COPT Defense Properties - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended	September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from		to

Commission file number 1-14023 (Corporate Office Properties Trust)

Commission file number 333-189188 (Corporate Office Properties, L.P.)

Corporate Office Properties Trust

Corporate Office Properties, L.P.

(Exact name of registrant as specified in its charter)



Corporate Office Properties Trust	Maryland	23-2947217
	(State or other jurisdiction of	(IRS Employer
	incorporation or organization)	Identification No.)

Corporate Office Properties, L.P.	Delaware	23-2930022
	(State or other jurisdiction of	(IRS Employer
	incorporation or organization)	Identification No.)



6711 Columbia Gateway Drive	Suite 300	Columbia	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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of beneficial interest, $0.01 par value	OFC	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Corporate Office Properties Trust ☒ Yes ☐ No

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

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

Corporate Office Properties Trust ☒ Yes ☐ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Corporate Office Properties Trust

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

Corporate Office Properties, L.P.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

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

Corporate Office Properties Trust ☐

Corporate Office Properties, L.P. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Corporate Office Properties Trust ☐ Yes ☒ No

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

As of October 25, 2019, 112,058,925 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2019 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.

COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of September 30, 2019, COPT owned 98.7% of the outstanding common units in COPLP; the remaining common units and all of the outstanding COPLP preferred units were owned by third parties. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the two operate as an interrelated, consolidated company. COPT is a REIT whose only material asset is its ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

Noncontrolling interests, shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements. COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships and limited liability companies (“LLCs”); the differences between shareholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real estate partnerships and LLCs. The only other

significant differences between the consolidated financial statements of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan and the corresponding liability to the plan’s participants that are held directly by COPT.

We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:


•	combined reports better reflect how management, investors and the analyst community view the business as a single operating unit;


•	combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;


•	combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and


•	combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:


•	consolidated financial statements;


•	the following notes to the consolidated financial statements:


•	Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;


•	Note 8, Prepaid Expenses and Other Assets, Net of COPT and subsidiaries and COPLP and subsidiaries; and


•	Note 16, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;


•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and


•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPLP.”

This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

TABLE OF CONTENTS

FORM 10-Q



		PAGE
PART I: FINANCIAL INFORMATION

Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	8
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	10
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	11
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	12
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	13
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	15
Notes to Consolidated Financial Statements (unaudited)		17
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4:	Controls and Procedures	52

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	53
Item 1A:	Risk Factors	53
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3:	Defaults Upon Senior Securities	53
Item 4:	Mine Safety Disclosures	53
Item 5:	Other Information	53
Item 6:	Exhibits	54

SIGNATURES		55

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)



	September 30, 2019			December 31, 2018
Assets
Properties, net:
Operating properties, net	$	2,713,900		$	2,847,265
Projects in development or held for future development	544,923			403,361
Total properties, net	3,258,823			3,250,626
Property - operating right-of-use assets	27,325			—
Property - finance right-of-use assets	40,467			—
Assets held for sale, net	61,728			—
Cash and cash equivalents	34,005			8,066
Investment in unconsolidated real estate joint ventures	49,408			39,845
Accounts receivable	37,623			26,277
Deferred rent receivable	88,001			89,350
Intangible assets on real estate acquisitions, net	29,454			43,470
Deferred leasing costs (net of accumulated amortization of $34,198 and $31,994, respectively)	55,839			50,191
Investing receivables	72,114			56,982
Prepaid expenses and other assets, net	100,582			91,198
Total assets	$	3,855,369		$	3,656,005
Liabilities and equity
Liabilities:
Debt, net	$	1,862,301		$	1,823,909
Accounts payable and accrued expenses	141,242			92,855
Rents received in advance and security deposits	27,975			30,079
Dividends and distributions payable	31,345			30,856
Deferred revenue associated with operating leases	7,665			9,125
Property - operating lease liabilities	16,686			—
Interest rate derivatives	34,825			5,459
Other liabilities	8,706			10,414
Total liabilities	2,130,745			2,002,697
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	28,677			26,260
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,059,175 at September 30, 2019 and 110,241,868 at December 31, 2018)	1,121			1,102
Additional paid-in capital	2,480,083			2,431,355
Cumulative distributions in excess of net income	(790,235		)	(846,808		)
Accumulated other comprehensive loss	(34,580		)	(238		)
Total Corporate Office Properties Trust’s shareholders’ equity	1,656,389			1,585,411
Noncontrolling interests in subsidiaries:
Common units in COPLP	19,365			19,168
Preferred units in COPLP	8,800			8,800
Other consolidated entities	11,393			13,669
Noncontrolling interests in subsidiaries	39,558			41,637
Total equity	1,695,947			1,627,048
Total liabilities, redeemable noncontrolling interests and equity	$	3,855,369		$	3,656,005

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues
Lease revenue	$	129,461		$	127,691		$	391,779		$	382,731
Other property revenue	1,273			1,297			3,716			3,697
Construction contract and other service revenues	28,697			8,423			87,946			53,202
Total revenues	159,431			137,411			483,441			439,630
Operating expenses
Property operating expenses	49,714			49,340			147,045			149,737
Depreciation and amortization associated with real estate operations	34,692			34,195			104,290			100,897
Construction contract and other service expenses	27,802			8,058			85,130			51,215
Impairment losses	327			—			327			—
General, administrative and leasing expenses	7,929			6,899			26,066			21,819
Business development expenses and land carry costs	964			1,567			2,947			4,415
Total operating expenses	121,428			100,059			365,805			328,083
Interest expense	(17,126		)	(19,181		)	(54,275		)	(56,910		)
Interest and other income	1,842			1,486			5,977			4,284
Gain on sales of real estate	—			—			84,469			(27		)
Income before equity in income of unconsolidated entities and income taxes	22,719			19,657			153,807			58,894
Equity in income of unconsolidated entities	396			374			1,207			1,120
Income tax benefit	131			291			113			173
Net income	23,246			20,322			155,127			60,187
Net income attributable to noncontrolling interests:
Common units in COPLP	(267		)	(380		)	(1,863		)	(1,532		)
Preferred units in COPLP	(157		)	(165		)	(487		)	(495		)
Other consolidated entities	(1,565		)	(1,080		)	(3,870		)	(2,879		)
Net income attributable to COPT common shareholders	$	21,257		$	18,697		$	148,907		$	55,281

