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COPT DEFENSE PROPERTIES - Quarter Report: 2022 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2022
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
ofc-20220630_g1.jpg
CORPORATE OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 23-2947217
(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

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. ☒ Yes   ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ 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.

Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes   ☒ No

As of July 22, 2022, 112,423,310 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.


TABLE OF CONTENTS
 
FORM 10-Q
 
 PAGE
 
 
   
 
  

2

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
June 30,
2022		December 31, 2021
Assets  
Properties, net:  
Operating properties, net$3,180,790 $3,090,510 
Projects in development or held for future development458,961 442,434 
Total properties, net3,639,751 3,532,944 
Property - operating right-of-use assets38,056 38,361 
Assets held for sale, net— 192,699 
Cash and cash equivalents20,735 13,262 
Investment in unconsolidated real estate joint ventures39,017 39,889 
Accounts receivable, net31,554 40,752 
Deferred rent receivable 121,015 108,926 
Intangible assets on property acquisitions, net12,543 14,567 
Lease incentives, net50,871 51,486 
Deferred leasing costs (net of accumulated amortization of $32,379 and $31,768, respectively)
68,004 65,850 
Investing receivables (net of allowance for credit losses of $1,645 and $1,599, respectively)
84,885 82,226 
Prepaid expenses and other assets, net78,762 81,490 
Total assets$4,185,193 $4,262,452 
Liabilities and equity  
Liabilities:  
Debt, net$2,177,811 $2,272,304 
Accounts payable and accrued expenses177,180 186,202 
Rents received in advance and security deposits27,745 32,262 
Dividends and distributions payable31,400 31,299 
Deferred revenue associated with operating leases8,416 9,341 
Property - operating lease liabilities29,412 29,342 
Other liabilities10,526 17,729 
Total liabilities2,462,490 2,578,479 
Commitments and contingencies (Note 18)
Redeemable noncontrolling interests26,752 26,898 
Equity:  
Shareholders’ equity:  
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,424,671 at June 30, 2022 and 112,327,533 at December 31, 2021)
1,124 1,123 
Additional paid-in capital2,481,139 2,481,539 
Cumulative distributions in excess of net income(827,076)(856,863)
Accumulated other comprehensive income (loss)1,806 (3,059)
Total shareholders’ equity1,656,993 1,622,740 
Noncontrolling interests in subsidiaries:  
Common units in Corporate Office Properties, L.P. (“COPLP”)25,505 21,363 
Other consolidated entities13,453 12,972 
Noncontrolling interests in subsidiaries38,958 34,335 
Total equity1,695,951 1,657,075 
Total liabilities, redeemable noncontrolling interests and equity$4,185,193 $4,262,452 

See accompanying notes to consolidated financial statements.
3

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Revenues  
Lease revenue$142,277 $136,454 $283,666 $273,744 
Other property revenue969 765 1,860 1,305 
Construction contract and other service revenues42,557 19,988 95,757 36,546 
Total revenues185,803 157,207 381,283 311,595 
Operating expenses    
Property operating expenses54,116 50,914 111,297 104,190 
Depreciation and amortization associated with real estate operations34,812 34,732 69,076 69,232 
Construction contract and other service expenses41,304 19,082 92,954 34,875 
General, administrative and leasing expenses8,355 9,222 16,899 17,628 
Business development expenses and land carry costs701 1,372 1,484 2,466 
Total operating expenses139,288 115,322 291,710 228,391 
Interest expense(14,808)(15,942)(29,232)(33,461)
Interest and other income 1,818 2,228 3,711 4,093 
Credit loss (expense) recoveries(225)(193)91 714 
Gain on sales of real estate(19)40,233 (4)39,743 
Loss on early extinguishment of debt— (25,228)(342)(58,394)
Income from continuing operations before equity in income of unconsolidated entities and income taxes33,281 42,983 63,797 35,899 
Equity in income of unconsolidated entities318 260 1,206 482 
Income tax expense(4)(24)(157)(56)
Income from continuing operations33,595 43,219 64,846 36,325 
Discontinued operations— 679 29,573 1,494 
Net income 33,595 43,898 94,419 37,819 
Net income attributable to noncontrolling interests:    
Common units in COPLP(496)(559)(1,352)(474)
Other consolidated entities(789)(938)(1,438)(1,613)
Net income attributable to COPT common shareholders$32,310 $42,401 $91,629 $35,732 
Basic earnings per common share: (1)    
Income from continuing operations$0.29 $0.37 $0.55 $0.30 
Discontinued operations— 0.01 0.26 0.02 
Net income attributable to COPT common shareholders$0.29 $0.38 $0.81 $0.32 
Diluted earnings per common share: (1)
Income from continuing operations$0.29 $0.37 $0.55 $0.30 
Discontinued operations— 0.01 0.26 0.02 
Net income attributable to COPT common shareholders$0.29 $0.38 $0.81 $0.32 
(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.
4

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Net income$33,595 $43,898 $94,419 $37,819 
Other comprehensive income:    
Unrealized income (loss) on interest rate derivatives1,008 (240)3,545 544 
Reclassification adjustments on interest rate derivatives recognized in interest expense
754 1,203 1,757 2,378 
Total other comprehensive income 1,762 963 5,302 2,922 
Comprehensive income35,357 44,861 99,721 40,741 
Comprehensive income attributable to noncontrolling interests(1,405)(1,484)(3,227)(2,267)
Comprehensive income attributable to COPT$33,952 $43,377 $96,494 $38,474 
 
See accompanying notes to consolidated financial statements.


5

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
Common
Shares		Additional
Paid-in
Capital		Cumulative
Distributions in
Excess of Net
Income		Accumulated
Other
Comprehensive Income (Loss)		Noncontrolling
Interests		Total
For the Three Months Ended June 30, 2021
Balance at March 31, 2021 (112,327,234 common shares outstanding)
$1,123 $2,476,807 $(847,407)$(7,391)$33,660 $1,656,792 
Redemption of common units— — — — (241)(241)
Share-based compensation (8,836 shares issued, net of redemptions)
— 1,078 — — 1,067 2,145 
Redemption of vested equity awards— (68)— — — (68)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 739 — — (739)— 
Comprehensive income— — 42,401 976 743 44,120 
Dividends— — (30,888)— — (30,888)
Distributions to owners of common units in COPLP— — — — (400)(400)
Distributions to noncontrolling interests in other consolidated entities— — — — (8)(8)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (140)— — — (140)
Balance at June 30, 2021 (112,336,070 common shares outstanding)
$1,123 $2,478,416 $(835,894)$(6,415)$34,082 $1,671,312 
For the Three Months Ended June 30, 2022
Balance at March 31, 2022 (112,418,811 common shares outstanding)
$1,124 $2,479,119 $(828,473)$164 $38,602 $1,690,536 
Redemption of common units— — — — (164)(164)
Share-based compensation (5,860 shares issued, net of redemptions)
— 1,007 — — 1,370 2,377 
Redemption of vested equity awards— (61)— — — (61)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 1,036 — — (1,036)— 
Comprehensive income— — 32,310 1,642 666 34,618 
Dividends— — (30,913)— — (30,913)
Distributions to owners of common units in COPLP— — — — (472)(472)
Distributions to noncontrolling interests in other consolidated entities— — — — (8)(8)
Adjustment to arrive at fair value of redeemable noncontrolling interests— 38 — — — 38 
Balance at June 30, 2022 (112,424,671 common shares outstanding)
$1,124 $2,481,139 $(827,076)$1,806 $38,958 $1,695,951 

See accompanying notes to consolidated financial statements.



6

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
 Common
Shares		Additional
Paid-in
Capital		Cumulative
Distributions in
Excess of Net
Income		Accumulated
Other
Comprehensive Income (Loss)		Noncontrolling
Interests		Total
For the Six Months Ended June 30, 2021
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 
Conversion of common units to common shares (8,054 shares)
— 121 — — (121)— 
Redemption of common units— — — — (241)(241)
Share-based compensation (146,257 shares issued, net of redemptions)
1 2,175 — — 1,984 4,160 
Redemption of vested equity awards— (2,358)— — — (2,358)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— 194 — — (194)— 
Comprehensive income— — 35,732 2,742 1,114 39,588 
Dividends— — (61,790)— — (61,790)
Distributions to owners of common units in COPLP— — — — (798)(798)
Distributions to noncontrolling interests in other consolidated entities— — — — (15)(15)
Adjustment to arrive at fair value of redeemable noncontrolling interests— (622)— — — (622)
Other— — — — (324)(324)
Balance at June 30, 2021 (112,336,070 common shares outstanding)
$1,123 $2,478,416 $(835,894)$(6,415)$34,082 $1,671,312 
For the Six Months Ended June 30, 2022
Balance at December 31, 2021 (112,327,533 common shares outstanding)
$1,123 $2,481,539 $(856,863)$(3,059)$34,335 $1,657,075 
Redemption of common units— — — — (376)(376)
Share-based compensation (97,138 shares issued, net of redemptions)
1 2,021 — — 2,656 4,678 
Redemption of vested equity awards— (1,120)— — — (1,120)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP— (1,378)— — 1,378 — 
Comprehensive income— — 91,629 4,865 1,921 98,415 
Dividends— — (61,842)— — (61,842)
Distributions to owners of common units in COPLP— — — — (941)(941)
Distributions to noncontrolling interests in other consolidated entities— — — — (15)(15)
Adjustment to arrive at fair value of redeemable noncontrolling interests— 77 — — — 77 
Balance at June 30, 2022 (112,424,671 common shares outstanding)
$1,124 $2,481,139 $(827,076)$1,806 $38,958 $1,695,951 

See accompanying notes to consolidated financial statements.
7

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
For the Six Months Ended June 30,
 20222021
Cash flows from operating activities  
Revenues from real estate operations received$285,858 $280,708 
Construction contract and other service revenues received90,663 38,419 
Property operating expenses paid(99,512)(91,672)
Construction contract and other service expenses paid(88,833)(34,445)
General, administrative, leasing, business development and land carry costs paid(17,782)(15,399)
Interest expense paid(26,732)(31,392)
Lease incentives paid(7,739)(7,442)
Other2,797 (765)
Net cash provided by operating activities138,720 138,012 
Cash flows from investing activities  
Development and redevelopment of properties(142,862)(110,909)
Tenant improvements on operating properties(16,734)(10,872)
Other capital improvements on operating properties(21,590)(12,382)
Proceeds from sale of properties220,780 114,394 
Leasing costs paid(4,121)(11,408)
Other(565)576 
Net cash provided by (used in) investing activities34,908 (30,601)
Cash flows from financing activities  
Proceeds from debt
Revolving Credit Facility329,000 387,000 
Unsecured senior notes— 589,818 
Other debt proceeds— 4,459 
Repayments of debt
Revolving Credit Facility(224,000)(361,000)
Unsecured senior notes— (600,000)
Scheduled principal amortization(1,618)(1,922)
Other debt repayments(200,000)— 
Payments in connection with early extinguishment of debt(6)(55,713)
Common share dividends paid(61,814)(61,747)
Other(6,859)(8,564)
Net cash used in financing activities(165,297)(107,669)
Net increase (decrease) in cash and cash equivalents and restricted cash8,331 (258)
Cash and cash equivalents and restricted cash  
Beginning of period17,316 22,033 
End of period$25,647 $21,775 

See accompanying notes to consolidated financial statements.
 

