Over Financial Reporting

COPT

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 December 31, 2020.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’s disclosure controls and procedures as of December 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
47



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.

(a)    Management’s Report on Internal Control Over Financial Reporting

Management’s Report on Internal Control Over Financial Reporting is included in a separate section at the end of this report on page F-2.

(b)    Report of Independent Registered Public Accounting Firm

The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on pages F-4 and F-5.

(c)    Change in Internal Control over Financial Reporting

No change in 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

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 December 31, 2020.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPLP’s disclosure controls and procedures as of December 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.
 
(a)    Management’s Report on Internal Control Over Financial Reporting

Management’s Report on Internal Control Over Financial Reporting is included in a separate section at the end of this report on page F-3.

(b)    Report of Independent Registered Public Accounting Firm

The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on pages F-6 and F-7.

(c)    Change in Internal Control over Financial Reporting

No change in 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.
 
Item 9B. Other Information
None.
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PART III
Items 10, 11, 12, 13 & 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; and Principal Accountant Fees and Services
For the information required by Item 10, Item 11, Item 12, Item 13 and Item 14, you should refer to COPT’s definitive proxy statement relating to the 2021 Annual Meeting of COPT’s Shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

PART IV
Item 15. Exhibits and Financial Statement Schedules

(a)The following documents are filed as exhibits to this Form 10-K:

1.Financial Statements. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K.

2.Financial Statement Schedules. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K.

3.See section below entitled “Exhibits.”

(b)    Exhibits. Refer to the Exhibit Index that follows. Unless otherwise noted, the file number of all documents incorporated by reference is 1-14023.
EXHIBIT
NO.
DESCRIPTION
49



EXHIBIT
NO.
DESCRIPTION
50



EXHIBIT
NO.
DESCRIPTION
101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema Document (filed herewith).
101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LABXBRL Extension Labels Linkbase (filed herewith).
101.PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* - Indicates a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.

(c)    Not applicable.

Item 16. Form 10-K Summary
None.
51




SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   CORPORATE OFFICE PROPERTIES TRUST
    
Date:February 12, 2021By:/s/ Stephen E. Budorick
   Stephen E. Budorick
   President and Chief Executive Officer
    
    
Date:February 12, 2021By:/s/ Anthony Mifsud
   Anthony Mifsud
   Executive Vice President and Chief Financial Officer


52



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SignaturesTitleDate
/s/ Stephen E. BudorickPresident and Chief Executive Officer and TrusteeFebruary 12, 2021
(Stephen E. Budorick)
/s/ Anthony MifsudExecutive Vice President and Chief FinancialFebruary 12, 2021
(Anthony Mifsud)Officer (Principal Financial Officer)
/s/ Gregory J. ThorSenior Vice President, Controller and ChiefFebruary 12, 2021
(Gregory J. Thor)Accounting Officer (Principal Accounting Officer)
 /s/ Thomas F. BradyChairman of the Board and TrusteeFebruary 12, 2021
(Thomas F. Brady)
/s/ Robert L. Denton, Sr.TrusteeFebruary 12, 2021
( Robert L. Denton, Sr.)
/s/ Philip L. HawkinsTrusteeFebruary 12, 2021
(Philip L. Hawkins)
/s/ David M. JacobsteinTrusteeFebruary 12, 2021
(David M. Jacobstein)
/s/ Steven D. KeslerTrusteeFebruary 12, 2021
(Steven D. Kesler)
/s/ Letitia A. LongTrusteeFebruary 12, 2021
(Letitia A. Long)
/s/ C. Taylor PickettTrusteeFebruary 12, 2021
(C. Taylor Pickett)
/s/ Lisa G. TrimbergerTrusteeFebruary 12, 2021
(Lisa G. Trimberger)


 
53



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   CORPORATE OFFICE PROPERTIES, L.P.
By: Corporate Office Properties Trust,
its General Partner
    
Date:February 12, 2021By:/s/ Stephen E. Budorick
   Stephen E. Budorick
   President and Chief Executive Officer
    
    
Date:February 12, 2021By:/s/ Anthony Mifsud
   Anthony Mifsud
   Executive Vice President and Chief Financial Officer


54



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SignaturesTitleDate
/s/ Stephen E. BudorickPresident and Chief Executive Officer and TrusteeFebruary 12, 2021
(Stephen E. Budorick)
/s/ Anthony MifsudExecutive Vice President and Chief FinancialFebruary 12, 2021
(Anthony Mifsud)Officer (Principal Financial Officer)
/s/ Gregory J. ThorSenior Vice President, Controller and ChiefFebruary 12, 2021
(Gregory J. Thor)Accounting Officer (Principal Accounting Officer)
 /s/ Thomas F. BradyChairman of the Board and TrusteeFebruary 12, 2021
(Thomas F. Brady)
/s/ Robert L. Denton, Sr.TrusteeFebruary 12, 2021
( Robert L. Denton, Sr.)
/s/ Philip L. HawkinsTrusteeFebruary 12, 2021
(Philip L. Hawkins)
/s/ David M. JacobsteinTrusteeFebruary 12, 2021
(David M. Jacobstein)
/s/ Steven D. KeslerTrusteeFebruary 12, 2021
(Steven D. Kesler)
/s/ Letitia A. LongTrusteeFebruary 12, 2021
(Letitia A. Long)
/s/ C. Taylor PickettTrusteeFebruary 12, 2021
(C. Taylor Pickett)
/s/ Lisa G. TrimbergerTrusteeFebruary 12, 2021
(Lisa G. Trimberger)


 
55



INDEX TO FINANCIAL STATEMENTS AND SCHEDULE





F-1


Corporate Office Properties Trust Managements Report on Internal Control Over Financial Reporting



Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2020 based on the criteria in Internal Control - Integrated Framework (2013) issued by the COSO.

The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

F-2


Corporate Office Properties, L.P. Managements Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2020 based on the criteria in Internal Control - Integrated Framework (2013) issued by the COSO.

The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

F-3


Report of Independent Registered Public Accounting Firm


To the Board of Trustees and Shareholders of Corporate Office Properties Trust
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Corporate Office Properties Trust and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-4


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Determination of Expected Lease End Date for United States Government Leases with One-year Renewal Options and/or Early Termination Rights

As described in Notes 2 and 5 to the consolidated financial statements, total lease revenue for the year ended December 31, 2020 was $536.1 million and a significant portion of the Company’s leases are with the United States Government, which represented 25% of the fixed lease revenues for the year ended December 31, 2020. The majority of United States Government leases contain one-year renewal options and/or provide for early termination rights. The Company recognizes minimum rental payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Company as the lessor. When assessing the expected lease end date, management uses judgment in contemplating the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. 

The principal considerations for our determination that performing procedures relating to the determination of the expected lease end date for United States Government leases with one-year renewal options and/or early termination rights is a critical audit matter are the significant judgments by management when determining the expected lease end date for the United States Government leases with one-year renewal options and/or early termination rights, which in turn led to a high degree of auditor judgment, subjectivity and audit effort in performing procedures and evaluating audit evidence relating to the determination of such expected lease end dates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition for leases, including controls over the determination of the expected lease end dates for United States Government leases with one-year renewal options and/or early termination rights. These procedures also included, among others, testing management’s process for determining the expected lease end date for a sample of United States Government leases with one-year renewal options and/or early termination rights, including evaluating the reasonableness of significant assumptions utilized by management, related to the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Evaluating the assumptions included evaluating whether the assumptions used were reasonable considering past experience with the tenant and the rental property and whether the assumptions were consistent with evidence obtained in other areas of the audit. 


/s/ PricewaterhouseCoopers LLP

Baltimore, Maryland
February 12, 2021
We have served as the Company’s auditor since 1997.

F-5


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Unitholders of Corporate Office Properties, L.P.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Corporate Office Properties, L.P. and its subsidiaries (the “Operating Partnership”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Operating Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Operating Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Operating Partnership’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Operating Partnership’s consolidated financial statements and on the Operating Partnership’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-6



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Determination of Expected Lease End Date for United States Government Leases with One-year Renewal Options and/or Early Termination Rights

As described in Notes 2 and 5 to the consolidated financial statements, total lease revenue for the year ended December 31, 2020 was $536.1 million and a significant portion of the Operating Partnership’s leases are with the United States Government, which represented 25% of the fixed lease revenues for the year ended December 31, 2020. The majority of United States Government leases contain one-year renewal options and/or provide for early termination rights. The Operating Partnership recognizes minimum rental payments on a straight-line basis over the terms of each lease. The lease term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Operating Partnership as the lessor. When assessing the expected lease end date, management uses judgment in contemplating the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. 