Earnings per common share: (1)
Net income attributable to COPT common shareholders - basic	$	0.19		$	0.18		$	1.34		$	0.54
Net income attributable to COPT common shareholders - diluted	$	0.19		$	0.18		$	1.33		$	0.54

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	23,246		$	20,322		$	155,127		$	60,187
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives	(11,047		)	1,325			(33,437		)	7,913
Gain on interest rate derivatives recognized in interest expense	(307		)	(207		)	(1,434		)	(9		)
Other comprehensive (loss) income	(11,354		)	1,118			(34,871		)	7,904
Comprehensive income	11,892			21,440			120,256			68,091
Comprehensive income attributable to noncontrolling interests	(1,750		)	(1,647		)	(5,691		)	(5,145		)
Comprehensive income attributable to COPT	$	10,142		$	19,793		$	114,565		$	62,946

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)



	Common Shares		Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
For the Three Months Ended September 30, 2018
Balance at June 30, 2018 (103,260,495 common shares outstanding)	$	1,033	$	2,254,430		$	(822,270	)	$	9,012		$	66,280		$	1,508,485
Conversion of common units to common shares (1,841,810 shares)	18		26,503			—			—			(26,521		)	—
Common shares issued under forward equity sale agreements (2,750,000 shares)	27		80,076			—			—			—			80,103
Common shares issued under at-the-market program (991,664 shares)	10		29,722			—			—			—			29,732
Share-based compensation (4,254 shares issued, net of redemptions)	—		1,779			—			—			—			1,779
Redemption of vested equity awards	—		(86		)	—			—			—			(86		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(1,367		)	—			—			1,367			—
Comprehensive income	—		—			18,697			1,096			973			20,766
Dividends	—		—			(29,935		)	—			—			(29,935		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(538		)	(538		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(4		)	(4		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(573		)	—			—			—			(573		)
Balance at September 30, 2018 (108,848,223 common shares outstanding)	$	1,088	$	2,390,484		$	(833,508	)	$	10,108		$	41,557		$	1,609,729

For the Three Months Ended September 30, 2019
Balance at June 30, 2019 (111,949,887 common shares outstanding)	$	1,119	$	2,475,293		$	(780,667	)	$	(23,465	)	$	46,831		$	1,719,111
Conversion of common units to common shares (97,539 shares)	1		1,475			—			—			(1,476		)	—
Redemption of common units	—		—			—			—			(24		)	(24		)
Share-based compensation (11,749 shares issued, net of redemptions)	1		1,525			—			—			369			1,895
Redemption of vested equity awards	—		(53		)	—			—			—			(53		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		312			—			—			(312		)	—
Comprehensive income	—		—			21,257			(11,115		)	565			10,707
Dividends	—		—			(30,825		)	—			—			(30,825		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(517		)	(517		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(5,878		)	(5,878		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		1,531			—			—			—			1,531
Balance at September 30, 2019 (112,059,175 common shares outstanding)	$	1,121	$	2,480,083		$	(790,235	)	$	(34,580	)	$	39,558		$	1,695,947

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity (continued)

(Dollars in thousands)

(unaudited)



	Common Shares		Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total
For the Nine Months Ended September 30, 2018
Balance at December 31, 2017 (101,292,299 common shares outstanding)	$	1,013	$	2,201,047		$	(802,085	)	$	2,167		$	66,165		$	1,468,307
Cumulative effect of accounting change for adoption of hedge accounting guidance	—		—			(276		)	276			—			—
Balance at December 31, 2017, as adjusted	1,013		2,201,047			(802,361		)	2,443			66,165			1,468,307
Conversion of common units to common shares (1,895,627 shares)	19		27,263			—			—			(27,282		)	—
Common shares issued under forward equity sale agreements (4,527,000 shares)	45		132,285			—			—			—			132,330
Common shares issued under at-the-market program (991,664 shares)	10		29,722			—			—			—			29,732
Share-based compensation (141,633 shares issued, net of redemptions)	1		5,178			—			—			—			5,179
Redemption of vested equity awards	—		(1,611		)	—			—			—			(1,611		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(2,069		)	—			—			2,069			—
Comprehensive income	—		—			55,281			7,665			3,242			66,188
Dividends	—		—			(86,428		)	—			—			(86,428		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(2,626		)	(2,626		)
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(11		)	(11		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(1,331		)	—			—			—			(1,331		)
Balance at September 30, 2018 (108,848,223 common shares outstanding)	$	1,088	$	2,390,484		$	(833,508	)	$	10,108		$	41,557		$	1,609,729

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018 (110,241,868 common shares outstanding)	$	1,102	$	2,431,355		$	(846,808	)	$	(238	)	$	41,637		$	1,627,048
Conversion of common units to common shares (103,039 shares)	1		1,555			—			—			(1,556		)	—
Redemption of common units	—		—			—			—			(25		)	(25		)
Common shares issued under forward equity sale agreements (1,614,087 shares)	16		46,438			—			—			—			46,454
Share-based compensation (100,181 shares issued, net of redemptions)	2		4,574			—			—			954			5,530
Redemption of vested equity awards	—		(1,973		)	—			—			—			(1,973		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		(522		)	—			—			522			—
Comprehensive income	—		—			148,907			(34,342		)	2,962			117,527
Dividends	—		—			(92,334		)	—			—			(92,334		)
Distributions to owners of common and preferred units in COPLP	—		—			—			—			(1,620		)	(1,620		)
Contributions from noncontrolling interests in other consolidated entities	—		—			—			—			2,570			2,570
Distributions to noncontrolling interests in other consolidated entities	—		—			—			—			(5,886		)	(5,886		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(1,344		)	—			—			—			(1,344		)
Balance at September 30, 2019 (112,059,175 common shares outstanding)	$	1,121	$	2,480,083		$	(790,235	)	$	(34,580	)	$	39,558		$	1,695,947