8

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
For the Six Months Ended June 30,
 20222021
Reconciliation of net income to net cash provided by operating activities:  
Net income $94,419 $37,819 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and other amortization70,235 76,476 
Amortization of deferred financing costs and net debt discounts2,351 2,666 
Increase in deferred rent receivable(11,603)(9,421)
Gain on sales of real estate(28,560)(39,743)
Share-based compensation4,301 3,913 
Loss on early extinguishment of debt342 58,394 
Other(2,549)(2,462)
Changes in operating assets and liabilities: 
Decrease in accounts receivable9,374 45 
Decrease in lease incentives and prepaid expenses and other assets, net8,407 13,894 
Decrease in accounts payable, accrued expenses and other liabilities(3,480)(1,037)
Decrease in rents received in advance and security deposits(4,517)(2,532)
Net cash provided by operating activities$138,720 $138,012 
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period$13,262 $18,369 
Restricted cash at beginning of period4,054 3,664 
Cash and cash equivalents and restricted cash at beginning of period$17,316 $22,033 
Cash and cash equivalents at end of period$20,735 $17,182 
Restricted cash at end of period4,912 4,593 
Cash and cash equivalents and restricted cash at end of period$25,647 $21,775 
Supplemental schedule of non-cash investing and financing activities:  
Decrease in accrued capital improvements, leasing and other investing activity costs$(6,222)$(15,887)
Recognition of operating right-of-use assets and related lease liabilities$683 $328 
Investment in unconsolidated real estate joint venture retained in property disposition$— $11,842 
Increase in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests$5,072 $2,922 
Dividends/distributions payable$31,400 $31,302 
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares$— $121 
Adjustments to noncontrolling interests resulting from changes in COPLP ownership$1,378 $(194)
(Decrease) increase in redeemable noncontrolling interests and (increase) decrease in equity to carry redeemable noncontrolling interests at fair value$(77)$622 
 
See accompanying notes to consolidated financial statements.

9

Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”). We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of June 30, 2022, our properties included the following:

•188 properties totaling 22.1 million square feet comprised of 17.1 million square feet in 161 office properties and 5.0 million square feet in 27 single-tenant data center shells. We owned 19 of these data center shells through unconsolidated real estate joint ventures;
•12 properties under development (nine office properties and three data center shells), including one partially-operational property, and an expansion of one fully-operational property that we estimate will total approximately 1.9 million square feet upon completion; and
•approximately 710 acres of land controlled for future development that we believe could be developed into approximately 8.4 million square feet and 43 acres of other land.
 
We conduct almost all of our operations and own almost all of our assets through our operating partnership, Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT is the sole general partner. 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 June 30, 2022, COPT owned 98.0% 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”.
  
2.    Summary of Significant Accounting Policies
 
Basis of Presentation
 
These 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.  We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities.  We eliminate all intercompany balances and transactions in consolidation.

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
 
When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2021 included in our 2021 Annual Report on Form 10-K.  The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations.  All adjustments are of a normal recurring nature.  The consolidated financial statements have been prepared using the accounting policies described in our 2021 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

10

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, including amounts reclassified in conjunction with the transfer of a wholesale data center to discontinued operations in the fourth quarter of 2021. We provide disclosure regarding our discontinued operations in Note 4.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board 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 elected over time as reference rate reform activities occur. In 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.

3.     Fair Value Measurements

Recurring Fair Value Measurements

We have 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. Effective December 31, 2019, no new investments of deferred compensation were eligible for the plan.  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 our consolidated balance sheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded and totaled $1.9 million as of June 30, 2022, is included in the line entitled “prepaid expenses and other assets, net” on our 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 our 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 June 30, 2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments were not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  The fair values of our investing receivables, as disclosed in Note 7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 9, we estimated the fair value of our unsecured senior notes based on quoted market rates for our senior notes (categorized within Level 1 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 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives. 

11

The table below sets forth our financial assets and liabilities accounted for at fair value on a recurring basis as of June 30, 2022 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
Assets:    
Marketable securities in deferred compensation plan (1)    
Mutual funds$1,824 $— $— $1,824 
Other57 — — 57 
Other marketable securities (1)32 — — 32 
Interest rate derivatives (1)— 2,468 — 2,468 
Total assets$1,913 $2,468 $— $4,381 
Liabilities:    
Deferred compensation plan liability (2)$— $1,881 $— $1,881 
(1)Included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheet.
(2)Included in the line entitled “other liabilities” on our consolidated balance sheet.

4.    Properties, Net
 
Operating properties, net consisted of the following (in thousands): 
June 30,
2022		December 31, 2021
Land$584,878 $572,900 
Buildings and improvements3,809,623 3,670,133 
Less: Accumulated depreciation(1,213,711)(1,152,523)
Operating properties, net$3,180,790 $3,090,510 

2022 Dispositions and Discontinued Operations

On January 25, 2022, we sold 9651 Hornbaker Road in Manassas, Virginia, our sole wholesale data center investment, for $222.5 million, resulting in a gain on sale of $28.6 million. This property, a separate reportable segment, is reported herein as discontinued operations. The table below sets forth the components of the property’s assets classified as held for sale on our consolidated balance sheet as of December 31, 2021 (in thousands):

Properties, net$191,857 
Deferred rent receivable462 
Intangible assets on property acquisitions, net73 
Deferred leasing costs, net307 
Assets held for sale, net$192,699 

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The table below sets forth the property’s results of operations included in discontinued operations on our consolidated statements of operations and its operating and investing cash flows included on our consolidated statements of cash flows (in thousands):
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
 (in thousands)
Revenues from real estate operations$— $7,204 $1,980 $14,538 
Property operating expenses— (3,702)(971)(7,400)
Depreciation and amortization associated with real estate operations— (2,823)— (5,644)
Gain on sale of real estate— — 28,564 — 
Discontinued operations$— $679 $29,573 $1,494 
Cash flows from operating activities$5,497 $8,938 
Cash flows from investing activities$220,549 $(577)

2022 Development Activities

During the six months ended June 30, 2022, we placed into service 363,000 square feet in three newly-developed properties. As of June 30, 2022, we had 12 properties under development, including one partially-operational property, and an expansion of one fully-operational property that we estimate will total 1.9 million square feet upon completion.

5.    Leases

Lessor Arrangements

We lease real estate properties, comprised primarily of office properties and data center shells, to third parties. These leases encompass all, or a portion, of properties, with various expiration dates. 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 leases. The table below sets forth our composition of lease revenue recognized between fixed and variable lease revenue (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
Lease revenue (1)2022202120222021
Fixed$112,691 $107,823 $223,858 $214,758 
Variable 29,586 28,631 59,808 58,986 
$142,277 $136,454 $283,666 $273,744 
(1)Excludes lease revenue from discontinued operations of which: $5.6 million was fixed and $1.6 million was variable for the three months ended June 30, 2021; and $1.5 million and $11.1 million was fixed and $527,000 and $3.4 million was variable for the six months ended June 30, 2022 and 2021, respectively.

Fixed contractual payments due under our property leases were as follows (in thousands):

As of June 30, 2022
Year Ending December 31,Operating leasesSales-type leases
2022 (1)$223,948 $480 
2023420,071 960 
2024372,126 960 
2025285,179 960 
2026221,782 960 
Thereafter1,055,808 3,556 
Total contractual payments$2,578,914 7,876 
Less: Amount representing interest(1,942)
Net investment in sales-type leases$5,934 
(1)Represents the six months ending December 31, 2022.

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Lessee Arrangements

As of June 30, 2022, our balance sheet included $40.3 million in right-of-use assets associated primarily with land leased from third parties underlying certain properties that we are operating with various expiration dates. Our property right-of-use assets consisted of the following (in thousands):
LeasesBalance Sheet LocationJune 30, 2022December 31, 2021
Right-of-use assets
Operating leases - PropertyProperty - operating right-of-use assets$38,056 $38,361 
Finance leases - PropertyPrepaid expenses and other assets, net2,222 2,238 
Total right-of-use assets$40,278 $40,599 

Our property lease liabilities reported on our consolidated balance sheets consisted of the following (in thousands):
LeasesBalance Sheet LocationJune 30, 2022December 31, 2021
Lease liabilities
Operating leases - PropertyProperty - operating lease liabilities$29,412 $29,342 

As of June 30, 2022, our operating leases had a weighted average remaining lease term of 52 years and a weighted average discount rate of 7.19%. The table below presents our total property lease cost (in thousands):
Statement of Operations LocationFor the Three Months Ended June 30, For the Six Months Ended June 30,
Lease cost2022202120222021
Operating lease cost
Property leases - fixedProperty operating expenses$1,032 $1,013 $2,051 $1,986 
Property leases - variableProperty operating expenses17 10 33 20 
Finance lease cost
Amortization of property right-of-use assetsProperty operating expenses8 9 16 18 
$1,057 $1,032 $2,100 $2,024 

The table below presents the effect of property lease payments on our consolidated statements of cash flows (in thousands):
For the Six Months Ended June 30,
Supplemental cash flow information20222021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$1,676 $1,586 
Financing cash flows for financing leases$— $10 

Payments on property operating leases were due as follows (in thousands):
Year Ending December 31,
June 30, 2022
2022 (1)$1,679 
20233,399 
20243,451 
20251,797 
20261,578 
Thereafter125,934 
Total lease payments137,838 
Less: Amount representing interest(108,426)
Lease liability$29,412 
(1)Represents the six months ending December 31, 2022.