The principal considerations for our determination that performing procedures relating to the determination of the expected lease end date for United States Government leases with one-year renewal options and/or early termination rights is a critical audit matter are the significant judgments by management when determining the expected lease end date for the United States Government leases with one-year renewal options and/or early termination rights, which in turn led to a high degree of auditor judgment, subjectivity and audit effort in performing procedures and evaluating audit evidence relating to the determination of such expected lease end dates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition for leases, including controls over the determination of the expected lease end dates for United States Government leases with one-year renewal options and/or early termination rights. These procedures also included, among others, testing management’s process for determining the expected lease end date for a sample of United States Government leases with one-year renewal options and/or early termination rights, including evaluating the reasonableness of significant assumptions utilized by management, related to the significance of any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. Evaluating the assumptions included evaluating whether the assumptions used were reasonable considering past experience with the tenant and the rental property and whether the assumptions were consistent with evidence obtained in other areas of the audit. 
 

/s/ PricewaterhouseCoopers LLP

Baltimore, Maryland
February 12, 2021
We have served as the Operating Partnership’s auditor since 2013.
F-7

Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)

December 31,
20202019
Assets  
Properties, net:  
Operating properties, net$3,115,280 $2,772,647 
Projects in development or held for future development447,269 568,239 
Total properties, net3,562,549 3,340,886 
Property - operating right-of-use assets40,570 27,864 
Property - finance right-of-use assets40,425 40,458 
Cash and cash equivalents18,369 14,733 
Investment in unconsolidated real estate joint ventures29,303 51,949 
Accounts receivable, net41,637 35,444 
Deferred rent receivable92,876 87,736 
Intangible assets on real estate acquisitions, net19,344 27,392 
Deferred leasing costs (net of accumulated amortization of $30,375 and $33,782, respectively)58,613 58,392 
Investing receivables (net of allowance for credit losses of $2,851 at December 31, 2020)68,754 73,523 
Prepaid expenses and other assets, net104,583 96,076 
Total assets$4,077,023 $3,854,453 
Liabilities and equity  
Liabilities:  
Debt, net$2,086,918 $1,831,139 
Accounts payable and accrued expenses142,717 148,746 
Rents received in advance and security deposits33,425 33,620 
Dividends and distributions payable31,231 31,263 
Deferred revenue associated with operating leases10,832 7,361 
Property - operating lease liabilities30,746 17,317 
Interest rate derivatives9,522 25,682 
Other liabilities12,490 10,649 
Total liabilities2,357,881 2,105,777 
Commitments and contingencies (Note 20)00
Redeemable noncontrolling interests25,430 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 112,181,759 at December 31, 2020 and 112,068,705 at December 31, 2019)1,122 1,121 
Additional paid-in capital2,478,906 2,481,558 
Cumulative distributions in excess of net income(809,836)(778,275)
Accumulated other comprehensive loss(9,157)(25,444)
Total Corporate Office Properties Trust’s shareholders’ equity1,661,035 1,678,960 
Noncontrolling interests in subsidiaries:  
Common units in COPLP20,465 19,597 
Preferred units in COPLP8,800 
Other consolidated entities12,212 11,888 
Noncontrolling interests in subsidiaries32,677 40,285 
Total equity1,693,712 1,719,245 
Total liabilities, redeemable noncontrolling interests and equity$4,077,023 $3,854,453 
See accompanying notes to consolidated financial statements.
F-8

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
For the Years Ended December 31,
 202020192018
Revenues
Lease revenue$536,127 $522,472 $512,327 
Other property revenue2,598 4,991 4,926 
Construction contract and other service revenues70,640 113,763 60,859 
Total revenues609,365 641,226 578,112 
Operating expenses  
Property operating expenses203,840 198,143 201,035 
Depreciation and amortization associated with real estate operations138,193 137,069 137,116 
Construction contract and other service expenses67,615 109,962 58,326 
Impairment losses1,530 329 2,367 
General, administrative and leasing expenses33,001 35,402 28,900 
Business development expenses and land carry costs4,473 4,239 5,840 
Total operating expenses448,652 485,144 433,584 
Interest expense(67,937)(71,052)(75,385)
Interest and other income8,574 7,894 4,358 
Credit loss recoveries933 
Gain on sales of real estate30,209 105,230 2,340 
Gain on sale of investment in unconsolidated real estate joint venture29,416 
Loss on early extinguishment of debt(7,306)(258)
Loss on interest rate derivatives(53,196)
Income before equity in income of unconsolidated entities and income taxes101,406 198,154 75,583 
Equity in income of unconsolidated entities1,825 1,633 2,697 
Income tax (expense) benefit(353)217 363 
Net income102,878 200,004 78,643 
Net income attributable to noncontrolling interests:  
Common units in COPLP(1,180)(2,363)(1,742)
Preferred units in COPLP(300)(564)(660)
Other consolidated entities(4,024)(5,385)(3,940)
Net income attributable to COPT common shareholders$97,374 $191,692 $72,301 
Earnings per common share: (1)  
Net income attributable to COPT common shareholders - basic$0.87 $1.72 $0.69 
Net income attributable to COPT common shareholders - diluted$0.87 $1.71 $0.69 
(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.
F-9

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands) 
For the Years Ended December 31,
 202020192018
Net income$102,878 $200,004 $78,643 
Other comprehensive income (loss)  
Unrealized loss on interest rate derivatives(39,454)(24,321)(2,373)
Reclassification adjustments on interest rate derivatives recognized in interest expense3,725 (1,415)(407)
Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives51,865 
Equity in other comprehensive income of equity method investee199 210 
Total other comprehensive income (loss)16,136 (25,537)(2,570)
Comprehensive income119,014 174,467 76,073 
Comprehensive income attributable to noncontrolling interests(5,353)(7,981)(6,453)
Comprehensive income attributable to COPT$113,661 $166,486 $69,620 
 
See accompanying notes to consolidated financial statements.

F-10

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
 Common
Shares
Additional
Paid-in
Capital
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interests
Total
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 (1,904,615 shares)19 27,394 — — (27,413)
Redemption of common units— — — — (339)(339)
Common shares issued under forward equity sale agreements (5,907,000 shares)59 172,235 — — — 172,294 
Common shares issued under at-the-market program (991,664 shares)10 29,722 — — — 29,732 
Share-based compensation (146,290 shares issued, net of redemptions)6,962 — — — 6,963 
Redemption of vested equity awards— (1,702)— — — (1,702)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— (2,466)— — 2,466 
Comprehensive income— — 72,301 (2,681)3,930 73,550 
Dividends— — (116,748)— — (116,748)
Distributions to owners of common and preferred units in COPLP— — — — (3,157)(3,157)
Distributions to noncontrolling interest in other consolidated entities— — — — (15)(15)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (1,837)— — — (1,837)
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 (105,039 shares)1,585 — — (1,586)
Redemption of common units— — — — (25)(25)
Common shares issued to the public (1,000 shares)— 29 — — — 29 
Common shares issued under forward equity sale agreements (1,614,087 shares)16 46,438 — — — 46,454 
Share-based compensation (106,711 shares issued, net of redemptions)6,131 — — 1,323 7,456 
Redemption of vested equity awards— (2,064)— — — (2,064)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— (167)— — 167 
Comprehensive income— — 191,692 (25,206)4,146 170,632 
Dividends— — (123,159)— — (123,159)
Distributions to owners of common and preferred units in COPLP— — — — (2,057)(2,057)
Contributions from noncontrolling interests in other consolidated entities— — — — 2,570 2,570 
Distributions to noncontrolling interests in other consolidated entities— — — — (5,890)(5,890)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (1,749)— — — (1,749)
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 adjusted1,121 2,481,558 (783,816)(25,444)40,285 1,713,704 
Conversion of common units to common shares (14,009 shares)— 211 — — (211)
Redemption of preferred units— — — — (8,800)(8,800)
Share-based compensation (99,045 shares issued, net of redemptions)4,676 — — 1,907 6,584 
Redemption of vested equity awards— (1,699)— — — (1,699)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 767 — — (767)
Comprehensive income— — 97,374 16,287 1,927 115,588 
Dividends— — (123,394)— — (123,394)
Distributions to owners of common and preferred units in COPLP— — — — (1,746)(1,746)
Contributions from noncontrolling interests in other consolidated entities— — — — 112 112 
Distributions to noncontrolling interests in other consolidated entities— — — — (30)(30)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (6,607)— — — (6,607)
Balance at December 31, 2020 (112,181,759 common shares outstanding)$1,122 $2,478,906 $(809,836)$(9,157)$32,677 $1,693,712 
See accompanying notes to consolidated financial statements.
F-11