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Revenues from real estate operations received	$	391,758		$	395,172
Construction contract and other service revenues received	65,813			27,450
Property operating expenses paid	(151,478		)	(150,039		)
Construction contract and other service expenses paid	(68,599		)	(71,034		)
General, administrative, leasing, business development and land carry costs paid	(23,806		)	(20,858		)
Interest expense paid	(52,818		)	(55,611		)
Lease incentives paid	(6,366		)	(5,985		)
Other	2,533			2,572
Net cash provided by operating activities	157,037			121,667
Cash flows from investing activities
Construction, development and redevelopment	(308,997		)	(105,852		)
Tenant improvements on operating properties	(16,466		)	(27,962		)
Other capital improvements on operating properties	(14,497		)	(13,357		)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties	129,783			—
Sale of properties	107,440			—
Distributions from unconsolidated real estate joint ventures	16,937			1,469
Investing receivables funded	(11,169		)	—
Leasing costs paid	(13,502		)	(6,277		)
Other	1,558			(707		)
Net cash used in investing activities	(108,913		)	(152,686		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	349,000			208,000
Other debt proceeds	32,002			11,267
Repayments of debt
Revolving Credit Facility	(342,000		)	(235,000		)
Scheduled principal amortization	(3,300		)	(3,161		)
Deferred financing costs paid	(405		)	(3,413		)
Payments on finance lease liabilities	(173		)	(15,379		)
Net proceeds from issuance of common shares	46,415			162,230
Common share dividends paid	(91,835		)	(84,349		)
Distributions paid to noncontrolling interests in COPLP	(1,661		)	(3,169		)
Distributions paid to noncontrolling interests in other consolidated entities	(5,882		)	(7		)
Redemption of vested equity awards	(1,973		)	(1,611		)
Other	(2,755		)	(6,288		)
Net cash (used in) provided by financing activities	(22,567		)	29,120
Net increase (decrease) in cash and cash equivalents and restricted cash	25,557			(1,899		)
Cash and cash equivalents and restricted cash
Beginning of period	11,950			14,831
End of period	$	37,507		$	12,932

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Reconciliation of net income to net cash provided by operating activities:
Net income	$	155,127		$	60,187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	105,686			102,440
Impairment losses	327			—
Amortization of deferred financing costs and net debt discounts	2,716			2,478
Increase in deferred rent receivable	(4,184		)	(3,687		)
Gain on sales of real estate	(84,469		)	27
Share-based compensation	4,979			4,735
Other	(4,296		)	(1,969		)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(9,483		)	12,404
Increase in prepaid expenses and other assets, net	(26,878		)	(3,810		)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	19,616			(48,649		)
Decrease in rents received in advance and security deposits	(2,104		)	(2,489		)
Net cash provided by operating activities	$	157,037		$	121,667
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	8,066		$	12,261
Restricted cash at beginning of period	3,884			2,570
Cash and cash equivalents and restricted cash at beginning of period	$	11,950		$	14,831

Cash and cash equivalents at end of period	$	34,005		$	9,492
Restricted cash at end of period	3,502			3,440
Cash and cash equivalents and restricted cash at end of period	$	37,507		$	12,932
Supplemental schedule of non-cash investing and financing activities:
Increase in accrued capital improvements, leasing and other investing activity costs	$	29,457		$	3,550
Finance right-of-use asset contributed by noncontrolling interest in joint venture	$	2,570		$	—
Operating right-of-use assets obtained in exchange for operating lease liabilities	$	255		$	—
Non-cash changes from property dispositions
Contribution of properties to unconsolidated real estate joint venture	$	99,288		$	—
Investment in unconsolidated real estate joint venture retained in disposition	$	26,500		$	—
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests	$	(34,951	)	$	7,802
Dividends/distributions payable	$	31,345		$	30,483
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	1,556		$	27,282
Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	522		$	2,069
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value	$	1,344		$	1,331

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except unit data)

(unaudited)



	September 30, 2019			December 31, 2018
Assets
Properties, net:
Operating properties, net	$	2,713,900		$	2,847,265
Projects in development or held for future development	544,923			403,361
Total properties, net	3,258,823			3,250,626
Property - operating right-of-use assets	27,325			—
Property - finance right-of-use assets	40,467			—
Assets held for sale, net	61,728			—
Cash and cash equivalents	34,005			8,066
Investment in unconsolidated real estate joint ventures	49,408			39,845
Accounts receivable	37,623			26,277
Deferred rent receivable	88,001			89,350
Intangible assets on real estate acquisitions, net	29,454			43,470
Deferred leasing costs (net of accumulated amortization of $34,198 and $31,994, respectively)	55,839			50,191
Investing receivables	72,114			56,982
Prepaid expenses and other assets, net	96,325			87,330
Total assets	$	3,851,112		$	3,652,137
Liabilities and equity
Liabilities:
Debt, net	$	1,862,301		$	1,823,909
Accounts payable and accrued expenses	141,242			92,855
Rents received in advance and security deposits	27,975			30,079
Distributions payable	31,345			30,856
Deferred revenue associated with operating leases	7,665			9,125
Property - operating lease liabilities	16,686			—
Interest rate derivatives	34,825			5,459
Other liabilities	4,449			6,546
Total liabilities	2,126,488			1,998,829
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests	28,677			26,260
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units held by limited partner, 352,000 preferred units outstanding at September 30, 2019 and December 31, 2018	8,800			8,800
Common units, 112,059,175 and 110,241,868 held by the general partner and 1,484,425 and 1,332,886 held by limited partners at September 30, 2019 and December 31, 2018, respectively	1,710,600			1,604,655
Accumulated other comprehensive loss	(34,891		)	(121		)
Total Corporate Office Properties, L.P.’s equity	1,684,509			1,613,334
Noncontrolling interests in subsidiaries	11,438			13,714
Total equity	1,695,947			1,627,048
Total liabilities, redeemable noncontrolling interests and equity	$	3,851,112		$	3,652,137