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6.    Real Estate Joint Ventures

Consolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of June 30, 2022 (dollars in thousands):
  Nominal Ownership % 
June 30, 2022 (1)
Date AcquiredTotal
Assets		Encumbered AssetsTotal Liabilities
EntityLocation
LW Redstone Company, LLC (2)3/23/201085%Huntsville, Alabama$547,429 $88,065 $108,738 
Stevens Investors, LLC (3)8/11/201595%Washington, DC167,443 — 904 
M Square Associates, LLC6/26/200750%College Park, Maryland102,419 60,153 51,802 
 $817,291 $148,218 $161,444 
(1)Excludes amounts eliminated in consolidation.
(2)We fund all capital requirements. Our partner generally receives distributions of the first $1.2 million of annual operating cash flows and we receive the remainder.
(3)As of June 30, 2022, we also had a $112.0 million construction loan to the joint venture, which is eliminated in consolidation, that carries an interest rate of LIBOR plus 2.35% and had a balance of $95.3 million; the loan matures on August 11, 2024, and we have priority for repayment in full of borrowings and accrued interest on the loan over partner distributions of any future refinancing proceeds or other available cash flows.

Unconsolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):
Date AcquiredNominal Ownership %Number of PropertiesCarrying Value of Investment (1)
EntityJune 30, 2022December 31, 2021
B RE COPT DC JV II LLC (2)10/30/202010%8 $15,291 $15,579 
BREIT COPT DC JV LLC6/20/201910%9 11,971 12,460 
B RE COPT DC JV III LLC6/2/202110%2 11,755 11,850 
 19 $39,017 $39,889 
(1)Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.
(2)Our investment in B RE COPT DC JV II LLC was lower than our share of the joint venture’s equity by $7.1 million as of June 30, 2022 and $7.2 million as of December 31, 2021 due to a difference between our cost basis and our share of the joint venture’s underlying equity in its net assets. We recognize adjustments to our share of the joint venture’s earnings and losses resulting from this basis difference in the underlying assets of the joint venture.

7.    Investing Receivables
 
Investing receivables consisted of the following (in thousands): 
June 30,
2022		December 31, 2021
Notes receivable from the City of Huntsville$81,497 $77,784 
Other investing loans receivable5,033 6,041 
Amortized cost basis86,530 83,825 
Allowance for credit losses(1,645)(1,599)
Investing receivables, net$84,885 $82,226 
 
The balances above include accrued interest receivable, net of allowance for credit losses, of $2.3 million as of June 30, 2022 and $5.3 million as of December 31, 2021.

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

The fair value of these receivables was approximately $88 million as of June 30, 2022 and $84 million as of December 31, 2021.

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8.    Prepaid Expenses and Other Assets, Net
 
Prepaid expenses and other assets, net consisted of the following (in thousands): 
June 30,
2022		December 31, 2021
Construction contract costs in excess of billings, net$29,223 $22,384 
Furniture, fixtures and equipment, net9,014 9,599 
Deposits7,154 3,910 
Non-real estate equity investments6,107 5,544 
Prepaid expenses6,066 20,058 
Net investment in sales-type leases5,934 6,194 
Restricted cash4,912 4,054 
Interest rate derivatives2,468 355 
Property - finance right-of-use assets2,222 2,238 
Marketable securities in deferred compensation plan1,881 2,556 
Deferred tax asset, net (1)1,685 1,841 
Deferred financing costs, net (2)746 1,314 
Other assets1,350 1,443 
Prepaid expenses and other assets, net$78,762 $81,490 
(1)Includes a valuation allowance of $24,000 as of June 30, 2022 and December 31, 2021.
(2)Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.
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9.    Debt, Net
 
Our debt consisted of the following (dollars in thousands):
 Carrying Value (1) as of
 June 30,
2022		December 31, 2021June 30, 2022
 Stated Interest RatesScheduled Maturity
Mortgage and Other Secured Debt:    
Fixed rate mortgage debt $85,708 $86,960 
3.82% - 4.62% (2)
2023-2026
Variable rate secured debt 33,530 33,667 
LIBOR + 1.45% to 1.55% (3)
2025-2026
Total mortgage and other secured debt119,238 120,627   
Revolving Credit Facility (4)181,000 76,000 
LIBOR + 0.775% to 1.45% (5)
March 2023 (4)
Term Loan Facility (6)99,904 299,420 
LIBOR + 1.00% to 1.65% (7)
December 2022
Unsecured Senior Notes
2.25%, $400,000 aggregate principal
396,013 395,491 
2.25% (8)
March 2026
2.00%, $400,000 aggregate principal
396,749 396,512 
2.00% (9)
January 2029
2.75%, $600,000 aggregate principal
589,588 589,060 
2.75% (10)
April 2031
2.90%, $400,000 aggregate principal
394,643 394,441 
2.90% (11)
December 2033
Unsecured note payable676 753 
0% (12)
May 2026
Total debt, net$2,177,811 $2,272,304   
(1)The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $4.9 million as of June 30, 2022 and $5.8 million as of December 31, 2021.
(2)The weighted average interest rate on our fixed rate mortgage debt was 4.07% as of June 30, 2022.
(3)The weighted average interest rate on our variable rate secured debt was 2.58% as of June 30, 2022.
(4)The facility matures in March 2023, with the ability for us to further extend such maturity by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period. In connection with this facility, we also have the ability to borrow up to $500.0 million under new term loans from the facility’s lender group provided that there is no default under the facility and subject to the approval of the lenders.
(5)The weighted average interest rate on the Revolving Credit Facility was 2.38% as of June 30, 2022.
(6)We repaid $200.0 million of this loan during the six months ended June 30, 2022.
(7)The interest rate on this loan was 2.31% as of June 30, 2022.
(8)The carrying value of these notes reflects an unamortized discount totaling $3.2 million as of June 30, 2022 and $3.6 million as of December 31, 2021. The effective interest rate under the notes, including amortization of the issuance costs, was 2.48%.
(9)The carrying value of these notes reflects an unamortized discount totaling $2.3 million as of June 30, 2022 and $2.5 million as of December 31, 2021. The effective interest rate under the notes, including amortization of the issuance costs, was 2.09%.
(10)The carrying value of these notes reflects an unamortized discount totaling $9.0 million as of June 30, 2022 and $9.5 million as of December 31, 2021. The effective interest rate under the notes, including amortization of the issuance costs, was 2.94%.
(11)The carrying value of these notes reflects an unamortized discount totaling $4.4 million as of June 30, 2022 and $4.5 million as of December 31, 2021. The effective interest rate under the notes, including amortization of the issuance costs, was 3.01%.
(12)This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates.  The carrying value of this note reflects an unamortized discount totaling $85,000 as of June 30, 2022 and $108,000 as of December 31, 2021.
 
All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed COPLP’s Revolving Credit Facility, Term Loan Facility and Unsecured Senior Notes.

Certain of our debt instruments require that we comply with a number of restrictive financial covenants.  As of June 30, 2022, we were compliant with these financial covenants.
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Our debt matures on the following schedule (in thousands):
Year Ending December 31,June 30, 2022
2022 (1)$101,715 
2023199,953 
202429,983 
202523,717 
2026446,300 
Thereafter1,400,000 
Total$2,201,668 (2)
(1)Represents the six months ending December 31, 2022.
(2)Represents scheduled principal amortization and maturities only and therefore excludes net discounts and deferred financing costs of $23.9 million.

We capitalized interest costs of $1.4 million in the three months ended June 30, 2022, $1.7 million in the three months ended June 30, 2021, $2.9 million in the six months ended June 30, 2022 and $3.5 million in the six months ended June 30, 2021.

The following table sets forth information pertaining to the fair value of our debt (in thousands): 
 June 30, 2022December 31, 2021
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Fixed-rate debt    
Unsecured Senior Notes$1,776,993 $1,739,316 $1,775,504 $1,809,950 
Other fixed-rate debt86,384 82,707 87,713 87,339 
Variable-rate debt314,434 313,220 409,087 409,639 
 $2,177,811 $2,135,243 $2,272,304 $2,306,928 
 
10.    Interest Rate Derivatives
 
The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):
     Fair Value at
Notional Amount Fixed RateFloating Rate IndexEffective DateExpiration DateJune 30,
2022		December 31, 2021
$100,000  1.901%One-Month LIBOR9/1/201612/1/2022$269 $(1,361)
$100,000 1.905%One-Month LIBOR9/1/201612/1/2022268 (1,365)
$11,000 (1)1.678%One-Month LIBOR8/1/20198/1/2026495 (234)
$22,925 (2)0.573%One-Month LIBOR4/1/20203/26/20251,436 355 
$50,000 (3)1.908%One-Month LIBOR9/1/2016N/A— (684)
      $2,468 $(3,289)
(1)The notional amount of this instrument is scheduled to amortize to $10.0 million.
(2)The notional amount of this instrument is scheduled to amortize to $22.1 million.
(3)We cash settled this swap and accrued interest thereon for $625,000 on January 28, 2022.