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the Years Ended December 31,
 202020192018
Cash flows from operating activities  
Revenues from real estate operations received$542,727 $530,280 $528,066 
Construction contract and other service revenues received78,470 94,677 33,579 
Property operating expenses paid(202,660)(196,611)(197,647)
Construction contract and other service expenses paid(67,760)(96,789)(79,386)
General, administrative, leasing, business development and land carry costs paid(31,406)(29,347)(27,006)
Interest expense paid(61,471)(67,475)(72,460)
Lease incentives paid(11,925)(9,482)(7,679)
Sales-type lease costs paid(10,747)
Income taxes paid(4)(21)
Other3,200 3,305 3,036 
Net cash provided by operating activities238,424 228,558 180,482 
Cash flows from investing activities  
Development and redevelopment of properties(344,401)(394,444)(159,994)
Tenant improvements on operating properties(28,754)(23,809)(35,098)
Other capital improvements on operating properties(32,756)(24,659)(24,223)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties201,499 
Sale of properties83,165 108,128 
Proceeds from sale of investment in unconsolidated real estate joint venture59,841 
Non-operating distributions from unconsolidated real estate joint venture3,695 22,426 1,942 
Investing receivables funded(272)(11,180)(97)
Investing receivables payments received8,000 4,455 
Leasing costs paid(16,938)(16,825)(10,926)
Settlement of interest rate derivatives(53,130)
Other(4,242)849 (8,977)
Net cash used in investing activities(325,792)(138,015)(232,918)
Cash flows from financing activities  
Proceeds from debt
Revolving Credit Facility664,000 409,000 381,000 
Unsecured senior notes395,264 
Other debt proceeds206,931 43,615 13,406 
Repayments of debt
Revolving Credit Facility(698,000)(445,000)(294,000)
Unsecured senior notes(300,000)
Scheduled principal amortization(4,125)(4,310)(4,240)
Other debt repayments(12,031)(77)(100,000)
Deferred financing costs paid(2,400)(448)(8,292)
Payments on finance lease liabilities(854)(223)(15,379)
Net proceeds from issuance of common shares46,415 202,065 
Common share dividends paid(123,367)(122,657)(114,286)
Distributions paid to noncontrolling interests in COPLP(1,825)(2,166)(3,699)
Distributions paid to noncontrolling interests in other consolidated entities(30)(5,890)(16)
Distributions paid to redeemable noncontrolling interests(14,357)(1,659)(1,382)
Redemption of preferred units(8,800)
Payments in connection with early extinguishment of debt(7,029)
Other(2,106)(963)(5,622)
Net cash provided by (used in) financing activities91,271 (84,363)49,555 
Net increase (decrease) in cash and cash equivalents and restricted cash3,903 6,180 (2,881)
Cash and cash equivalents and restricted cash  
Beginning of year18,130 11,950 14,831 
End of year$22,033 $18,130 $11,950 

See accompanying notes to consolidated financial statements.
F-12

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
For the Years Ended December 31,
 202020192018
Reconciliation of net income to net cash provided by operating activities:  
Net income$102,878 $200,004 $78,643 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and other amortization140,031 138,903 139,063 
Impairment losses1,530 329 2,367 
Amortization of deferred financing costs and net debt discounts4,272 3,639 3,393 
Increase in deferred rent receivable(2,168)(4,091)(4,621)
Gain on sales of real estate(30,209)(105,230)(2,340)
Gain on sale of investment in unconsolidated real estate joint venture(29,416)
Share-based compensation6,503 6,714 6,376 
Loss on early extinguishment of debt7,306 258 
Loss on interest rate derivatives53,196 
Other(7,855)(6,022)(2,991)
Changes in operating assets and liabilities: 
(Increase) decrease in accounts receivable(6,377)(7,141)5,673 
Increase in prepaid expenses and other assets, net(7,626)(22,457)(987)
Increase (decrease) in accounts payable, accrued expenses and other liabilities6,554 20,369 (49,179)
(Decrease) increase in rents received in advance and security deposits(195)3,541 4,827 
Net cash provided by operating activities$238,424 $228,558 $180,482 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period$14,733 $8,066 $12,261 
Restricted cash at beginning of period3,397 3,884 2,570 
Cash and cash equivalents and restricted cash at beginning of period$18,130 $11,950 $14,831 
Cash and cash equivalents at end of period$18,369 $14,733 $8,066 
Restricted cash at end of period3,664 3,397 3,884 
Cash and cash equivalents and restricted cash at end of period$22,033 $18,130 $11,950 
Supplemental schedule of non-cash investing and financing activities:  
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs$(9,421)$35,913 $6,570 
Finance right-of-use asset contributed by noncontrolling interest in joint venture$$2,570 $
Recognition of operating right-of-use assets and related lease liabilities$13,340 $840 $
Non-cash changes from property dispositions:
Contribution of properties to unconsolidated real estate joint venture$$158,542 $
Investment in unconsolidated real estate joint ventures retained in disposition$11,474 $34,506 $
Non-cash changes from recognition of property sale previously accounted for as financing arrangement:
Decrease in assets held for sale, net$$$(42,226)
Decrease in deferred property sale$$$43,377 
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests$(35,728)$(25,817)$2,915 
Equity in other comprehensive income of an equity method investee$$199 $210 
Dividends/distributions payable$31,231 $31,263 $30,856 
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares$211 $1,586 $27,413 
Adjustments to noncontrolling interests resulting from changes in COPLP ownership$(767)$167 $2,466 
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value$6,607 $1,749 $1,837 
 
See accompanying notes to consolidated financial statements.
F-13

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)

December 31,
20202019
Assets  
Properties, net:  
Operating properties, net$3,115,280 $2,772,647 
Projects in development or held for future development447,269 568,239 
Total properties, net3,562,549 3,340,886 
Property - operating right-of-use assets40,570 27,864 
Property - finance right-of-use assets40,425 40,458 
Cash and cash equivalents18,369 14,733 
Investment in unconsolidated real estate joint ventures29,303 51,949 
Accounts receivable, net41,637 35,444 
Deferred rent receivable92,876 87,736 
Intangible assets on real estate acquisitions, net19,344 27,392 
Deferred leasing costs (net of accumulated amortization of $30,375 and $33,782, respectively)58,613 58,392 
Investing receivables (net of allowance for credit losses of $2,851 at December 31, 2020)68,754 73,523 
Prepaid expenses and other assets, net101,556 93,016 
Total assets$4,073,996 $3,851,393 
Liabilities and equity  
Liabilities:  
Debt, net$2,086,918 $1,831,139 
Accounts payable and accrued expenses142,717 148,746 
Rents received in advance and security deposits33,425 33,620 
Distributions payable31,231 31,263 
Deferred revenue associated with operating leases10,832 7,361 
Property - operating lease liabilities30,746 17,317 
Interest rate derivatives9,522 25,682 
Other liabilities9,463 7,589 
Total liabilities2,354,854 2,102,717 
Commitments and contingencies (Note 20)00
Redeemable noncontrolling interests25,430 29,431 
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units held by limited partner, 352,000 preferred units outstanding at December 31, 20198,800 
Common units, 112,181,759 and 112,068,705 held by the general partner and 1,352,430 and 1,482,425 held by limited partners at December 31, 2020 and 2019, respectively1,690,610 1,724,159 
Accumulated other comprehensive loss(9,155)(25,648)
Total Corporate Office Properties, L.P.’s equity1,681,455 1,707,311 
Noncontrolling interests in subsidiaries12,257 11,934 
Total equity1,693,712 1,719,245 
Total liabilities, redeemable noncontrolling interests and equity$4,073,996 $3,851,393 
See accompanying notes to consolidated financial statements.
F-14