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per unit data)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues
Lease revenue	$	129,461		$	127,691		$	391,779		$	382,731
Other property revenue	1,273			1,297			3,716			3,697
Construction contract and other service revenues	28,697			8,423			87,946			53,202
Total revenues	159,431			137,411			483,441			439,630
Operating expenses
Property operating expenses	49,714			49,340			147,045			149,737
Depreciation and amortization associated with real estate operations	34,692			34,195			104,290			100,897
Construction contract and other service expenses	27,802			8,058			85,130			51,215
Impairment losses	327			—			327			—
General, administrative and leasing expenses	7,929			6,899			26,066			21,819
Business development expenses and land carry costs	964			1,567			2,947			4,415
Total operating expenses	121,428			100,059			365,805			328,083
Interest expense	(17,126		)	(19,181		)	(54,275		)	(56,910		)
Interest and other income	1,842			1,486			5,977			4,284
Gain on sales of real estate	—			—			84,469			(27		)
Income before equity in income of unconsolidated entities and income taxes	22,719			19,657			153,807			58,894
Equity in income of unconsolidated entities	396			374			1,207			1,120
Income tax benefit	131			291			113			173
Net income	23,246			20,322			155,127			60,187
Net income attributable to noncontrolling interests in consolidated entities	(1,565		)	(1,080		)	(3,870		)	(2,879		)
Net income attributable to COPLP	21,681			19,242			151,257			57,308
Preferred unit distributions	(157		)	(165		)	(487		)	(495		)
Net income attributable to COPLP common unitholders	$	21,524		$	19,077		$	150,770		$	56,813

Earnings per common unit: (1)
Net income attributable to COPLP common unitholders - basic	$	0.19		$	0.18		$	1.34		$	0.54
Net income attributable to COPLP common unitholders - diluted	$	0.19		$	0.18		$	1.33		$	0.54

(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	23,246		$	20,322		$	155,127		$	60,187
Other comprehensive (loss) income
Unrealized (loss) gain on interest rate derivatives	(11,047		)	1,325			(33,437		)	7,913
Gain on interest rate derivatives recognized in interest expense	(307		)	(207		)	(1,434		)	(9		)
Other comprehensive (loss) income	(11,354		)	1,118			(34,871		)	7,904
Comprehensive income	11,892			21,440			120,256			68,091
Comprehensive income attributable to noncontrolling interests	(1,464		)	(1,080		)	(3,769		)	(2,879		)
Comprehensive income attributable to COPLP	$	10,428		$	20,360		$	116,487		$	65,212

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)



	Limited Partner Preferred Units				Common Units					Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries
	Units	Amount			Units		Amount			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries			Total Equity
For the Three Months Ended September 30, 2018
Balance at June 30, 2018	352,000	$	8,800		106,457,556		$	1,477,575		$	9,235		$	12,875		$	1,508,485
Issuance of common units resulting from common shares issued under COPT forward equity sale agreements	—	—			2,750,000		80,103			—			—			80,103
Issuance of common units resulting from common shares issued under COPT at-the-market program	—	—			991,664		29,732			—			—			29,732
Share-based compensation (units net of redemption)	—	—			4,254		1,779			—			—			1,779
Redemptions of vested equity awards	—	—			—		(86		)	—			—			(86		)
Comprehensive income	—	165			—		19,077			1,118			406			20,766
Distributions to owners of common and preferred units	—	(165		)	—		(30,308		)	—			—			(30,473		)
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—			(4		)	(4		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—	—			—		(573		)	—			—			(573		)
Balance at September 30, 2018	352,000	$	8,800		110,203,474		$	1,577,299		$	10,353		$	13,277		$	1,609,729

For the Three Months Ended September 30, 2019
Balance at June 30, 2019	352,000	$	8,800		113,532,731		$	1,716,912		$	(23,638	)	$	17,037		$	1,719,111
Redemption of common units	—	—			(880	)	(24		)	—			—			(24		)
Share-based compensation (units net of redemption)	—	—			11,749		1,895			—			—			1,895
Redemptions of vested equity awards	—	—			—		(53		)	—			—			(53		)
Comprehensive income	—	157			—		21,524			(11,253		)	279			10,707
Distributions to owners of common and preferred units	—	(157		)	—		(31,185		)	—			—			(31,342		)
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—			(5,878		)	(5,878		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—	—			—		1,531			—			—			1,531
Balance at September 30, 2019	352,000	$	8,800		113,543,600		$	1,710,600		$	(34,891	)	$	11,438		$	1,695,947

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Equity (continued)

(Dollars in thousands)

(unaudited)



	Limited Partner Preferred Units				Common Units					Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries
	Units	Amount			Units		Amount			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries			Total Equity
For the Nine Months Ended September 30, 2018
Balance at December 31, 2017	352,000	$	8,800		104,543,177		$	1,445,022		$	2,173		$	12,312		$	1,468,307
Cumulative effect of accounting change for adoption of hedge accounting guidance	—	—			—		(276		)	276			—			—
Balance at December 31, 2017, as adjusted	352,000	8,800			104,543,177		1,444,746			2,449			12,312			1,468,307
Issuance of common units resulting from common shares issued under COPT forward equity sale agreements	—	—			4,527,000		132,330			—			—			132,330
Issuance of common units resulting from common shares issued under COPT at-the-market program	—	—			991,664		29,732			—			—			29,732
Share-based compensation (units net of redemption)	—	—			141,633		5,179			—			—			5,179
Redemptions of vested equity awards	—	—			—		(1,611		)	—			—			(1,611		)
Comprehensive income	—	495			—		56,813			7,904			976			66,188
Distributions to owners of common and preferred units	—	(495		)	—		(88,559		)	—			—			(89,054		)
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—			(11		)	(11		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—	—			—		(1,331		)	—			—			(1,331		)
Balance at September 30, 2018	352,000	$	8,800		110,203,474		$	1,577,299		$	10,353		$	13,277		$	1,609,729

For the Nine Months Ended September 30, 2019
Balance at December 31, 2018	352,000	$	8,800		111,574,754		$	1,604,655		$	(121	)	$	13,714		$	1,627,048
Redemption of common units	—	—			(924	)	(25		)	—			—			(25		)
Issuance of common units resulting from common shares issued under COPT forward equity sale agreements	—	—			1,614,087		46,454			—			—			46,454
Share-based compensation (units net of redemption)	—	—			355,683		5,530			—			—			5,530
Redemptions of vested equity awards	—	—			—		(1,973		)	—			—			(1,973		)
Comprehensive income	—	487			—		150,770			(34,770		)	1,040			117,527
Distributions to owners of common and preferred units	—	(487		)	—		(93,467		)	—			—			(93,954		)
Contributions from noncontrolling interests in subsidiaries	—	—			—		—			—			2,570			2,570
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—			(5,886		)	(5,886		)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—	—			—		(1,344		)	—			—			(1,344		)
Balance at September 30, 2019	352,000	$	8,800		113,543,600		$	1,710,600		$	(34,891	)	$	11,438		$	1,695,947