Each of these swaps was designated as a cash flow hedge of interest rate risk except for the swap with a $50.0 million notional amount for which we discontinued hedge accounting in December 2021.

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):
 Fair Value at
DerivativesBalance Sheet LocationJune 30,
2022		December 31, 2021
Interest rate swaps designated as cash flow hedgesPrepaid expenses and other assets, net$2,468 $355 
Interest rate swaps designated as cash flow hedgesOther liabilities$— $(2,960)
Interest rate swap not designatedOther liabilities$— $(684)
 
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The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
Amount of Income (Loss) Recognized in
AOCI on Derivatives		Amount of Loss Reclassified from AOCI into Interest Expense on Statement of Operations
Derivatives in Hedging RelationshipsFor the Three Months Ended June 30, For the Six Months Ended June 30,For the Three Months Ended June 30, For the Six Months Ended June 30,
20222021202220212022202120222021
Interest rate derivatives$1,008 $(240)$3,545 $544 $(754)$(1,203)$(1,757)$(2,378)

Based on the fair value of our derivatives as of June 30, 2022, we estimate that approximately $1.0 million of gains will be reclassified from accumulated other comprehensive income (“ AOCI”) as a decrease to interest expense over the next 12 months.

We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of June 30, 2022, we were not in default with any of these provisions, and we had not posted any collateral related to these agreements. 

11.    Redeemable Noncontrolling Interests

Our partners in two real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC, have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):
For the Six Months Ended June 30,
20222021
Beginning balance$26,898 $25,430 
Distributions to noncontrolling interests(1,375)(1,165)
Net income attributable to noncontrolling interests1,306 1,153 
Adjustment to arrive at fair value of interests(77)622 
Ending balance$26,752 $26,040 

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

12.    Equity
 
In May 2022, we entered into an at-the-market (“ATM”) stock offering program (the “2022 ATM Program”) that replaced a similar program established in 2018 (the “2018 ATM Program”) because we replaced the registration statement under which the 2018 ATM Program was registered with a new registration statement. Under the 2022 ATM Program, we may offer and sell common shares in at-the-market stock offerings having an aggregate gross sales price of up to $300 million and may also, at our discretion, sell common shares under forward equity sales agreements. As of June 30, 2022, we had not issued any shares under the 2022 ATM Program.

We declared dividends per common share of $0.275 in the three months ended June 30, 2022 and 2021 and $0.550 in the six months ended June 30, 2022 and 2021.

See Note 16 for disclosure of COPT common share and COPLP common unit activity pertaining to our share-based compensation plans.

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13.    Credit Losses, Financial Assets and Other Instruments

The table below sets forth the allowance for credit losses activity for the six months ended June 30, 2022 and 2021 (in thousands):
Investing ReceivablesTenant Notes
Receivable (1)		Other Assets (2)Total
December 31, 2021$1,599 $1,057 $913 $3,569 
Credit loss expense (recoveries) 46 (76)(61)(91)
June 30, 2022$1,645 $981 $852 $3,478 
December 31, 2020$2,851 $1,203 $643 $4,697 
Credit loss (recoveries) expense(719)(77)82 (714)
June 30, 2021$2,132 $1,126 $725 $3,983 
(1)Included in the line entitled “accounts receivable, net” on our consolidated balance sheets.
(2)The balance as of June 30, 2022 and December 31, 2021 included $742,000 and $218,000, respectively, in the line entitled “accounts receivable, net” and $110,000 and $695,000, respectively, in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets. The balance as of June 30, 2021 and December 31, 2020 included $89,000 and $257,000, respectively, in the line entitled “accounts receivable, net” and $636,000 and $386,000, respectively, in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets.

The following table presents the amortized cost basis of our investing receivables, tenant notes receivable and sales-type lease receivables by credit risk classification, by origination year as of June 30, 2022 (in thousands):
Origination Year
2017 and Earlier2018201920202021Total
Investing receivables:
Credit risk classification:
Investment grade$73,478 $— $— $1,757 $6,262 $81,497 
Non-investment grade— — 5,033 — — 5,033 
Total $73,478 $— $5,033 $1,757 $6,262 $86,530 
Tenant notes receivable:
Credit risk classification:
Investment grade$— $855 $52 $234 $— $1,141 
Non-investment grade180 115 108 1,646 — 2,049 
Total$180 $970 $160 $1,880 $— $3,190 
Sales-type lease receivables:
Credit risk classification:
Investment grade$— $— $— $5,934 $— $5,934 

Our investment grade credit risk classification represents entities with investment grade credit ratings from ratings agencies (such as Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings Ltd.), meaning that they are considered to have at least an adequate capacity to meet their financial commitments, with credit risk ranging from minimal to moderate. Our non-investment grade credit risk classification represents entities with either no credit agency credit ratings or ratings deemed to be sub-investment grade; we believe that there is significantly more credit risk associated with this classification. The credit risk classifications of our investing receivables and tenant notes receivable were last updated in June 2022.

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

Notes receivable on nonaccrual status as of June 30, 2022 and December 31, 2021 were not significant. We did not recognize any interest income on notes receivable on nonaccrual status during the three or six months ended June 30, 2022 and 2021.

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14.    Information by Business Segment

We have the following reportable segments: Defense/IT Locations; Regional Office; Wholesale Data Center (the only property in which we sold on January 25, 2022); and Other. We also report on Defense/IT Locations sub-segments, which include the following: Fort George G. Meade and the Baltimore/Washington Corridor (“Fort Meade/BW Corridor”); Northern Virginia Defense/IT Locations (“NoVA Defense/IT”); Lackland Air Force Base (in San Antonio); locations serving the U.S. Navy (“Navy Support”), which included properties proximate to the Washington Navy Yard, the Naval Air Station Patuxent River in Maryland and the Naval Surface Warfare Center Dahlgren Division in Virginia; Redstone Arsenal (in Huntsville); and data center shells (properties leased to tenants to be operated as data centers in which the tenants fund the costs for the power, fiber connectivity and data center infrastructure). Our segment reporting included below reflects our retrospective reclassification of: certain activities to our Other reportable segment from our Wholesale Data Center reportable segment in the fourth quarter of 2021; and two properties to our NoVA Defense/IT sub-segment from our Regional Office segment in the first quarter of 2022.

We measure the performance of our segments through the measure we define as net operating income from real estate operations (“NOI from real estate operations”), which includes: real estate revenues and property operating expenses; and the net of revenues and property operating expenses of real estate operations owned through unconsolidated real estate joint ventures (“UJVs”) that is allocable to our ownership interest (“UJV NOI allocable to COPT”). Amounts reported for segment assets represent long-lived assets associated with consolidated operating properties (including the carrying value of properties, right-of-use assets, net of related lease liabilities, intangible assets, deferred leasing costs, deferred rents receivable and lease incentives) and the carrying value of investments in UJVs owning operating properties. Amounts reported as additions to long-lived assets represent additions to existing consolidated operating properties, excluding transfers from non-operating properties, which we report separately.
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The table below reports segment financial information for our reportable segments (in thousands): 
Defense/IT Locations
 Fort Meade/BW CorridorNoVA Defense/ITLackland Air Force BaseNavy SupportRedstone ArsenalData Center ShellsTotal Defense/IT LocationsRegional OfficeWholesale
Data Center		OtherTotal
Three Months Ended June 30, 2022
         
Revenues from real estate operations$67,589 $18,103 $15,129 $8,085 $9,308 $9,140 $127,354 $14,121 $— $1,771 $143,246 
Property operating expenses(23,499)(6,157)(7,520)(3,330)(3,631)(1,189)(45,326)(7,628)50 (1,212)(54,116)
UJV NOI allocable to COPT— — — — — 1,080 1,080 — — — 1,080 
NOI from real estate operations$44,090 $11,946 $7,609 $4,755 $5,677 $9,031 $83,108 $6,493 $50 $559 $90,210 
Additions to long-lived assets$12,341 $2,541 $— $650 $224 $— $15,756 $3,561 $16 $65 $19,398 
Transfers from non-operating properties$768 $918 $521 $(78)$20,037 $5,673 $27,839 $30 $— $— $27,869 
Three Months Ended June 30, 2021
          
Revenues from real estate operations$64,840 $15,626 $13,688 $8,445 $8,775 $8,070 $119,444 $15,970 $7,204 $1,805 $144,423 
Property operating expenses(21,714)(5,917)(7,506)(3,227)(2,968)(777)(42,109)(7,463)(3,828)(1,216)(54,616)
UJV NOI allocable to COPT— — — — — 973 973 — — — 973 
NOI from real estate operations$43,126 $9,709 $6,182 $5,218 $5,807 $8,266 $78,308 $8,507 $3,376 $589 $90,780 
Additions to long-lived assets$11,511 $1,172 $— $1,205 $3,053 $— $16,941 $3,939 $121 $9 $21,010 
Transfers from non-operating properties$784 $25 $49,218 $— $1,288 $1,017 $52,332 $38,000 $— $— $90,332 
Six Months Ended June 30, 2022
         
Revenues from real estate operations$134,803 $36,679 $29,842 $16,254 $18,503 $16,645 $252,726 $29,203 $1,980 $3,597 $287,506 
Property operating expenses(49,283)(13,026)(14,592)(6,801)(7,366)(2,199)(93,267)(15,558)(975)(2,468)(112,268)
UJV NOI allocable to COPT— — — — — 2,160 2,160 — — — 2,160 
NOI from real estate operations$85,520 $23,653 $15,250 $9,453 $11,137 $16,606 $161,619 $13,645 $1,005 $1,129 $177,398 
Additions to long-lived assets$24,126 $4,730 $— $1,390 $459 $— $30,705 $7,894 $(35)$66 $38,630 
Transfers from non-operating properties$6,137 $1,237 $939 $6,298 $20,113 $86,876 $121,600 $301 $— $— $121,901 
Segment assets at June 30, 2022
$1,331,828 $488,597 $196,723 $172,873 $316,008 $435,252 $2,941,281 $534,257 $— $3,878 $3,479,416 
Six Months Ended June 30, 2021
         