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
For the Years Ended December 31,
 202020192018
Revenues
Lease revenue$536,127 $522,472 $512,327 
Other property revenue2,598 4,991 4,926 
Construction contract and other service revenues70,640 113,763 60,859 
Total revenues609,365 641,226 578,112 
Operating expenses  
Property operating expenses203,840 198,143 201,035 
Depreciation and amortization associated with real estate operations138,193 137,069 137,116 
Construction contract and other service expenses67,615 109,962 58,326 
Impairment losses1,530 329 2,367 
General, administrative and leasing expenses33,001 35,402 28,900 
Business development expenses and land carry costs4,473 4,239 5,840 
Total operating expenses448,652 485,144 433,584 
Interest expense(67,937)(71,052)(75,385)
Interest and other income8,574 7,894 4,358 
Credit loss recoveries933 
Gain on sales of real estate30,209 105,230 2,340 
Gain on sale of investment in unconsolidated real estate joint venture29,416 
Loss on early extinguishment of debt(7,306)(258)
Loss on interest rate derivatives(53,196)
Income before equity in income of unconsolidated entities and income taxes101,406 198,154 75,583 
Equity in income of unconsolidated entities1,825 1,633 2,697 
Income tax (expense) benefit(353)217 363 
Net income102,878 200,004 78,643 
Net income attributable to noncontrolling interests in consolidated entities(4,024)(5,385)(3,940)
Net income attributable to COPLP98,854 194,619 74,703 
Preferred unit distributions(300)(564)(660)
Net income attributable to COPLP common unitholders$98,554 $194,055 $74,043 
Earnings per common unit: (1)  
Net income attributable to COPLP common unitholders - basic$0.87 $1.72 $0.69 
Net income attributable to COPLP common unitholders - diluted$0.87 $1.71 $0.69 
(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.

F-15

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
For the Years Ended December 31,
 202020192018
Net income$102,878 $200,004 $78,643 
Other comprehensive income (loss)
Unrealized loss on interest rate derivatives(39,454)(24,321)(2,373)
Reclassification adjustments on interest rate derivatives recognized in interest expense3,725 (1,415)(407)
Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives51,865 
Equity in other comprehensive income of equity method investee199 210 
Total other comprehensive income (loss)16,136 (25,537)(2,570)
Comprehensive income119,014 174,467 76,073 
Comprehensive income attributable to noncontrolling interests(3,667)(5,375)(3,940)
Comprehensive income attributable to COPLP$115,347 $169,092 $72,133 
 
See accompanying notes to consolidated financial statements.


F-16

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Limited Partner Preferred UnitsCommon UnitsAccumulated Other Comprehensive Income (Loss)Noncontrolling Interests in SubsidiariesTotal Equity
 UnitsAmountUnitsAmount
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 
Redemption of common units— — (13,377)(339)— — (339)
Issuance of common units resulting from common shares issued under COPT forward equity sale agreements— — 5,907,000 172,294 — — 172,294 
Issuance of common units resulting from common shares issued under COPT at-the-market program— — 991,664 29,732 — — 29,732 
Share-based compensation (units net of redemption)— — 146,290 6,963 — — 6,963 
Redemptions of vested equity awards— — — (1,702)— — (1,702)
Comprehensive income— 660 — 74,043 (2,570)1,417 73,550 
Distributions to owners of common and preferred units— (660)— (119,245)— — (119,905)
Distributions to noncontrolling interests in subsidiaries— — — — — (15)(15)
Adjustment to arrive at fair value of redeemable noncontrolling interests— — — (1,837)— — (1,837)
Balance at December 31, 2018352,000 8,800 111,574,754 1,604,655 (121)13,714 1,627,048 
Redemption of common units— — (924)(25)— — (25)
Issuance of common units resulting from public issuance of common shares— — 1,000 29 — — 29 
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)— — 362,213 7,456 — — 7,456 
Redemptions of vested equity awards— — — (2,064)— — (2,064)
Comprehensive income— 564 — 194,055 (25,527)1,540 170,632 
Distributions to owners of common and preferred units— (564)— (124,652)— — (125,216)
Contributions from noncontrolling interests in subsidiaries— — — — — 2,570 2,570 
Distributions to noncontrolling interests in subsidiaries— — — — — (5,890)(5,890)
Adjustment to arrive at fair value of redeemable noncontrolling interests— — — (1,749)— — (1,749)
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 
Redemption of preferred units(352,000)(8,800)— — — — (8,800)
Share-based compensation (units net of redemption)— — 280,315 6,584 — — 6,584 
Redemptions of vested equity awards— — — (1,699)— — (1,699)
Comprehensive income— 300 — 98,554 16,493 241 115,588 
Distributions to owners of common and preferred units— (300)— (124,840)— — (125,140)
Contributions from noncontrolling interests in subsidiaries— — — — — 112 112 
Distributions to noncontrolling interests in subsidiaries— — — — — (30)(30)
Adjustment to arrive at fair value of redeemable noncontrolling interests— — — (6,607)— — (6,607)
Balance at December 31, 2020$113,831,445 $1,690,610 $(9,155)$12,257 $1,693,712 
See accompanying notes to consolidated financial statements.
F-17

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the Years Ended December 31,
 202020192018
Cash flows from operating activities  
Revenues from real estate operations received$542,727 $530,280 $528,066 
Construction contract and other service revenues received78,470 94,677 33,579 
Property operating expenses paid(202,660)(196,611)(197,647)
Construction contract and other service expenses paid(67,760)(96,789)(79,386)
General, administrative, leasing, business development and land carry costs paid(31,406)(29,347)(27,006)
Interest expense paid(61,471)(67,475)(72,460)
Lease incentives paid(11,925)(9,482)(7,679)
Sales-type lease costs paid(10,747)
Income taxes paid(4)(21)
Other3,200 3,305 3,036 
Net cash provided by operating activities238,424 228,558 180,482 
Cash flows from investing activities  
Development and redevelopment of properties(344,401)(394,444)(159,994)
Tenant improvements on operating properties(28,754)(23,809)(35,098)
Other capital improvements on operating properties(32,756)(24,659)(24,223)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties201,499 
Sale of properties83,165 108,128 
Proceeds from sale of investment in unconsolidated real estate joint venture59,841 
Non-operating distributions from unconsolidated real estate joint venture3,695 22,426 1,942 
Investing receivables funded(272)(11,180)(97)
Investing receivables payments received8,000 4,455 
Leasing costs paid(16,938)(16,825)(10,926)
Settlement of interest rate derivatives(53,130)
Other(4,242)849 (8,977)
Net cash used in investing activities(325,792)(138,015)(232,918)
Cash flows from financing activities  
Proceeds from debt
Revolving Credit Facility664,000 409,000 381,000 
Unsecured senior notes395,264 
Other debt proceeds206,931 43,615 13,406 
Repayments of debt
Revolving Credit Facility(698,000)(445,000)(294,000)
Unsecured senior notes(300,000)
Scheduled principal amortization(4,125)(4,310)(4,240)
Other debt repayments(12,031)(77)(100,000)
Deferred financing costs paid(2,400)(448)(8,292)
Payments on finance lease liabilities(854)(223)(15,379)
Net proceeds from issuance of common units46,415 202,065 
Redemption of preferred units(8,800)
Common unit distributions paid(124,815)(124,171)(117,325)
Distributions paid to noncontrolling interests in other consolidated entities(30)(5,890)(16)
Distributions paid to redeemable noncontrolling interests(14,357)(1,659)(1,382)
Payments in connection with early extinguishment of debt(7,029)
Other(2,483)(1,615)(6,282)
Net cash provided by (used in) financing activities91,271 (84,363)49,555 
Net increase (decrease) in cash and cash equivalents and restricted cash3,903 6,180 (2,881)
Cash and cash equivalents and restricted cash  
Beginning of year18,130 11,950 14,831 
End of year$22,033 $18,130 $11,950 