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Revenues from real estate operations received	$	391,758		$	395,172
Construction contract and other service revenues received	65,813			27,450
Property operating expenses paid	(151,478		)	(150,039		)
Construction contract and other service expenses paid	(68,599		)	(71,034		)
General, administrative, leasing, business development and land carry costs paid	(23,806		)	(20,858		)
Interest expense paid	(52,818		)	(55,611		)
Lease incentives paid	(6,366		)	(5,985		)
Other	2,533			2,572
Net cash provided by operating activities	157,037			121,667
Cash flows from investing activities
Construction, development and redevelopment	(308,997		)	(105,852		)
Tenant improvements on operating properties	(16,466		)	(27,962		)
Other capital improvements on operating properties	(14,497		)	(13,357		)
Proceeds from property dispositions
Distribution from unconsolidated real estate joint venture following contribution of properties	129,783			—
Sale of properties	107,440			—
Distributions from unconsolidated real estate joint ventures	16,937			1,469
Investing receivables funded	(11,169		)	—
Leasing costs paid	(13,502		)	(6,277		)
Other	1,558			(707		)
Net cash used in investing activities	(108,913		)	(152,686		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	349,000			208,000
Other debt proceeds	32,002			11,267
Repayments of debt
Revolving Credit Facility	(342,000		)	(235,000		)
Scheduled principal amortization	(3,300		)	(3,161		)
Deferred financing costs paid	(405		)	(3,413		)
Payments on finance lease liabilities	(173		)	(15,379		)
Net proceeds from issuance of common units	46,415			162,230
Common unit distributions paid	(93,001		)	(87,023		)
Distributions paid to noncontrolling interests in other consolidated entities	(5,882		)	(7		)
Redemption of vested equity awards	(1,973		)	(1,611		)
Other	(3,250		)	(6,783		)
Net cash (used in) provided by financing activities	(22,567		)	29,120
Net increase (decrease) in cash and cash equivalents and restricted cash	25,557			(1,899		)
Cash and cash equivalents and restricted cash
Beginning of period	11,950			14,831
End of period	$	37,507		$	12,932

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2019			2018
Reconciliation of net income to net cash provided by operating activities:
Net income	$	155,127		$	60,187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	105,686			102,440
Impairment losses	327			—
Amortization of deferred financing costs and net debt discounts	2,716			2,478
Increase in deferred rent receivable	(4,184		)	(3,687		)
Gain on sales of real estate	(84,469		)	27
Share-based compensation	4,979			4,735
Other	(4,296		)	(1,969		)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(9,483		)	12,404
Increase in prepaid expenses and other assets, net	(26,489		)	(4,080		)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	19,227			(48,379		)
Decrease in rents received in advance and security deposits	(2,104		)	(2,489		)
Net cash provided by operating activities	$	157,037		$	121,667
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	8,066		$	12,261
Restricted cash at beginning of period	3,884			2,570
Cash and cash equivalents and restricted cash at beginning of period	$	11,950		$	14,831

Cash and cash equivalents at end of period	$	34,005		$	9,492
Restricted cash at end of period	3,502			3,440
Cash and cash equivalents and restricted cash at end of period	$	37,507		$	12,932
Supplemental schedule of non-cash investing and financing activities:
Increase in accrued capital improvements, leasing and other investing activity costs	$	29,457		$	3,550
Finance right-of-use asset contributed by noncontrolling interest in joint venture	$	2,570		$	—
Operating right-of-use assets obtained in exchange for operating lease liabilities	$	255		$	—
Non-cash changes from property dispositions
Contribution of properties to unconsolidated real estate joint venture	$	99,288		$	—
Investment in unconsolidated real estate joint venture retained in disposition	$	26,500		$	—
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income and noncontrolling interests	$	(34,951	)	$	7,802
Distributions payable	$	31,345		$	30,483
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value	$	1,344		$	1,331

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government 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 September 30, 2019, our properties included the following:


•	169 properties totaling 19.0 million square feet comprised of 15.3 million square feet in 147 office properties and 3.7 million square feet in 22 single-tenant data center shell properties (“data center shells”). We owned 13 of these data center shells through unconsolidated real estate joint ventures;


•	a wholesale data center with a critical load of 19.25 megawatts;


•	15 properties under construction or redevelopment (ten office properties and five data center shells) that we estimate will total approximately 2.6 million square feet upon completion, including two partially-operational properties; and


•	approximately 900 acres of land controlled for future development that we believe could be developed into approximately 11.2 million square feet and 150 acres of other land.

COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Equity interests in COPLP are in the form of common and preferred units. As of September 30, 2019, COPT owned 98.7% of the outstanding COPLP common units (“common units”); the remaining common units and all of the outstanding COPLP preferred units (“preferred units”) were owned by third parties. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as those of COPT common shareholders. However, COPLP’s common units include a special class of unit referred to as profit interest units (“PIUs”) originating from certain share-based compensation awards issued to executives (described further in Note 15) that are subject to vesting and certain tax event criteria, and accordingly may carry different rights to redemption and distributions than non-PIU common units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers; similarly, although COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.

2. Summary of Significant Accounting Policies

Basis of Presentation

The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2018 included in our 2018 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 2018 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

Reclassification

We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity, including reclassifications of our revenue from real estate operations in connection with our adoption of new lease guidance described below.