Revenues from real estate operations$131,286 $31,811 $26,243 $16,843 $17,028 $16,857 $240,068 $31,673 $14,538 $3,308 $289,587 
Property operating expenses(46,385)(12,253)(14,380)(6,660)(5,522)(1,859)(87,059)(14,667)(7,651)(2,213)(111,590)
UJV NOI allocable to COPT— — — — — 1,890 1,890 — — — 1,890 
NOI from real estate operations$84,901 $19,558 $11,863 $10,183 $11,506 $16,888 $154,899 $17,006 $6,887 $1,095 $179,887 
Additions to long-lived assets$18,392 $1,470 $— $1,757 $3,311 $— $24,930 $7,948 $349 $13 $33,240 
Transfers from non-operating properties$1,140 $113 $49,269 $— $14,205 $2,002 $66,729 $38,357 $— $— $105,086 
Segment assets at June 30, 2021
$1,266,622 $403,442 $189,418 $174,633 $295,672 $353,797 $2,683,584 $520,126 $196,209 $3,639 $3,403,558 

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The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Segment revenues from real estate operations$143,246 $144,423 $287,506 $289,587 
Construction contract and other service revenues42,557 19,988 95,757 36,546 
Less: Revenues from discontinued operations (Note 4)
— (7,204)(1,980)(14,538)
Total revenues$185,803 $157,207 $381,283 $311,595 
 
The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands):

For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Segment property operating expenses$54,116 $54,616 $112,268 $111,590 
Less: Property operating expenses from discontinued operations (Note 4)
— (3,702)(971)(7,400)
Total property operating expenses$54,116 $50,914 $111,297 $104,190 

The following table reconciles UJV NOI allocable to COPT to equity in income of unconsolidated entities as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
UJV NOI allocable to COPT$1,080 $973 $2,160 $1,890 
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense(760)(711)(1,518)(1,404)
Add: Equity in (loss) income of unconsolidated non-real estate entities(2)(2)564 (4)
Equity in income of unconsolidated entities$318 $260 $1,206 $482 
 
As previously discussed, we provide real estate services such as property management, development and construction services primarily for our properties but also for third parties.  The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities.  Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue.  We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Construction contract and other service revenues$42,557 $19,988 $95,757 $36,546 
Construction contract and other service expenses(41,304)(19,082)(92,954)(34,875)
NOI from service operations$1,253 $906 $2,803 $1,671 

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The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to income (loss) from continuing operations as reported on our consolidated statements of operations (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
NOI from real estate operations$90,210 $90,780 $177,398 $179,887 
NOI from service operations1,253 906 2,803 1,671 
Interest and other income 1,818 2,228 3,711 4,093 
Credit loss (expense) recoveries(225)(193)91 714 
Gain on sales of real estate(19)40,233 (4)39,743 
Equity in income of unconsolidated entities318 260 1,206 482 
Income tax expense(4)(24)(157)(56)
Depreciation and other amortization associated with real estate operations(34,812)(34,732)(69,076)(69,232)
General, administrative and leasing expenses(8,355)(9,222)(16,899)(17,628)
Business development expenses and land carry costs(701)(1,372)(1,484)(2,466)
Interest expense(14,808)(15,942)(29,232)(33,461)
UJV NOI allocable to COPT included in equity in income of unconsolidated entities(1,080)(973)(2,160)(1,890)
Revenues from real estate operations from discontinued operations (Note 4)
— (7,204)(1,980)(14,538)
Property operating expenses from discontinued operations (Note 4)
— 3,702 971 7,400 
Loss on early extinguishment of debt— (25,228)(342)(58,394)
Income from continuing operations$33,595 $43,219 $64,846 $36,325 
 
The following table reconciles our segment assets to our consolidated total assets (in thousands): 
June 30,
2022		June 30,
2021
Segment assets$3,479,416 $3,403,558 
Operating properties lease liabilities included in segment assets29,412 29,927 
Non-operating property assets469,380 441,048 
Other assets206,985 177,499 
Total consolidated assets$4,185,193 $4,052,032 
 
The accounting policies of the segments are the same as those used to prepare our consolidated financial statements, except that discontinued operations are not presented separately for segment purposes.  In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization, gain on sales of real estate, loss on early extinguishment of debt and equity in income of unconsolidated entities not included in NOI to our real estate segments since they are not included in the measure of segment profit reviewed by management.  We also did not allocate general, administrative and leasing expenses, business development expenses and land carry costs, interest and other income, credit loss (expense) recoveries, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.
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15.    Construction Contract and Other Service Revenues

We disaggregate our construction contract and other service revenues by compensation arrangement and by service type as we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and other service revenues by compensation arrangement (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
2022202120222021
Construction contract revenue:
Guaranteed maximum price$36,503 $11,388 $84,426 $13,489 
Firm fixed price3,257 2,441 6,701 3,912 
Cost-plus fee2,255 5,847 3,561 18,333 
Other542 312 1,069 812 
$42,557 $19,988 $95,757 $36,546 

The table below reports construction contract and other service revenues by service type (in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
2022202120222021
Construction contract revenue:
Construction$41,829 $18,828 $94,398 $34,584 
Design186 848 290 1,150 
Other542 312 1,069 812 
$42,557 $19,988 $95,757 $36,546 

We recognized an insignificant amount of revenue in the three and six months ended June 30, 2022 and 2021 from performance obligations satisfied (or partially satisfied) in previous periods.

Accounts receivable related to our construction contract services is included in accounts receivable, net on our consolidated balance sheets. The beginning and ending balances of accounts receivable related to our construction contracts were as follows (in thousands):
For the Six Months Ended June 30,
20222021
Beginning balance$7,193 $13,997 
Ending balance$4,751 $10,003 

Contract assets, which we refer to herein as construction contract costs in excess of billings, net, are included in prepaid expenses and other assets, net on our consolidated balance sheets. The beginning and ending balances of our contract assets were as follows (in thousands):
For the Six Months Ended June 30,
20222021
Beginning balance$22,384 $10,343 
Ending balance$29,223 $9,766 

Contract liabilities are included in other liabilities on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):
For the Six Months Ended June 30,
20222021
Beginning balance$2,499 $4,610 
Ending balance$2,363 $2,320 
Portion of beginning balance recognized in revenue during:
Three months ended June 30$164 $2,070 
Six months ended June 30$190 $2,617 

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Revenue allocated to the remaining performance obligations under existing contracts as of June 30, 2022 that will be recognized as revenue in future periods was $62.4 million, of which we expect to recognize approximately $44 million in the six months ending December 31, 2022 and the remainder in 2023.

We have no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues as of June 30, 2022 and December 31, 2021. Credit loss expense on construction contracts receivable and unbilled construction revenue was insignificant for the three and six months ended June 30, 2022 and 2021.

16.    Share-Based Compensation
 
Restricted Shares
 
During the six months ended June 30, 2022, certain employees and non-employee members of our Board of Trustees (“Trustees”) were granted a total of 165,284 restricted common shares with an aggregate grant date fair value of $4.4 million (weighted average of $26.52 per share). Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. Restricted shares granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. During the six months ended June 30, 2022, forfeiture restrictions lapsed on 141,185 previously issued common shares; these shares had a weighted average grant date fair value of $26.28 per share, and the aggregate intrinsic value of the shares on the vesting dates was $3.7 million.

Profit Interest Units in COPLP (“PIUs”)

We granted two forms of PIUs: time-based PIUs (“TB-PIUs”); and performance-based PIUs (“PB-PIUs”). TB-PIUs are subject to forfeiture restrictions until the end of the requisite service period, at which time the TB-PIUs automatically convert into vested PIUs. PB-PIUs are subject to a market condition in that the number of earned awards are determined at the end of the performance period (as described further below) and then settled in vested PIUs. Vested PIUs carry substantially the same rights to redemption and distributions as non-PIU common units.

TB-PIUs

During the six months ended June 30, 2022, we granted 101,966 TB-PIUs with an aggregate grant date fair value of $2.7 million (weighted average of $26.39 per TB-PIU) to senior management team members and certain non-employee Trustees. TB-PIUs granted to senior management team members vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employee remains employed by us. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights. During the six months ended June 30, 2022, forfeiture restrictions lapsed on 73,056 previously issued TB-PIUs; these TB-PIUs had a weighted average grant date fair value of $26.01 per unit, and the aggregate intrinsic value of the TB-PIUs on the vesting date was $1.9 million.

PB-PIUs

On January 1, 2022, we granted certain senior management team members 231,838 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 2024 or the date of: (1) termination by us without cause, death or disability of the employee or constructive discharge of the employee (collectively, “qualified termination”); or (2) a sale event.  The number of earned awards at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return (“TSR”) relative to a peer group of companies, as set forth in the following schedule:
Percentile Rank Earned PB-PIUs Payout %
75th or greater 
100% of PB-PIUs granted
50th (target) 
50% of PB-PIUs granted
25th 
25% of PB-PIUs granted
Below 25th 
0% of PB-PIUs granted

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

At the end of the performance period, we will settle the award by issuing vested PIUs equal to: the number of earned awards; and the excess, if any, of (1) the aggregate distributions that would have been paid with respect to vested PIUs issued in settlement of the earned awards through the date of settlement had such vested PIUs been issued on the grant date over (2) the aggregate distributions made on the PB-PIUs during the performance period, divided by the price of our common shares on the
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settlement date. If a performance period ends due to a sale event or qualified termination, the number of earned awards is prorated based on the portion of the three-year performance period that has elapsed.  If employment is terminated by the employee or by us for cause, all PB-PIUs are forfeited.

These PB-PIU grants had an aggregate grant date fair value of $3.8 million ($32.87 per target-level award associated with the grants) which is being recognized over the performance period. The grant date fair value was computed using a Monte Carlo model that included the following assumptions: baseline common share value of $27.97; expected volatility for common shares of 31.7%; and a risk-free interest rate of 0.98%.  