See accompanying notes to consolidated financial statements.
F-18

Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
For the Years Ended December 31,
 202020192018
Reconciliation of net income to net cash provided by operating activities:  
Net income$102,878 $200,004 $78,643 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and other amortization140,031 138,903 139,063 
Impairment losses1,530 329 2,367 
Amortization of deferred financing costs and net debt discounts4,272 3,639 3,393 
Increase in deferred rent receivable(2,168)(4,091)(4,621)
Gain on sales of real estate(30,209)(105,230)(2,340)
Gain on sale of investment in unconsolidated real estate joint venture(29,416)
Share-based compensation6,503 6,714 6,376 
Loss on early extinguishment of debt7,306 258 
Loss on interest rate derivatives53,196 
Other(7,855)(6,022)(2,991)
Changes in operating assets and liabilities: 
(Increase) decrease in accounts receivable(6,377)(7,141)5,673 
Increase in prepaid expenses and other assets, net(7,659)(23,255)(1,735)
Increase (decrease) in accounts payable, accrued expenses and other liabilities6,587 21,167 (48,431)
(Decrease) increase in rents received in advance and security deposits(195)3,541 4,827 
Net cash provided by operating activities$238,424 $228,558 $180,482 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period$14,733 $8,066 $12,261 
Restricted cash at beginning of period3,397 3,884 2,570 
Cash and cash equivalents and restricted cash at beginning of period$18,130 $11,950 $14,831 
Cash and cash equivalents at end of period$18,369 $14,733 $8,066 
Restricted cash at end of period3,664 3,397 3,884 
Cash and cash equivalents and restricted cash at end of period$22,033 $18,130 $11,950 
Supplemental schedule of non-cash investing and financing activities:  
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs$(9,421)$35,913 $6,570 
Finance right-of-use asset contributed by noncontrolling interest in joint venture$$2,570 $
Recognition of operating right-of-use assets and related lease liabilities$13,340 $840 $
Non-cash changes from property dispositions:
Contribution of properties to unconsolidated real estate joint venture$$158,542 $
Investment in unconsolidated real estate joint ventures retained in disposition$11,474 $34,506 $
Non-cash changes from recognition of property sale previously accounted for as financing arrangement:
Decrease in assets held for sale, net$$$(42,226)
Decrease in deferred property sale$$$43,377 
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests$(35,728)$(25,817)$2,915 
Equity in other comprehensive income of an equity method investee$$199 $210 
Distributions payable$31,231 $31,263 $30,856 
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value$6,607 $1,749 $1,837 
 
See accompanying notes to consolidated financial statements.
F-19


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements


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 December 31, 2020, our properties included the following (all references to number of properties, square footage, acres and megawatts are unaudited):

181 properties totaling 21.0 million square feet comprised of 16.2 million square feet in 155 office properties and 4.7 million square feet in 26 single-tenant data center shell properties (“data center shells”). We owned 17 of these data center shells through unconsolidated real estate joint ventures;
a wholesale data center with a critical load of 19.25 megawatts;
11 properties under development (9 office properties and 2 data center shells), including 3 partially-operational properties, that we estimate will total approximately 1.5 million square feet upon completion; and
approximately 830 acres of land controlled for future development that we believe could be developed into approximately 10.4 million square feet and 43 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 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 December 31, 2020, COPT owned 98.6% of the outstanding COPLP common units (“common units”) and there were 0 preferred units outstanding. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT common shareholders.

COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

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.
F-20


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

 
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.
 
Use of Estimates in the Preparation of Financial Statements

We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions affect various matters, including:
the reported amounts of assets and liabilities in our consolidated balance sheets as of the dates of the financial statements;
the disclosure of contingent assets and liabilities as of the dates of the financial statements; and
the reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods.

Significant estimates are inherent in the presentation of our financial statements in a number of areas, including the evaluation of the collectability of accounts and deferred rent receivable, the determination of estimated useful lives of assets, the determination of lease terms, the evaluation of impairment of long-lived assets, the amount of impairment losses recognized, the allocation of property acquisition costs, the amount of revenue recognized relating to tenant improvements, the level of expense recognized in connection with share-based compensation and the determination of accounting method for investments. Actual results could differ from these and other estimates.

Properties

We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses.

We capitalize direct and indirect project costs (including related compensation and other indirect costs), interest expense and real estate taxes associated with properties, or portions thereof, undergoing development or redevelopment activities. In capitalizing interest expense, if there is a specific borrowing for a property undergoing development or redevelopment activities, we apply the interest rate of that borrowing to the average accumulated expenditures that do not exceed such borrowing; for the portion of expenditures exceeding any such specific borrowing, we apply our weighted average interest rate on other borrowings to the expenditures. We continue to capitalize costs while development or redevelopment activities are underway until a property becomes “operational,” which occurs when lease terms commence (generally when the tenant has control of the leased space and we have delivered the premises to the tenant as required under the terms of such lease), but no later than one year after the cessation of major construction activities. When leases commence on portions of a newly-developed or redeveloped property in the period prior to one year from the cessation of major construction activities, we consider that property to be “partially operational.” When a property is partially operational, we allocate the costs associated with the property between the portion that is operational and the portion under development. We start depreciating costs associated with newly-developed or redeveloped properties as they become operational.

Most of our leases provide for some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets. If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense over the shorter of the useful life of the assets or the term of the lease and recognize any payments from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors, including whether the economic substance of the lease terms is properly reflected and whether the improvements: have value to us as real estate; are unique to the tenant or reusable by other tenants; may be altered or removed by the tenant without our consent or without compensating us for any lost fair value; or are owned, and remain, with us or the tenant at the end of the lease term.

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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

We depreciate our fixed assets using the straight-line method over their estimated useful lives as follows:
Estimated Useful Lives
Buildings and building improvements10-40 years
Land improvements10-20 years
Tenant improvements on operating propertiesShorter of remaining useful lives of assets or related lease term
Equipment and personal property3-10 years

For periods in which a property is classified as held for sale, we classify the assets of the property’s asset group as held for sale on our consolidated balance sheet for such periods.

When we dispose of, or classify as held for sale, a component (such as a reportable segment or sub-segment) or group of components that represents a strategic shift having a major effect on our operations and financial results (such as a major geographical area of operations or major line of business), we classify the associated results of operations as discontinued operations. We had no properties newly classified as discontinued operations in the last three years.

Sales of Properties

We recognize gains from sales of consolidated interests in properties to non-customer third parties when we have transferred control of such interests.

Impairment of Properties

We assess the asset groups associated with each of our properties, including operating properties, properties in development, land held for future development, related intangible assets, right-of-use assets, deferred rents receivable and lease liabilities for indicators of impairment quarterly or when circumstances indicate that an asset group may be impaired.  If our analyses indicate that the carrying values of certain properties’ asset groups may be impaired, we perform a recovery analysis for such asset groups.  For properties to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over, in most cases, a ten-year holding period.  If we believe it is more likely than not that we will dispose of the properties earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the properties over the various possible holding periods.  If the analysis indicates that the carrying value of a tested property’s asset group is not recoverable from its estimated future cash flows, the property’s asset group is written down to the property’s estimated fair value and an impairment loss is recognized.  If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of such property using holding periods that are consistent with our revised plans. Changes in holding periods may require us to recognize impairment losses. 

Fair values are estimated based on contract prices, indicative bids, discounted cash flow analyses, yield analyses or comparable sales analyses. Estimated cash flows used in our impairment analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future market rental and occupancy rates, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from real estate leasing and brokerage firms and our direct experience with the properties and their markets.

When we determine that a property is held for sale, we stop depreciating the property and estimate the property’s fair value, net of selling costs; if we then determine that the estimated fair value, net of selling costs, is less than the net book value of the property’s asset group, we recognize an impairment loss equal to the difference and reduce the net book value of the property’s asset group.

F-22


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Acquisition of Operating Properties

Upon completion of operating property acquisitions, we allocate the purchase price to tangible and intangible assets and liabilities associated with such acquisitions based on our estimates of their fair values. We determine these fair values by using market data and independent appraisals available to us and making numerous estimates and assumptions. We allocate operating property acquisitions to the following components:

properties based on a valuation performed under the assumption that the property is vacant upon acquisition (the “if-vacant value”). The if-vacant value is allocated between land and buildings or, in the case of properties under development, development in progress. We also allocate additional amounts to properties for in-place tenant improvements based on our estimate of improvements per square foot provided under market leases that would be attributable to the remaining non-cancelable terms of the respective leases;
above- and below-market lease intangible assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be received pursuant to the in-place leases; and (2) our estimate of fair market lease rates for the corresponding space, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above- and below-market lease values are amortized as adjustments to lease revenue over the remaining lease terms of the respective leases, and to renewal periods in the case of below-market leases;
in-place lease value based on our estimates of: (1) the present value of additional income to be realized as a result of leases being in place on the acquired properties; and (2) costs to execute similar leases. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs;
tenant relationship value based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors; and
above- and below-market cost arrangements (such as real estate tax treaties or above- or below-market ground leases) based on the present value of the expected benefit from any such arrangements in place on the property at the time of acquisition.