Recent Accounting Pronouncements

In February 2016, the FASB issued guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases. This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. The resulting classification determines whether the lease expense is recognized based on an effective interest method or straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This guidance requires lessors of real estate to account for leases using an approach substantially equivalent to guidance previously in place for operating leases, direct financing leases and sales-type leases. We adopted this guidance on January 1, 2019 using a modified retrospective transition approach under which we elected to apply the guidance effective January 1, 2019 and not adjust prior comparative reporting periods (except for our presentation of lease revenue discussed below). We elected to apply a package of practical expedients that enabled us to carry forward upon adoption our historical assessments of: expired or existing leases regarding their lease classification and deferred recognition of non-incremental direct leasing costs; and whether any expired or existing contracts are, or contain, leases. We also elected a practical expedient that enabled us to avoid the need to assess whether expired or existing land easements not previously accounted for as leases are, or contain, a lease. In addition, we elected a practical expedient for our rental properties (as lessor) to avoid separating non-lease components that otherwise would need to be accounted for under the recently-adopted revenue accounting guidance (such as tenant reimbursements of property operating expenses) from the associated lease component since (1) the non-lease components have the same timing and pattern of transfer as the associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease; this enables us to account for the combination of the lease component and non-lease components as an operating lease since the lease component is the predominant component of the combined components. Below is a summary of the primary changes in our accounting and reporting that resulted from our adoption of this guidance:


•	Property leases in which we are the lessor:


◦	Deferral of non-incremental leasing costs: For new or extended tenant leases, we no longer defer recognition of non-incremental leasing costs that we would have deferred under prior accounting guidance (refer to our 2018 Annual Report on Form 10-K in which we reported amounts deferred in 2018, 2017 and 2016).

◦

Change in presentation of revenue: Due to our adoption of the practical expedient discussed above to not separate non-lease component revenue from the associated lease component, we are aggregating revenue from our lease components and non-lease components (comprised predominantly of tenant operating expense reimbursements) into the line entitled “lease revenue.” We are reporting other revenue from our properties in the line entitled “other property revenue.” We recast prior periods for these changes in presentation.


◦	Changes in assessment of lease revenue collectability: Changes in our assessment of lease revenue collectability that previously would have resulted in charges to bad debt expense under prior guidance are being recognized as an

adjustment to rental revenue under the new guidance. Such amounts recognized by us in prior periods were not significant.


◦	Operating expenses paid directly by tenants to third parties: Operating expenses paid directly by tenants to third parties (primarily for real estate taxes) and revenue associated with such tenant payments that would have been recognized under prior guidance will no longer be reported on our Statement of Operations. Such amounts recognized by us in prior periods were not significant.


•	Leases (the most significant of which are ground leases) in which we are the lessee:

◦

Balance sheet presentation of property operating lease right-of-use assets: Upon adoption on January 1, 2019, we recognized property right-of-use assets and offsetting lease liabilities for existing operating leases totaling $16 million for the present value of minimum lease payments under these leases, and also reclassified an additional $11 million in amounts previously presented elsewhere on our balance sheet in connection with these leases to the right-of-use assets. We will recognize additional right-of-use assets and lease liabilities as we enter into new operating leases.

◦

Balance sheet presentation of property finance lease right-of-use assets: Property right-of-use assets of finance leases that previously were presented as properties under prior guidance are being presented as property finance right-of-use assets under the new guidance. As a result, we reclassified $38 million in assets from properties to property finance right-of-use assets upon adoption on January 1, 2019.


◦	Segment assets: We changed our definition of segment assets used for our reportable segments to include property right-of-use assets associated with operating properties, net of related lease liabilities.

In June 2016, the FASB issued guidance that changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current incurred loss model with an expected loss approach, resulting in a more timely recognition of such losses. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g. loan commitments). Under the new guidance, an entity will recognize its estimate of expected credit losses as an allowance, as the guidance requires that financial assets be measured on an amortized cost basis and to be presented at the net amount expected to be collected. The guidance is effective for us beginning January 1, 2020, with early adoption permitted after December 2018. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

In August 2018, the FASB issued guidance that modifies disclosure requirements for fair value measurements. This guidance is effective for us beginning January 1, 2020. Early adoption is permitted for this guidance, and entities are permitted to early adopt with respect to any removed or modified disclosures while delaying adoption of additional disclosure requirements until the effective date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. FASB guidance did not previously address the accounting for such implementation costs. The guidance is effective for us beginning January 1, 2020, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

3. Fair Value Measurements

Recurring Fair Value Measurements

COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on COPT’s consolidated balance sheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $4.3 million as of September 30, 2019, and is included in the line entitled “prepaid expenses and other assets, net” on COPT’s consolidated balance sheets. 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 included in the line entitled “other liabilities” on COPT’s consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.

The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and

implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of September 30, 2019, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 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 values of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible and may not be a prudent management decision.

For additional fair value information, please refer to Note 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives.

COPT and Subsidiaries

The table below sets forth financial assets and liabilities of COPT and subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds	$	4,232	$	—	$	—	$	4,232
Other	25		—		—		25
Interest rate derivatives (1)	—		32		—		32
Total assets	$	4,257	$	32	$	—	$	4,289
Liabilities:
Deferred compensation plan liability (2)	$	—	$	4,257	$	—	$	4,257
Interest rate derivatives	—		34,825		—		34,825
Total liabilities	$	—	$	39,082	$	—	$	39,082

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

(2) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.

COPLP and Subsidiaries

The table below sets forth financial assets and liabilities of COPLP and subsidiaries that are accounted for at fair value on a recurring basis as of September 30, 2019 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):



Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs(Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Interest rate derivatives (1)	$	—	$	32	$	—	$	32
Liabilities:
Interest rate derivatives	$	—	$	34,825	$	—	$	34,825

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

Nonrecurring Fair Value Measurements

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

4. Properties, Net

Operating properties, net consisted of the following (in thousands):



	September 30, 2019			December 31, 2018
Land	$	460,110		$	503,274
Buildings and improvements	3,233,143			3,241,894
Less: Accumulated depreciation	(979,353		)	(897,903		)
Operating properties, net	$	2,713,900		$	2,847,265

As of September 30, 2019, we were under contract to sell controlling interests in two data center shell properties in Virginia; we expect this sale to occur in the fourth quarter of 2019. The table below sets forth the components of assets held for sale on our consolidated balance sheet as of September 30, 2019 for these properties (in thousands):



Properties, net	$	60,566
Deferred rent receivable	1,128
Deferred leasing costs, net	34
Assets held for sale, net	$	61,728

2019 Dispositions

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

2019 Construction Activities

During the nine months ended September 30, 2019, we placed into service 794,000 square feet in seven newly-constructed properties (including one partially-operational property) and 10,000 in one partially-operational property under redevelopment. As of September 30, 2019, we had 14 properties under construction (including one partially-operational property), or which we were contractually committed to construct, that we estimate will total 2.5 million square feet upon completion and one partially-operational property under redevelopment that we estimate will total 106,000 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. As of September 30, 2019, these leases, which may encompass all, or a portion of, a property, had remaining terms spanning from one month to 15 years and averaging approximately five years. These leases usually include options under which the tenant may renew its lease based on market rates at the time of renewal, which are then typically subject to further negotiation. These leases occasionally provide the tenant with an option to terminate its lease early usually for a defined termination fee. While a significant portion of our portfolio is leased to the United States Government, and the majority of those leases consist of a series of one-year renewal options, or provide for early termination rights, we have concluded that exercise of existing renewal options, or continuation of such leases without exercising early termination rights, is reasonably assured for virtually all of these leases.