Based on COPT’s TSR relative to its peer group of companies, for the 2019 PB-PIUs issued to executives that vested on December 31, 2021, we issued 156,104 PIUs in settlement of the PB-PIUs on February 1, 2022.

Deferred Share Awards

During the six months ended June 30, 2022, a non-employee Trustee was granted 3,941 deferred share awards with an aggregate grant date fair value of $100,000 ($25.41 per share). Deferred share awards vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. We settle deferred share awards by issuing an equivalent number of common shares upon vesting of the awards or a later date elected by the Trustee (generally upon cessation of being a Trustee).

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

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Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Numerator:  
Income from continuing operations$33,595 $43,219 $64,846 $36,325 
Income from continuing operations attributable to noncontrolling interests(1,285)(1,488)(2,369)(2,068)
Income from continuing operations attributable to share-based compensation awards for basic EPS(92)(134)(204)(247)
Numerator for basic EPS from continuing operations attributable to COPT common shareholders32,218 41,597 62,273 34,010 
Redeemable noncontrolling interests(30)(20)(69)7 
Adjustment to income from continuing operations attributable to share-based compensation awards for diluted EPS17 11 35 9 
Numerator for diluted EPS from continuing operations attributable to COPT common shareholders32,205 41,588 62,239 34,026 
Discontinued operations— 679 29,573 1,494 
Discontinued operations attributable to noncontrolling interests— (9)(421)(19)
Income from discontinued operations attributable to share-based compensation awards for diluted EPS— (2)(90)3 
Numerator for diluted EPS on net income attributable to COPT common shareholders$32,205 $42,256 $91,301 $35,504 
Denominator (all weighted averages):  
Denominator for basic EPS (common shares)112,082 111,974 112,052 111,931 
Dilutive effect of redeemable noncontrolling interests126 133 129 125 
Dilutive effect of share-based compensation awards429 297 427 280 
Denominator for diluted EPS (common shares) 112,637 112,404 112,608 112,336 
Basic EPS:
Income from continuing operations attributable to COPT common shareholders$0.29 $0.37 $0.55 $0.30 
Discontinued operations attributable to COPT common shareholders— 0.01 0.26 0.02 
Net income attributable to COPT common shareholders$0.29 $0.38 $0.81 $0.32 
Diluted EPS:
Income from continuing operations attributable to COPT common shareholders$0.29 $0.37 $0.55 $0.30 
Discontinued operations attributable to COPT common shareholders— 0.01 0.26 0.02 
Net income attributable to COPT common shareholders$0.29 $0.38 $0.81 $0.32 
 
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods (in thousands):
Weighted Average Shares Excluded from Denominator
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
Conversion of common units1,476 1,262 1,430 1,254 
Conversion of redeemable noncontrolling interests863 776 835 799 

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

•weighted average restricted shares and deferred share awards for the three months ended June 30, 2022 and 2021 of 404,000 and 420,000, respectively, and for the six months ended June 30, 2022 and 2021 of 401,000 and 419,000, respectively;
•weighted average TB-PIUs for the three months ended June 30, 2022 and 2021 of 191,000 and 166,000, respectively, and for the six months ended June 30, 2022 and 2021 of 182,000 and 148,000, respectively; and
•weighted average PB-PIUs for the three and six months ended June 30, 2021 of 228,000.
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18.    Commitments and Contingencies
 
Litigation and Claims
 
In the normal course of business, we are subject to legal actions and other claims.  We record losses for specific legal proceedings and claims when we determine that a loss is probable and the amount of loss can be reasonably estimated.  As of June 30, 2022, management believes that it is reasonably possible that we could recognize a loss of up to $3.8 million for certain municipal tax claims; while we do not believe this loss would materially affect our financial position or liquidity, it could be material to our results of operations. Management believes that it is also reasonably possible that we could incur losses pursuant to other claims but do not believe such losses would materially affect our financial position, liquidity or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
 
Environmental
 
We are subject to various Federal, state and local environmental regulations related to our property ownership and operation.  We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.

In connection with a lease and subsequent sale in 2008 and 2010 of three properties in Dayton, New Jersey, we agreed to provide certain environmental indemnifications limited to $19 million in the aggregate. We have insurance coverage in place to mitigate much of any potential future losses that may result from these indemnification agreements.
 
Tax Incremental Financing Obligation
 
Anne Arundel County, Maryland issued tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as the National Business Park.  These bonds had a remaining principal balance of approximately $31 million as of June 30, 2022. The real estate taxes on increases in assessed values post-bond issuance of properties in development districts encompassing the National Business Park are transferred to a special fund pledged to the repayment of the bonds. While we are obligated to fund, through a special tax, any future shortfalls between debt service of the bonds and real estate taxes available to repay the bonds, as of June 30, 2022, we do not expect any such future fundings will be required.


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Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
During the six months ended June 30, 2022, we: 

•finished the period with our portfolio 91.6% occupied and 93.6% leased;
•placed into service 363,000 square feet in three newly-developed properties that were 99.0% leased as of June 30, 2022; and
•sold our wholesale data center for $222.5 million, resulting in a gain on sale of $28.6 million. We used the proceeds to repay a portion of our Term Loan Facility and the remainder to repay borrowings under our Revolving Credit Facility.

With regard to our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Quarterly Report on Form 10-Q, amounts disclosed include information pertaining to properties owned through unconsolidated real estate joint ventures.

In 2022, the United States economy has experienced inflationary conditions, increased interest rates and certain supply-chain related shortages, and had two consecutive quarters of decreased gross domestic product. For us, to date:

•inflationary conditions have contributed to increased costs for certain property operating expenses and building materials, which affects our development of new properties and improvements for existing properties. The effect of these increased costs has not significantly impacted us to date primarily since we had contracts in place for much of our property operating expense, development and building improvement cash requirements. However, we are expecting:
•continued increases in property operating expenses, particularly from new or renewed contracts for service arrangements. Most of our leases obligate tenants to pay either their full share of a building’s operating expenses or their share to the extent such expenses exceed amounts established in their leases. We believe that these lease arrangements reduce our exposure to increases in property operating expenses;
•increased costs for contemplated new property development, which could adversely affect our ability to achieve targeted development yields to the extent increases in market rental rates do not keep pace, and therefore could also reduce our willingness to commence development of new properties;
•increased costs for tenant improvements associated with new leasing, which could reduce our willingness to enter into new leases to the extent increases in market rents do not keep pace with cost increases; and
•increased costs for contemplated other capital improvements, which could affect our willingness, or timeline, for completing such improvements;
•increased interest rates have not significantly affected us due in large part to debt refinancings that we completed in 2020 and 2021. Our debt is predominantly fixed rate and in the form of long-term unsecured notes, and we have no significant fixed rate debt maturing until 2026. Moreover, most of the effect of interest rate increases on our variable rate debt is hedged by interest rate swaps through the end of 2022; and
•supply-chain related shortages have not had a significant effect on our ability to execute our operating and development activities.

We discuss significant factors contributing to changes in our net income in the section below entitled “Results of Operations.” In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things:

•how we expect to generate and obtain cash for short and long-term capital needs; and
•material cash requirements for known contractual and other obligations.
 
You should refer to our consolidated financial statements and the notes thereto as you read this section.
 
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. 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,
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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, property operating and construction costs, and property values;
•adverse changes in the real estate markets, including, among other things, increased competition with other companies;
•governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;
•our ability to borrow on favorable terms;
•risks of property 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;
•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;
•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.

Occupancy and Leasing
 
The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:
June 30,
2022		December 31, 2021
Occupancy rates at period end  
Total91.6 %92.4 %
Defense/IT Locations:
Fort Meade/BW Corridor90.5 %90.0 %
NoVA Defense/IT88.2 %89.5 %
Lackland Air Force Base100.0 %100.0 %
Navy Support 91.3 %93.9 %
Redstone Arsenal87.7 %90.8 %
Data Center Shells100.0 %100.0 %
Total Defense/IT Locations92.9 %93.2 %
Regional Office80.2 %87.3 %
Other75.5 %66.2 %
Annualized rental revenue per occupied square foot at period end $32.76 $32.47 
Rentable
Square Feet		Occupied
Square Feet
 (in thousands)
December 31, 202121,710 20,070 
Vacated upon lease expiration (1)— (473)
Occupancy for new leases— 294 
Developed 363 352 
Other changes16 — 
June 30, 202222,089 20,243 
(1)Includes lease terminations and space reductions occurring in connection with lease renewals.

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During the six months ended June 30, 2022, we leased 1.4 million square feet, including: 676,000 square feet of renewal leasing, representing a tenant retention rate of 61.9%; 277,000 square feet of vacant space leasing; and 476,000 square feet of development leasing.

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 and rent associated with tenant funded landlord assets). Our computation of annualized rental revenue excludes the effect of lease incentives. 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. Tenant retention rate is a measure we use that represents the percentage of square feet renewed in a period relative to the total square feet scheduled to expire in that period; we include the effect of early renewals in this measure.

Results of Operations
 
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure, which includes real estate revenues and property operating expenses from continuing and discontinued operations and UJV NOI allocable to COPT.  We view our NOI from real estate operations as comprising the following primary categories:

•office and data center shell properties:
•stably owned and 100% operational throughout the current and prior year reporting periods being compared.  We define these as changes from “Same Properties”
•developed or redeveloped and placed into service that were not 100% operational throughout the current and prior year reporting periods; and
•disposed; and
•our wholesale data center that we sold on January 25, 2022.