Leased Assets, as a Lessee

Effective January 1, 2019, we adopted guidance requiring lessees to classify 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. The guidance also requires us to recognize upon lease term commencement a right-of-use asset and lease liability for all leases with a term of greater than 12 months regardless of their classification. We adopted this guidance for leases on January 1, 2019 using a modified retrospective transition approach under which we elected to not adjust prior comparative reporting periods. 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 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 determining right-of-use assets and lease liabilities, we 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 usually significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimate of this rate requires significant judgment, and considers factors such as interest rates available to us on a fully-collateralized basis for shorter-termed debt and U.S. Treasury rates.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts that may exceed Federally insured limits at times. We have not experienced any losses in these accounts in the past and believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.
F-23


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)


Investments in Marketable Securities

We classify marketable securities as trading securities when we have the intent to sell such securities in the near term, and classify other marketable securities as available-for-sale securities. We determine the appropriate classification of investments in marketable securities at the acquisition date and re-evaluate the classification at each balance sheet date. We report investments in marketable securities classified as trading securities at fair value (which is included in the line entitled “Prepaid expenses and other assets, net” on our consolidated balance sheets), with unrealized gains and losses recognized through earnings; on our consolidated statements of cash flows, we classify cash flows from these securities as operating activities.

Receivables and Credit Losses

We evaluate our receivables from customers and borrowers for collectability and recognize estimated credit losses on these receivables. We use judgment in estimating these losses based upon the credit status of the entities associated with the individual receivables and payment history.

Effective January 1, 2020, we adopted guidance issued by the Financial Accounting Standards Board (“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 8;
tenant notes receivable;
net investment in sales-type leases;
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.

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 exposure), 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 as credit loss expense or recoveries 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. 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 notes receivable from the City of Huntsville disclosed in Note 8 and a tax incremental financing obligation disclosed in Note 20).

For lease revenue, if collectability is not probable, revenue recognized is limited to the lesser of revenue that would have been recognized if collectability was probable or lease payments collected. Losses on lease revenue receivables are presented on our consolidated statements of operation with property operating expenses for years prior to January 1, 2019, when we adopted new lease accounting guidance, and as reductions in lease revenue thereafter.

F-24


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)



Prior to our adoption of the credit loss guidance discussed above, we evaluated the collectability of both interest and principal of loans whenever events or changes in circumstances indicated such amounts may not be recoverable. A loan was impaired when it was probable that we would be unable to collect all amounts due according to the existing contractual terms.  When a loan was impaired, the amount of the loss accrual was calculated by comparing the carrying amount of the investment to the present value of expected future cash flows discounted at the loan’s effective interest rate and the value of any collateral under such loan.

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 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 losses.

Intangible Assets and Deferred Revenue on Real Estate Acquisitions

We amortize the intangible assets and deferred revenue on real estate acquisitions discussed above as follows:
Asset TypeAmortization Period
Above- and below-market leasesRelated lease terms
In-place lease valueRelated lease terms
Tenant relationship valueEstimated period of time that tenant will lease space in property
Above- and below-market cost arrangementsTerm of arrangements

We recognize the amortization of acquired above- and below-market leases as adjustments to rental revenue. We recognize the amortization of above- and below-market cost arrangements as adjustments to property operating expenses. We recognize the amortization of other intangible assets on property acquisitions as amortization expense.

Deferred Leasing Costs

We defer costs incurred to obtain new tenant leases or extend existing tenant leases; our deferral of costs included related non-incremental compensation costs until January 1, 2019, when we adopted new lease accounting guidance. We amortize these costs evenly over the lease terms. We classify leasing costs paid as an investing activity on our statements of cash flows since such costs are necessary in order for us to generate long-term future cash flows from our properties. When tenant leases are terminated early, we expense any unamortized deferred leasing costs associated with those leases over the shortened term of the lease.
Deferred Financing Costs

We defer costs of financing arrangements and recognize these costs as interest expense over the related debt terms on a straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization. We expense any unamortized loan costs when loans are retired early. We present deferred costs of financing arrangements as a direct deduction from the related debt liability, except for costs attributable to line-of-credit arrangements and interest rate derivatives, which we present in the balance sheet in the line entitled “prepaid expenses and other assets, net”.

F-25


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Interest Rate Derivatives

Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  We use interest rate swaps to hedge the cash flows associated with interest rates on variable-rate debt borrowings. We also use forward-starting interest rate swaps to hedge the cash flows associated with interest rates on forecasted fixed-rate borrowings. We recognize all derivatives as assets or liabilities on our consolidated balance sheet at fair value.

We defer all changes in the fair value of designated cash flow hedges to accumulated other comprehensive income (“AOCI”) or loss (“AOCL”), reclassifying such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting and the hedged transactions are probable not to occur, we recognize changes in fair value of the hedge previously deferred to AOCI or AOCL, along with any changes in fair value occurring thereafter, through earnings. We do not use interest rate derivatives for trading or speculative purposes. We manage counter-party risk by only entering into contracts with major financial institutions based upon their credit ratings and other risk factors.

We use standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost in computing the fair value of derivatives at each balance sheet date. We made an accounting policy election to use an exception provided for in the applicable accounting guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to measure the fair value of groups of assets and liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure as of the measurement date.

Noncontrolling Interests

COPT’s consolidated noncontrolling interests are comprised of interests in COPLP not owned by COPT (discussed further in Note 14) and interests in consolidated real estate joint ventures not owned by us (discussed further in Note 6). COPLP’s consolidated noncontrolling interests are comprised primarily of interests in our consolidated real estate joint ventures. We evaluate whether noncontrolling interests are subject to redemption features outside of our control. We classify noncontrolling interests that are currently redeemable for cash at the option of the holders or are probable of becoming redeemable as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets; we adjust these interests each period to the greater of their fair value or carrying amount (initial amount as adjusted for allocations of income and losses and contributions and distributions), with a corresponding offset to additional paid-in capital on COPT’s consolidated balance sheets or common units on COPLP’s balance sheet. Our other noncontrolling interests are reported in the equity section of our consolidated balance sheets.

Revenue Recognition

Lease and Other Property Revenue

We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. 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.

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Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Most of our lease revenue is from 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.

Upon lease commencement, we evaluate leases to determine if they meet criteria set forth in lease accounting guidance for classification as sales-type leases or direct financing leases; when a lease meets none of these criteria, we classify the lease as an operating lease. Upon commencement of sales-type leases, we derecognize the underlying asset, recognizing in its place a net investment in the lease equal to the sum of the lease receivable and the present value of any unguaranteed residual asset and recognize any selling profit or loss created as a result of the difference between those two amounts. Similarly, for direct financing leases, the lessor derecognizes the underlying asset and recognizes a net investment in the lease, but, unlike in a sales-type lease, defers profit and amortizes it as interest income over the lease term. Our leases of properties as lessor are predominantly classified as operating leases, for which the underlying asset remains on our balance sheet and is depreciated consistently with other owned assets, with income recognized as described further below.

We recognize minimum rents on operating leases, net of abatements, on a straight-line basis over the term of tenant leases. A lease term commences when: (1) the tenant has control of the leased space (legal right to use the property); and (2) we have delivered the premises to the tenant as required under the terms of such lease. The term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a tenant option to extend the lease if the tenant is reasonably certain to exercise that option; (2) a tenant option to terminate the lease if the tenant is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by us as the lessor. When assessing the expected lease end date, we use judgment in contemplating the significance of: any penalties a tenant may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the tenant based on any existing contract, asset, entity or market-based factors in the lease. While a significant portion of our portfolio is leased to the USG, 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 certain for most of these leases.

We report the amount by which our minimum rental revenue recognized on a straight-line basis under leases exceeds the contractual rent billings associated with such leases as deferred rent receivable on our consolidated balance sheets. Amounts by which our minimum rental revenue recognized on a straight-line basis under leases are less than the contractual rent billings associated with such leases are reported in liabilities as deferred revenue associated with operating leases on our consolidated balance sheets.

In connection with a tenant’s entry into, or modification of, a lease, if we make cash payments to, or on behalf of, the tenant for purposes other than funding the construction of landlord assets, we defer the amount of such payments as lease incentives. As discussed above, when we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets; if the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset. We amortize lease incentives as a reduction of rental revenue over the term of the lease.

If collectability under a lease is not probable, revenue recognized is limited to the lesser of revenue that would have been recognized if collectability was probable or lease payments collected.

We recognize lease revenue associated with tenant expense recoveries in the same periods in which we incur the related expenses, including tenant reimbursements of property taxes, utilities and other property operating expenses.