Most of our lease revenue is from fixed contractual payments defined under the lease that, in most cases, escalate annually over the term of the lease. Our lease revenue also includes variable lease payments predominantly for tenant reimbursements of property operating expenses and lease termination fees. Property operating expense reimbursement structures vary, with some tenants responsible for all of a property’s expenses, while others are responsible for their share of a property’s expense only to the extent such expenses exceed amounts defined in the lease (which are derived from the property’s historical expense levels). Lease termination fees in most cases result from a tenant’s exercise of an existing right under a lease, and are usually equal to a defined percentage of the remaining rents due under the lease and/or the remaining unamortized lease origination costs (including tenant improvements and lease commissions).

The table below sets forth our allocation of lease revenue recognized between fixed contractual payments and variable lease payments (in thousands):



Lease revenue	For the Three Months Ended September 30, 2019		For the Nine Months Ended September 30, 2019
Fixed contractual payments	$	102,389	$	311,226
Variable lease payments	27,072		80,553
	$	129,461	$	391,779

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



Year Ending December 31,	September 30, 2019		December 31, 2018
2019 (1)	$	102,289	$	400,617
2020	378,897		337,646
2021	322,194		280,369
2022	284,935		246,329
2023	231,613		194,888
Thereafter	605,681		523,932
	$	1,925,609	$	1,983,781

(1) As of September 30, 2019, represents the three months ending December 31, 2019.

Lessee arrangements

We lease from third parties land underlying certain properties that we are operating or developing. These ground leases have long durations with remaining terms ranging from 30 years (excluding extension options) to 97 years. As of September 30, 2019, our balance sheet included $67.8 million in right-of-use assets associated with ground leases that included:


•	$37.8 million for land on which we are developing an office property in Washington, DC through our Stevens Investors, LLC joint venture, virtually all of the rent on which was previously paid. This lease has a 97-year remaining term, and we possess a bargain purchase option that we expect to exercise in 2020;


•	$10.3 million for land underlying office properties in Washington, DC under two leases with remaining terms of approximately 80 years;


•	$6.5 million for land underlying a parking garage in Baltimore, Maryland under a lease with a remaining term of 29 years and an option to renew for an additional 49 years that was included in the term used in determining the asset balance;


•	$6.7 million for land in a research park in College Park, Maryland under four leases through our M Square Associates, LLC joint venture all of the rent on which was previously paid. These leases had remaining terms ranging from 63 to 75 years;


•	$4.2 million for land in a business park in Huntsville, Alabama under nine leases through our LW Redstone Company, LLC joint venture, with remaining terms ranging from 44 to 50 years and options to renew for an additional 25 years that were not included in the term used in determining the asset balance; and


•	$2.3 million for other land in our Fort Meade/BW Corridor sub-segment under two leases with remaining terms of approximately 49 years all of the rent on which was previously paid.

As of September 30, 2019, our balance sheet also included right-of-use lease assets totaling $1.2 million in connection with vehicles and office equipment that we lease from third parties.

In determining operating right-of-use assets and lease liabilities for our existing operating leases upon our adoption of the new lease guidance discussed further in Note 2, as well as for new operating leases in the current period, we were required to estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. Since the terms under our ground leases are significantly longer than the terms of borrowings available to us on a fully-collateralized basis, our estimate of this rate required significant judgment, and considered factors such as interest rates available to us on a fully-collateralized basis for shorter-termed debt and U.S. Treasury rates.

Our right-of-use assets consisted of the following (in thousands):



Leases	Balance Sheet Location	September 30, 2019
Right-of-use assets
Operating leases - Property	Property - operating right-of-use assets	$	27,325
Finance leases
Property	Property - finance right-of-use assets	40,467
Vehicles and office equipment	Prepaid expenses and other assets, net	1,193
Total finance lease right-of-use assets		41,660

Total right-of-use assets		$	68,985

Lease liabilities consisted of the following (in thousands):



Leases	Balance Sheet Location	September 30, 2019
Lease liabilities
Operating leases - Property	Property - operating lease liabilities	$	16,686
Finance leases	Other liabilities	1,165

Total lease liabilities		$	17,851

The table below sets forth the weighted average terms and discount rates of our leases as of September 30, 2019:



Weighted average remaining lease term
Operating leases	69 years
Finance leases	1 year
Weighted average discount rate
Operating leases	7.35	%
Finance leases	3.11	%

The table below presents our total lease cost (in thousands):



Lease cost	Statement of Operations Location	For the Three Months Ended September 30, 2019		For the Nine Months Ended September 30, 2019
Operating lease cost
Property leases	Property operating expenses	$	413	$	1,239
Vehicles and office equipment	General, administrative and leasing expenses	18		53
Finance lease cost
Amortization of vehicles and office equipment right-of-use assets	General, administrative and leasing expenses	114		343
Amortization of property right-of-use assets	Property operating expenses	9		21
Interest on lease liabilities	Interest expense	3		10
		$	557	$	1,666

The table below presents the effect of lease payments on our consolidated statement of cash flows (in thousands):



Supplemental cash flow information	For the Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	804
Operating cash flows for financing leases	$	10
Financing cash flows for financing leases	$	173

Payments on leases as of September 30, 2019 were due as follows (in thousands):



Year Ending December 31,	Operating leases			Finance leases			Total
2019 (1)	$	279		$	52		$	331
2020	1,126			862			1,988
2021	1,111			202			1,313
2022	1,129			64			1,193
2023	1,134			—			1,134
Thereafter	99,187			—			99,187
Total lease payments	103,966			1,180			105,146
Less: Amount representing interest	(87,280		)	(15		)	(87,295		)
Lease liability	$	16,686		$	1,165		$	17,851

(1) Represents the three months ending December 31, 2019.