In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities.  The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee.  The operating margins from these activities are small relative to the revenue.  We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
 
Since both of the measures discussed above exclude certain items includable in net income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to income from continuing operations reported on the consolidated statements of operations is provided in Note 14 to our consolidated financial statements.
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Comparison of Statements of Operations for the Three Months Ended June 30, 2022 and 2021

 For the Three Months Ended June 30,
 20222021Variance
 (in thousands)
Revenues   
Revenues from real estate operations$143,246 $137,219 $6,027 
Construction contract and other service revenues42,557 19,988 22,569 
Total revenues185,803 157,207 28,596 
Operating expenses   
Property operating expenses54,116 50,914 3,202 
Depreciation and amortization associated with real estate operations34,812 34,732 80 
Construction contract and other service expenses41,304 19,082 22,222 
General, administrative and leasing expenses8,355 9,222 (867)
Business development expenses and land carry costs701 1,372 (671)
Total operating expenses139,288 115,322 23,966 
Interest expense(14,808)(15,942)1,134 
Interest and other income1,818 2,228 (410)
Credit loss expense(225)(193)(32)
Gain on sales of real estate(19)40,233 (40,252)
Loss on early extinguishment of debt— (25,228)25,228 
Equity in income of unconsolidated entities318 260 58 
Income tax expense(4)(24)20 
Income from continuing operations33,595 43,219 (9,624)
Discontinued operations— 679 (679)
Net income $33,595 $43,898 $(10,303)

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NOI from Real Estate Operations
For the Three Months Ended June 30,
20222021Variance
(Dollars in thousands,
 except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding net lease termination revenue and provision for collectability losses$131,535 $130,229 $1,306 
Lease termination revenue, net399 1,094 (695)
Provision for collectability losses included in lease revenue(727)5 (732)
Other property revenue935 732 203 
Same Properties total revenues132,142 132,060 82 
Developed and redeveloped properties placed in service9,979 2,841 7,138 
Wholesale data center— 7,204 (7,204)
Dispositions(4)1,165 (1,169)
Other1,129 1,153 (24)
143,246 144,423 (1,177)
Property operating expenses
Same Properties(50,972)(48,557)(2,415)
Developed and redeveloped properties placed in service(2,291)(1,150)(1,141)
Wholesale data center50 (3,828)3,878 
Dispositions— (135)135 
Other(903)(946)43 
(54,116)(54,616)500 
UJV NOI allocable to COPT
Same Properties 924 923 1 
Retained interest in newly-formed UJVs156 50 106 
1,080 973 107 
NOI from real estate operations
Same Properties82,094 84,426 (2,332)
Developed and redeveloped properties placed in service7,688 1,691 5,997 
Wholesale data center50 3,376 (3,326)
Dispositions, net of retained interest in newly-formed UJVs152 1,080 (928)
Other226 207 19 
$90,210 $90,780 $(570)
Same Properties NOI from real estate operations by segment
Defense/IT Locations$76,319 $76,359 $(40)
Regional Office5,441 7,686 (2,245)
Other334 381 (47)
$82,094 $84,426 $(2,332)
Same Properties rent statistics
Average occupancy rate91.6 %93.7 %(2.1 %)
Average straight-line rent per occupied square foot (1)$6.42 $6.40 $0.02 
 
(1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the periods set forth above.

Our Same Properties pool consisted of 176 properties, comprising 92.1% of our portfolio’s square footage as of June 30, 2022. This pool of properties changed from the pool used for purposes of comparing 2021 and 2020 in our 2021 Annual Report on Form 10-K due to the addition of nine properties placed in service and 100% operational on or before January 1, 2021 and eight properties owned through an unconsolidated real estate joint venture that was formed in 2020.

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Regarding the changes in NOI from real estate operations reported above:

•the decrease for our Same Properties pool was attributable primarily to our Regional Office segment, which had lower occupancy in the current period due mostly to the scheduled lease expiration of a 140,000 square foot space;
•developed and redeveloped properties placed in service reflects the effect of ten properties placed in service in 2021 and 2022; and
•dispositions, net of retained interest in newly-formed UJVs reflects the effect of our sale of a 90% interest in two data center shells in 2021.

NOI from Service Operations
For the Three Months Ended June 30,
20222021Variance
(in thousands)
Construction contract and other service revenues$42,557 $19,988 $22,569 
Construction contract and other service expenses(41,304)(19,082)(22,222)
NOI from service operations$1,253 $906 $347 

Construction contract and other service revenues and expenses increased in the current period due primarily to a higher volume of construction activity for one 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.

Gain on sales of real estate

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

Loss on extinguishment of debt

The loss on early extinguishment of debt recognized in the prior period was attributable to our redemption of unsecured senior notes that we refinanced.

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Comparison of Statements of Operations for the Six Months Ended June 30, 2022 and 2021

 For the Six Months Ended June 30,
 20222021Variance
 (in thousands)
Revenues   
Revenues from real estate operations$285,526 $275,049 $10,477 
Construction contract and other service revenues95,757 36,546 59,211 
Total revenues381,283 311,595 69,688 
Operating expenses   
Property operating expenses111,297 104,190 7,107 
Depreciation and amortization associated with real estate operations69,076 69,232 (156)
Construction contract and other service expenses92,954 34,875 58,079 
General, administrative and leasing expenses16,899 17,628 (729)
Business development expenses and land carry costs1,484 2,466 (982)
Total operating expenses291,710 228,391 63,319 
Interest expense(29,232)(33,461)4,229 
Interest and other income3,711 4,093 (382)
Credit loss recoveries91 714 (623)
Gain on sales of real estate(4)39,743 (39,747)
Loss on early extinguishment of debt(342)(58,394)58,052 
Equity in income of unconsolidated entities1,206 482 724 
Income tax expense(157)(56)(101)
Income from continuing operations64,846 36,325 28,521 
Discontinued operations29,573 1,494 28,079 
Net income $94,419 $37,819 $56,600 
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NOI from Real Estate Operations
For the Six Months Ended June 30,
20222021Variance
(Dollars in thousands, 
except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue and provision for collectability losses$264,040 $261,386 $2,654 
Lease termination revenue, net620 2,456 (1,836)
Provision for collectability losses included in lease revenue(727)(119)(608)
Other property revenue1,794 1,239 555 
Same Properties total revenues265,727 264,962 765 
Developed and redeveloped properties placed in service17,506 5,250 12,256 
Wholesale data center1,980 14,538 (12,558)
Dispositions(3)2,846 (2,849)
Other2,296 1,991 305 
287,506 289,587 (2,081)
Property operating expenses
Same Properties(105,133)(100,212)(4,921)
Developed and redeveloped properties placed in service(4,356)(1,712)(2,644)
Wholesale data center(975)(7,651)6,676 
Dispositions1 (433)434 
Other(1,805)(1,582)(223)
(112,268)(111,590)(678)
UJV NOI allocable to COPT
Same Properties 1,850 1,840 10 
Retained interest in newly-formed UJVs310 50 260 
2,160 1,890 270 
NOI from real estate operations
Same Properties162,444 166,590 (4,146)
Developed and redeveloped properties placed in service13,150 3,538 9,612 
Wholesale data center1,005 6,887 (5,882)
Dispositions, net of retained interest in newly-formed UJVs308 2,463 (2,155)
Other491 409 82 
$177,398 $179,887 $(2,489)
Same Properties NOI from real estate operations by segment
Defense/IT Locations$149,905 $151,018 $(1,113)
Regional Office11,900 14,887 (2,987)
Other639 685 (46)
$162,444 $166,590 $(4,146)
Same Properties rent statistics
Average occupancy rate91.7 %93.6 %(1.9 %)
Average straight-line rent per occupied square foot (1)$12.87 $12.80 $0.07 
 
(1)Includes minimum base rents, net of abatements and lease incentives and excluding lease termination revenue, on a straight-line basis for the periods set forth above.

Regarding the changes in NOI from real estate operations reported above:

•the decrease for our Same Properties pool was attributable primarily to our Regional Office segment, which had lower occupancy in the current period due mostly to the scheduled lease expiration of a 140,000 square foot space;
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•developed and redeveloped properties placed in service reflects the effect of ten properties placed in service in 2021 and 2022; and
•dispositions, net of retained interest in newly-formed UJVs reflects the effect of our sale of a 90% interest in two data center shells in 2021.

NOI from Service Operations
For the Six Months Ended June 30,
20222021Variance
(in thousands)
Construction contract and other service revenues$95,757 $36,546 $59,211 
Construction contract and other service expenses(92,954)(34,875)(58,079)
NOI from service operations$2,803 $1,671 $1,132 

Construction contract and other service revenue and expenses increased in the current period due primarily to a higher volume of construction activity for one of our tenants.

Interest expense

Interest expense decreased due to lower weighted average interest rates in the current period resulting primarily from debt refinancings that we completed in 2021.

Gain on sales of real estate

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

Loss on extinguishment of debt

The loss on early extinguishment of debt recognized in the prior period was attributable to our purchase or redemption of unsecured senior notes that we refinanced.

Discontinued operations

Discontinued operations includes our wholesale data center, which we sold on January 25, 2022.

Funds from Operations
 
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales and impairment losses of real estate (net of associated income tax) and real estate-related depreciation and amortization. FFO also includes adjustments to net income for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe that we use the National Association of Real Estate Investment Trusts (“Nareit”) definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs.  We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains on sales and impairment losses of real estate 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 and (4) Basic FFO allocable to share-based compensation awards.  With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders.  Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions.  We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares.  We believe that net income is the most directly comparable GAAP measure to Basic FFO.  Basic FFO has essentially
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the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
 
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares.  We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below.  We believe that net income is the most directly comparable GAAP measure to Diluted FFO.  Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures.  Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs.  Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
 
Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO adjusted to 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 of noncontrolling interests resulting from capital events; and certain other expenses that we believe are not closely correlated with our operating performance.  This measure also includes adjustments for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe this to be a useful supplemental measure alongside Diluted FFO as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that net income is the most directly comparable GAAP measure to this non-GAAP measure.  This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
 
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged.  We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income available to common shareholders.  In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
 
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged.  We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results.  We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure.  This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
 
The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.