We recognize fees received for lease terminations as revenue and write off against such revenue any (1) deferred rents receivable, and (2) deferred revenue, lease incentives and intangible assets that are amortizable into rental revenue associated with the leases; the resulting net amount is the net revenue from the early termination of the leases. When a tenant’s lease for space in a property is terminated early but the tenant continues to lease such space under a new or modified lease in the property, the net revenue from the early termination of the lease is recognized evenly over the remaining life of the new or modified lease in place on that property.

F-27


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Effective January 1, 2019, we adopted guidance issued by the FASB setting forth principles for the recognition, measurement, presentation and disclosure of leases, which required 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 for leases on January 1, 2019 using a modified retrospective transition approach under which we elected to 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 to avoid separating non-lease components that otherwise would need to be accounted for under 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.

Construction Contract and Other Service Revenues

We enter into construction contracts to complete various design and construction services primarily for our USG tenants. The revenues and expenses from these services consist primarily of subcontracted costs that are reimbursed to us by our customers along with a fee. These services are an ancillary component of our overall operations, with small operating margins relative to the revenue. We review each contract to determine the performance obligations and allocate the transaction price based on the standalone selling price, as discussed further below. We recognize revenue under these contracts as services are performed in an amount that reflects the consideration we expect to receive in exchange for those services. Our performance obligations are satisfied over time as work progresses. Revenue recognition is determined using the input method based on costs incurred as of a point in time relative to the total estimated costs at completion to measure progress toward satisfying our performance obligations. We believe incurred costs of work performed best depicts the transfer of control of the services being transferred to the customer.

In determining whether the performance obligations of each construction contract should be accounted for separately versus together, we consider numerous factors that may require significant judgment, including: whether the components contracted are substantially the same with the same pattern of transfer; whether the customer could contract with another party to perform construction based on our design project; and whether the customer can elect not to move forward after the design phase of the contract. Most of our contracts have a single performance obligation as the promise to transfer the services is not separately identifiable from other obligations in the contracts and, therefore, are not distinct. Some contracts have multiple performance obligations, most commonly due to having distinct project phases for design and construction for which our customer is making decisions and managing separately. In these cases, we allocate the transaction price between these performance obligations based on the relative standalone selling prices, which we determine by evaluating: the relative costs of each performance obligation; the expected operating margins (which typically do not vary significantly between obligations); and amounts set forth in the contracts for each obligation. Contract modifications, such as change orders, are routine for our construction contracts and are generally determined to be additions to the existing performance obligations because they would have been part of the initial performance obligations if they were identified at the initial contract date.

We have three main types of compensation arrangements for our construction contracts: guaranteed maximum price (“GMP”); firm fixed price (“FFP”); and cost-plus fee.

GMP contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs, up to a maximum contract amount. We generally enter into GMP contracts for projects that are significant in nature based on the size of the project and total fees, and for which the full scope of the project has not been determined as of the contract date. GMP contracts are lower risk to us than FFP contracts since the costs and revenue move proportionately to one another.
FFP contracts provide for revenue equal to a fixed fee. These contracts are typically lower in value and scope relative to GMP contracts, and are generally entered into when the scope of the project is well defined. Typically, we assume more risk with FFP contracts than GMP contracts since the revenue is fixed and we could realize losses or less than expected profits if we incur more costs than originally estimated. However, these types of contracts offer the opportunity for additional profits when we complete the work for less than originally estimated.
F-28


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)

Cost-plus fee contracts provide for revenue equal to costs incurred plus a fee equal to a percentage of such costs but, unlike GMP contracts, do not have a maximum contract amount. Similar to GMP contracts, cost-plus fee contracts are low risk to us since the costs and revenue move proportionately to one another.

Construction contract cost estimates are based primarily on contracts in place with subcontractors to complete most of the work, but may also include assumptions, such as performance of subcontractors and cost and availability of materials, to project the outcome of future events over the course of the project. We review and update these estimates regularly as a significant change could affect the profitability of our construction contracts. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method as the modification does not create a new performance obligation. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.

Our timing of revenue recognition for construction contracts generally differs from the timing of invoicing to customers. We recognize such revenue as we satisfy our performance obligations. Payment terms and conditions vary by contract type. Under most of our contracts, we bill customers monthly, as work progresses, in accordance with the contract terms, with payment due in 30 days, although customers occasionally pay in advance of services being provided. We have determined that our contracts generally do not include a significant financing component. The primary purpose of the timing of our invoicing is for convenience, not to receive financing from our customers or to provide customers with financing. Additionally, the timing of transfer of the services is often at the discretion of the customer.

Under most of our contracts, we bill customers one month subsequent to revenue recognition, resulting in contract assets representing unbilled construction revenue.

Our contract liabilities consist of advance payments from our customers or billings in excess of construction contract revenue recognized.

Expense Classification
We classify as property operating expense costs incurred for property taxes, ground rents, utilities, property management, insurance, repairs and exterior and interior maintenance, as well as associated labor and indirect costs attributable to these costs.

We classify as general, administrative and leasing expenses costs incurred for corporate-level management, public company administration, asset management, leasing, investor relations, marketing and corporate-level insurance (including general business and director and officers) and leasing prospects, as well as associated labor and indirect costs attributable to these expenses.

Share-Based Compensation
We issue 4 forms of share-based compensation: restricted COPT common shares (“restricted shares”), deferred share awards (also known as restricted share units), performance share units (also known as performance share awards) (“PSUs”) and profit interest units (“PIUs”) (time-based and performance-based). We account for share-based compensation in accordance with authoritative guidance provided by the FASB that establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The guidance requires us to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the grant date; such cost is then recognized over the period during which the employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The guidance also requires that share-based compensation be computed based on awards that are ultimately expected to vest; as a result, future forfeitures of awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If an award is voluntarily cancelled by an employee, we recognize the previously unrecognized cost associated with the original award on the date of such cancellation. We capitalize costs associated with share-based compensation attributable to employees engaged in development and redevelopment activities.

We compute the fair value of restricted shares, time-based PIUs and deferred share awards based on the fair value of COPT common shares on the grant date. We compute the fair value of PSUs and performance-based PIUs using a Monte Carlo
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Notes to Consolidated Financial Statements (Continued)

model. Significant assumptions used for that model include the following: the baseline common share value is the market value on the grant date; the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant; and expected volatility is based on historical volatility of COPT’s common shares.

Income Taxes 

COPT elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, COPT must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of the Company’s adjusted taxable income to its shareholders. As a REIT, COPT generally will not be subject to Federal income tax on taxable income that it distributes to its shareholders. If COPT fails to qualify as a REIT in any tax year, it will be subject to Federal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years.

COPLP is a limited partnership and is not subject to federal income tax. Its partners are required to report their respective share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating Partnership’s taxable income is reported on COPT’s income tax return.

For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The characterization of dividends paid on COPT’s common shares during each of the last three years was as follows:
For the Years Ended December 31,
202020192018
Ordinary income45.1 %54.4 %83.1 %
Long-term capital gain54.9 %45.6 %%
Return of capital%%16.9 %

The dividends allocated to each of the above years for Federal income tax purposes included dividends paid on COPT’s common shares during each of those years except for the dividends paid on January 15, 2021 and 2020 (with a record date of December 31, 2020 and 2019, respectively), which were allocated for Federal income tax purposes to 2020 and 2019, respectively.

We distributed all of COPT’s REIT taxable income in 2020, 2019 and 2018 and, as a result, did not incur Federal income tax in those years.

The net basis of our consolidated assets and liabilities for tax reporting purposes was approximately $10 million higher than the amount reported on our consolidated balance sheet as of December 31, 2020.

We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes is included in general and administrative expense and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant.

Reclassifications

We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.

Recent Accounting Pronouncements

As discussed above, effective January 1, 2020, we adopted guidance issued by the FASB that changed how entities measure credit losses for most financial assets and certain other instruments not measured at fair value through net income. The guidance replaced the current incurred loss model with an expected loss approach, resulting in a more timely recognition of such losses. The guidance applies 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. Under this guidance, we recognize an estimate of our expected
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Notes to Consolidated Financial Statements (Continued)

credit losses on these asset types 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. We adopted this guidance using 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 of this guidance.

Effective January 1, 2020, we adopted guidance issued by the FASB that modifies disclosure requirements for fair value measurements. The resulting changes in disclosure did not have a material impact on our consolidated financial statements.