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The table below sets forth the computation of the above stated measures, and provides reconciliations to the GAAP measures associated with such measures:
For the Three Months Ended June 30, For the Six Months Ended June 30,
 2022202120222021
 (Dollars and shares in thousands, except per share data)
Net income $33,595 $43,898 $94,419 $37,819 
Real estate-related depreciation and amortization34,812 37,555 69,076 74,876 
Depreciation and amortization on UJVs allocable to COPT525 476 1,051 930 
Gain on sales of real estate19 (40,233)(28,560)(39,743)
FFO68,951 41,696 135,986 73,882 
FFO allocable to other noncontrolling interests(1,178)(1,302)(2,220)(2,329)
Basic FFO allocable to share-based compensation awards(357)(193)(719)(353)
Basic FFO available to common share and common unit holders67,416 40,201 133,047 71,200 
Redeemable noncontrolling interests4 11 (2)70 
Diluted FFO adjustments allocable to share-based compensation awards27 — 54 — 
Diluted FFO available to common share and common unit holders67,447 40,212 133,099 71,270 
Loss on early extinguishment of debt— 25,228 342 58,394 
Demolition costs on redevelopment and nonrecurring improvements— 302 — 302 
Executive transition costs137 — 137 — 
Diluted FFO comparability adjustments allocable to share-based compensation awards— (137)(2)(304)
Diluted FFO available to common share and common unit holders, as adjusted for comparability$67,584 $65,605 $133,576 $129,662 
Weighted average common shares112,082 111,974 112,052 111,931 
Conversion of weighted average common units1,476 1,262 1,430 1,254 
Weighted average common shares/units - Basic FFO per share113,558 113,236 113,482 113,185 
Dilutive effect of share-based compensation awards429 297 427 280 
Redeemable noncontrolling interests126 133 129 125 
Weighted average common shares/units - Diluted FFO per share and as adjusted for comparability114,113 113,666 114,038 113,590 
Diluted FFO per share$0.59 $0.35 $1.17 $0.63 
Diluted FFO per share, as adjusted for comparability$0.59 $0.58 $1.17 $1.14 
Denominator for diluted EPS112,637 112,404 112,608 112,336 
Weighted average common units1,476 1,262 1,430 1,254 
Denominator for diluted FFO per share and as adjusted for comparability114,113 113,666 114,038 113,590 

Property Additions
 
The table below sets forth the major components of our additions to properties for the six months ended June 30, 2022 (in thousands):
Development$138,409 
Tenant improvements on operating properties (1)16,207 
Capital improvements on operating properties13,584 
 $168,200 
(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 $708,000 when comparing the six months ended June 30, 2022 and 2021, which included a decrease in interest expense paid resulting from debt refinancings completed in 2021 that reduced our borrowing rates on unsecured senior notes and affected the timing of our interest payments on such notes.
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Net cash flow provided by investing activities increased $65.5 million when comparing the six months ended June 30, 2022 and 2021 due to $220.8 million in proceeds from properties sold in the current period (primarily pertaining to our wholesale data center) as compared to $114.4 million in the prior period (mostly from our sale of a 90% interest in two data center shells), partially offset by a $32.0 million increase in cash outlays for development and redevelopment of properties in the current period.
 
Net cash flow used in financing activities in the six months ended June 30, 2022 was $165.3 million, and included the following:

•net repayment of debt borrowings of $96.6 million; and
•dividends to common shareholders of $61.8 million.

Net cash flow used in financing activities in the six months ended June 30, 2021 was $107.7 million, and included the following:

•dividends to common shareholders of $61.7 million; and
•net repayment of debt borrowings of $37.4 million.

Supplemental Guarantor Information

As of June 30, 2022, COPLP had several series of unsecured senior notes outstanding that were issued in transactions registered with the SEC under the Securities Act of 1933, as amended. These notes are COPLP’s direct, senior unsecured and unsubordinated obligations and rank equally in right of payment with all of COPLP’s existing and future senior unsecured and unsubordinated indebtedness. However, these notes are effectively subordinated in right of payment to COPLP’s existing and future secured indebtedness. The notes are also effectively subordinated in right of payment to all existing and future liabilities and other indebtedness, whether secured or unsecured, of COPLP's subsidiaries. COPT fully and unconditionally guarantees COPLP’s obligations under these notes. COPT’s guarantees of these notes are senior unsecured obligations that rank equally in right of payment with other senior unsecured obligations of, or guarantees by, COPT. COPT itself does not hold any indebtedness, and its only material asset is its investment in COPLP.

As permitted under Rule 13-01(a)(4)(vi), we do not provide summarized financial information for the Operating Partnership since: the assets, liabilities, and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company; and we believe that inclusion of such summarized financial information would be repetitive and not provide incremental value to investors.

Liquidity and Capital Resources
 
As of June 30, 2022, we had $20.7 million in cash and cash equivalents.
 
We have a Revolving Credit Facility with an aggregate commitment by the lenders of $800.0 million, with the ability for us to increase such commitment to $1.25 billion, provided that there is no default under the facility and subject to the approval of the lenders. We use this facility to initially fund much of the cash requirements from our investing activities, including property development/redevelopment costs, as well as certain debt balloon payments due upon maturity.  We then subsequently pay down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and sales of interests in properties. The facility matures in March 2023, and may be extended by two six-month periods at our option, provided that there is no default under the facility and we pay an extension fee of 0.075% of the total availability under the facility for each extension period. As of June 30, 2022, the maximum borrowing capacity under this facility totaled $800.0 million, of which $619.0 million was available.

Our senior unsecured debt is rated investment grade by the three major rating agencies. We aim to maintain 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. We also use secured nonrecourse debt from institutional lenders and banks primarily for joint venture financings. In addition, we periodically raise equity when we access the public equity markets by issuing common shares and, to a lesser extent, preferred shares.
 
In May 2022, we replaced our 2018 ATM stock offering program with the 2022 ATM Program under which we 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, we may also, at our 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 issuing the shares and receiving the sale proceeds until a later date.

We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. However, we may dispose of interests in properties opportunistically or when market conditions otherwise warrant. In addition, we believe that we have the ability to raise additional equity by selling interests in data center shells through joint ventures.
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Our material cash requirements, including contractual and other obligations, include:

•property operating expenses, including future lease obligations from us as a lessee;
•construction contract expenses;
•general and administrative expenses;
•debt service, including interest expense;
•property development/redevelopment costs;
•tenant and capital improvements and leasing costs for operating properties (expected to total approximately $55 million during the remainder of 2022);
•debt balloon payments due upon maturity; and
•dividends to our shareholders.

We expect to use cash flow from operations during the remainder of 2022 and annually thereafter for the foreseeable future to fund all of these cash requirements except for debt balloon payments due upon maturity and a portion of property development/redevelopment costs.

During the remainder of 2022, we expect to spend approximately $165 million on development/redevelopment costs, most of which was contractually obligated as of June 30, 2022; we expect to fund these cash requirements using, in part, any available remaining cash flow from operations, with the balance funded primarily using borrowings under our Revolving Credit Facility, at least initially. As of June 30, 2022, we had $100 million in debt balloon payments due in December 2022 that we expect to repay using borrowings under our Revolving Credit Facility or proceeds from new long-term debt borrowings. As we use our Revolving Credit Facility to fund development/redevelopment costs and debt balloon payments, we intend to free up borrowing capacity by paying it down using proceeds from sales of interests in data center shells, property sales, new long-term debt borrowings and/or issuing common shares.

Beyond 2022, we expect to fund property development and redevelopment activities using, in part, any available remaining cash flow from operations, with most of the balance funded initially using borrowings under our Revolving Credit Facility.

We provide disclosure in our consolidated financial statements on our future lessee obligations (expected to be funded primarily by cash flow from operations) in Note 5 and future debt obligations (expected to be refinanced by new debt borrowings or funded by future equity issuances and/or sales of interests in properties) in Note 9.

Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio.  As of June 30, 2022, we were compliant with these covenants.

Recent Accounting Pronouncements

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

Item 3.           Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to certain market risks, one of the most predominant of which is a change in interest rates.  Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable rate debt.  Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.
 
The following table sets forth as of June 30, 2022 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):
 For the Periods Ending December 31, 
 20222023202420252026ThereafterTotal
Debt:      
Fixed rate debt (1)$1,445 $18,413 $29,443 $1,302 $436,140 $1,400,000 $1,886,743 
Weighted average interest rate3.84%3.94%4.42%3.23%2.38%2.58%2.58%
Variable rate debt (2)$100,270 $181,540 $540 $22,415 $10,160 $— $314,925 
Weighted average interest rate (3)2.31%2.38%2.57%2.61%2.51%—%2.38%
(1)Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $23.9 million.
(2)As of June 30, 2022, maturities in 2023 included $181.0 million that may be extended to 2024, subject to certain conditions.
(3)The amounts reflected above used interest rates as of June 30, 2022 for variable rate debt.

The fair value of our debt was $2.1 billion as of June 30, 2022.  If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $122 million as of June 30, 2022.
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See Note 10 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of June 30, 2022 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 $395,000 in the six months ended June 30, 2022 if the applicable LIBOR rate was 1% higher.
 
Item 4.           Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2022.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2022 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 our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
(b)    Change in Internal Control over Financial Reporting
 
No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II: OTHER INFORMATION
 
Item 1.           Legal Proceedings
 
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against us (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
 
Item 1A.         Risk Factors

 There have been no material changes to the risk factors included in our 2021 Annual Report on Form 10-K.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)    Not applicable

(b)    Not applicable

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

Not applicable

Item 5.           Other Information

(a)    Not applicable

(b)    Not applicable

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Item 6.           Exhibits
 
(a)    Exhibits:
 
EXHIBIT
NO.		 DESCRIPTION
 
 
 
 
101.INS XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document (filed herewith).
101.SCH Inline XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.LAB Inline XBRL Extension Labels Linkbase (filed herewith).
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES
 
Pursuant to the requirements 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:August 2, 2022By:/s/ Stephen E. Budorick
   Stephen E. Budorick
   President and Chief Executive Officer
    
    
Date:August 2, 2022By:/s/ Anthony Mifsud
   Anthony Mifsud
   Executive Vice President and Chief Financial Officer
45