Effective January 1, 2020, we adopted guidance issued by the FASB 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. Our adoption of this guidance did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued guidance containing practical expedients for reference rate reform related activities pertaining to debt, leases, derivatives and other contracts. The guidance is optional and may be adopted over time as reference rate reform activities occur. During 2020, we elected to apply an expedient to treat any changes in loans resulting from reference rate reform as debt modifications (as opposed to extinguishments) and hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of the hedge accounting expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of this guidance and may apply other elections as applicable as additional changes in the market occur.

In April 2020, the FASB issued a Staff Q&A document that addressed the accounting for lease accounting guidance for lease concessions resulting from the COVID-19 pandemic. Under existing lease guidance, we would normally have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated as a lease modification) or if such a concession was implemented pursuant to enforceable rights and obligations within the existing lease agreement (and, therefore, not treated as a lease modification). The Staff Q&A document enabled us to bypass the lease-by-lease analysis for lease concessions resulting from the COVID-19 pandemic, and instead elect to either apply the lease modification accounting framework or not, with such elections applied consistently to leases with similar characteristics and similar circumstances. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (such as deferrals of lease payments or reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We chose to apply the elections available under the Staff Q&A to restructurings of lease payment terms granted by us to tenants, the effect of which did not have a material impact on our consolidated financial statements.

3.     Fair Value Measurements

Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in inactive markets and (3) inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.

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Notes to Consolidated Financial Statements (Continued)

Recurring Fair Value Measurements 

COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that, prior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. 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, totaled $3.0 million as of December 31, 2020 and $3.1 million as of December 31, 2019, and is included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets along with an insignificant amount of other marketable securities. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in “other liabilities” on COPT’s consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.

The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, 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 December 31, 2020 and 2019, 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 8, 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 10, we estimated the fair value 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.
 
For additional fair value information, refer to Note 8 for investing receivables, Note 10 for debt and Note 11 for interest rate derivatives.

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Notes to Consolidated Financial Statements (Continued)

COPT and Subsidiaries

The tables below set forth financial assets and liabilities of COPT and subsidiaries that are accounted for at fair value on a recurring basis as of December 31, 2020 and 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
DescriptionQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant Other
Observable Inputs(Level 2)
Significant
Unobservable 
Inputs
(Level 3)
Total
December 31, 2020:
Assets:    
Marketable securities in deferred compensation plan (1)    
Mutual funds$3,008 $$$3,008 
Other19 19 
Other marketable securities (1)30 30 
Total assets$3,057 $$$3,057 
Liabilities:    
Deferred compensation plan liability (2)$$3,027 $$3,027 
Interest rate derivatives9,522 9,522 
Total liabilities$$12,549 $$12,549 
December 31, 2019:
Assets:    
Marketable securities in deferred compensation plan (1)    
Mutual funds$3,035 $$$3,035 
Other25 25 
Interest rate derivatives (1)23 23 
Total assets$3,060 $23 $$3,083 
Liabilities:    
Deferred compensation plan liability (2)$$3,060 $$3,060 
Interest rate derivatives25,682 25,682 
Total liabilities$$28,742 $$28,742 

(1) Included in the line entitled “prepaid expenses and other assets, net” on COPTs consolidated balance sheet.
(2) Included in the line entitled “other liabilities” on COPTs consolidated balance sheet.

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Notes to Consolidated Financial Statements (Continued)

COPLP and Subsidiaries

The tables below set forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a recurring basis as of December 31, 2020 and 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
DescriptionQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant Other
Observable Inputs(Level 2)
Significant
Unobservable 
Inputs
(Level 3)
Total
December 31, 2020:
Assets:    
Other marketable securities (1)$30 $$$30 
Liabilities:    
Interest rate derivatives$$9,522 $$9,522 
December 31, 2019:
Assets:    
Interest rate derivatives (1)$$23 $$23 
Liabilities:    
Interest rate derivatives$$25,682 $$25,682 

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

2019 Nonrecurring Fair Value Measurements

In the third quarter of 2019, we determined that the carrying amount of land held in Frederick, Maryland would not be recovered from its eventual disposition. As a result, we recognized an impairment loss of $327,000 in order to adjust the land to its estimated fair value. This land was sold in the fourth quarter of 2019.

4.    Properties, Net
 
Operating properties, net consisted of the following (in thousands): 
December 31,
20202019
Land$528,269 $472,976 
Buildings and improvements3,711,264 3,306,791 
Less: Accumulated depreciation(1,124,253)(1,007,120)
Operating properties, net$3,115,280 $2,772,647 

2020 Dispositions

On October 30, 2020, we sold a 90% interest in 2 data center shell properties in Northern Virginia based on an aggregate property value of $89.7 million and retained a 10% interest in the properties through B RE COPT DC JV II LLC (“B RE COPT”), a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $80.7 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 $30.0 million.
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2020 Development Activities

In 2020, we placed into service 1.8 million square feet in 11 newly-developed properties, 42,000 square feet in expansions of 3 fully-operational properties and 21,000 square feet in a redeveloped property. As of December 31, 2020, we had 11 properties under development, including 3 partially-operational properties, that we estimate will total 1.5 million square feet upon completion.

In the third quarter of 2020, we concluded that we no longer expected to develop a property in Baltimore, Maryland. As a result, we recognized an impairment loss on previously incurred pre-development costs of $1.5 million.

2019 Dispositions

In 2019, we sold, through a series of transactions, a 90% interest in 9 data center shells in Northern Virginia based on an aggregate property value of $345.1 million, retaining a 10% interest in the properties through BREIT COPT DC JV LLC (“BREIT-COPT”), a newly-formed joint venture. The transactions for 7 of these properties were completed on June 20, 2019 and the remaining 2 properties on December 5, 2019. Our partner in the joint venture acquired the 90% interest from us for $310.6 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 $105.2 million.

2019 Development Activities

In 2019, we placed into service 1.1 million square feet in 9 newly-developed properties and 85,000 square feet in 1 property under redevelopment.

2018 Dispositions

In 2018, we sold 11751 Meadowville Lane, an operating property totaling 193,000 square feet in Chester, Virginia (in our Data Center Shells sub-segment). We contractually closed on the sale of this property on October 27, 2017 for $44.0 million. We provided a financial guaranty to the buyer under which we provided an indemnification for up to $20 million in losses it could incur related to a potential defined capital event occurring on the property; our financial guaranty to the buyer expired on October 1, 2018, resulting in no losses to us. We accounted for this transaction as a financing arrangement. Accordingly, we did not recognize the sale of this property for accounting purposes until the expiration of the guaranty on October 1, 2018. In the fourth quarter of 2018, we recognized a gain on this sale of $1.5 million.

2018 Development Activities

In 2018, we placed into service 666,000 square feet in 6 newly-developed properties, 22,000 square feet in 1 redeveloped property and land under a long-term contract.

In the fourth quarter of 2018, we abandoned plans to redevelop a property in our Fort Meade/BW Corridor sub-segment after we completed leasing on the property that did not require any redevelopment. Accordingly, we recognized an impairment loss of $2.4 million representing pre-development costs associated with the property.

5.    Leases

Lessor Arrangements

We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. As of December 31, 2020, these leases, which may encompass all, or a portion of, a property, had remaining terms spanning from one month to 18 years and averaging approximately 5.4 years.
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Notes to Consolidated Financial Statements (Continued)


Our 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 under the lease. The table below sets forth our composition of lease revenue recognized between fixed and variable lease revenue (in thousands):
For the Years Ended December 31,
Lease revenue20202019
Fixed$425,593 $412,342 
Variable110,534 110,130 
$536,127 $522,472 
A significant concentration of our lease revenue in 2020 and 2019 was earned from our largest tenant, the USG, including 35% and 34% of our total lease revenue, respectively, and 25% of our fixed lease revenue in each of those years. Our lease revenue from the USG in 2020 and 2019 was earned primarily from properties in the Fort Meade/BW Corridor, Lackland Air Force Base and Northern Virginia Defense/IT reportable sub-segments (see Note 17).

Fixed contractual payments due under our property leases were as follows (in thousands):
As of December 31, 2020
Year Ending December 31,Operating leasesSales-type leases
2021$424,585 $871 
2022378,573 949 
2023324,917 949 
2024276,488 949 
2025197,677 949 
Thereafter745,303 4,464 
Total contractual payments$2,347,543 9,131 
Less: Amount representing interest(2,558)
Net investment in sales-type leases$6,573 <