Future minimum rental payments on leases as of December 31, 2018 were due as follows (in thousands):



Year Ending December 31,	Operating leases		Finance leases			Total
2019	$	1,101	$	219		$	1,320
2020	1,110		844			1,954
2021	1,094		184			1,278
2022	1,115		49			1,164
2023	1,119		—			1,119
Thereafter	83,373		—			83,373
Total lease payments	$	88,912	1,296			90,208
Less: Amount representing interest	N/A		(24		)	(24		)
Total	N/A		$	1,272		$	90,184

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 September 30, 2019 (dollars in thousands):



				September 30, 2019 (1)
	Date Acquired	Nominal Ownership %		Total Assets		Encumbered Assets		Total Liabilities
Entity	Date Acquired	Nominal Ownership %	Location	Total Assets		Encumbered Assets		Total Liabilities
LW Redstone Company, LLC	3/23/2010	85%	Huntsville, Alabama	$	219,914	$	74,333	$	69,519
M Square Associates, LLC	6/26/2007	50%	College Park, Maryland	84,662		64,539		57,315
Stevens Investors, LLC	8/11/2015	95%	Washington, DC	111,994		111,467		42,464
				$	416,570	$	250,339	$	169,298


(1)	Excludes amounts eliminated in consolidation.

Unconsolidated Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in unconsolidated real estate joint ventures accounted for using the equity method of accounting (dollars in thousands):



	Date Acquired	Nominal Ownership %	Number of Properties	Carrying Value of Investment (1)
Entity	Date Acquired	Nominal Ownership %	Number of Properties	September 30, 2019		December 31, 2018
GI-COPT DC Partnership LLC	7/21/2016	50%	6	$	38,273	$	39,845
BREIT COPT DC JV LLC	6/20/2019	10%	7	11,135		—
			13	$	49,408	$	39,845

(1) Included in the line entitled “investment in unconsolidated real estate joint ventures” on our consolidated balance sheets.

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

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

7. Investing Receivables

Investing receivables, including accrued interest thereon, consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Notes receivable from the City of Huntsville	$	58,021	$	53,961
Other investing loans receivable	14,093		3,021
	$	72,114	$	56,982

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

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

8. Prepaid Expenses and Other Assets, Net

Prepaid expenses and other assets, net consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Lease incentives, net	$	26,179	$	21,258
Prepaid expenses	25,158		25,658
Construction contract costs incurred in excess of billings	16,743		3,189
Furniture, fixtures and equipment, net (1)	7,931		8,630
Non-real estate equity investments	6,153		5,940
Deferred financing costs, net (2)	3,914		4,733
Restricted cash	3,502		3,884
Deferred tax asset, net (3)	2,294		2,084
Interest rate derivatives	32		5,617
Other assets	4,419		6,337
Total for COPLP and subsidiaries	96,325		87,330
Marketable securities in deferred compensation plan	4,257		3,868
Total for COPT and subsidiaries	$	100,582	$	91,198

(1) Includes $1.2 million in finance right-of-use assets as of September 30, 2019.

(2) Represents deferred costs, net of accumulated amortization, attributable to our Revolving Credit Facility and interest rate derivatives.

(3) Includes a valuation allowance of $2.0 million as of September 30, 2019 and $2.7 million as of December 31, 2018.

9. Debt, Net

Our debt consisted of the following (dollars in thousands):



	Carrying Value (1) as of
	September 30, 2019		December 31, 2018		September 30, 2019
	September 30, 2019		December 31, 2018		Stated Interest Rates	Scheduled Maturity
Mortgage and Other Secured Debt:
Fixed rate mortgage debt (2)	$	144,270	$	147,141	3.82% - 4.62% (3)	2023-2026
Variable rate secured debt (4)	55,923		23,282		LIBOR + 1.45% to 2.35% (5)	2020-2026
Total mortgage and other secured debt	200,193		170,423
Revolving Credit Facility	220,000		213,000		LIBOR + 0.775% to 1.45% (6)	March 2023 (7)
Term Loan Facility (8)	248,598		248,273		LIBOR + 0.85% to 1.65% (9)	2022
Unsecured Senior Notes
3.600%, $350,000 aggregate principal	348,319		347,986		3.60% (10)	May 2023
5.250%, $250,000 aggregate principal	247,521		247,136		5.25% (11)	February 2024
3.700%, $300,000 aggregate principal	299,196		298,815		3.70% (12)	June 2021
5.000%, $300,000 aggregate principal	297,403		297,109		5.00% (13)	July 2025
Unsecured note payable	1,071		1,167		0% (14)	May 2026
Total debt, net	$	1,862,301	$	1,823,909


(1)	The carrying values of our debt other than the Revolving Credit Facility reflect net deferred financing costs of $6.3 million as of September 30, 2019 and $7.2 million as of December 31, 2018.


(2)	Certain of the fixed rate mortgages carry interest rates that, upon assumption, were above or below market rates and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $233,000 as of September 30, 2019 and $281,000 as of December 31, 2018.


(3)	The weighted average interest rate on our fixed rate mortgage debt was 4.16% as of September 30, 2019.


(4)	Includes a construction loan with $76.9 million in remaining borrowing capacity as of September 30, 2019.


(5)	The weighted average interest rate on our variable rate secured debt was 4.18% as of September 30, 2019.


(6)	The weighted average interest rate on the Revolving Credit Facility was 3.05% as of September 30, 2019.


(7)	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.

(8)

As of September 30, 2019, we have the ability to borrow an additional $150.0 million in the aggregate under this facility, provided that there is no default under the facility and subject to the approval of the lenders. In addition, in connection with our Revolving Credit Facility, we 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.


(9)	The interest rate on this loan was 3.35% as of September 30, 2019.


(10)	The carrying value of these notes reflects an unamortized discount totaling $1.2 million as of September 30, 2019 and $1.4 million as of December 31, 2018. The effective interest rate under the notes, including amortization of the issuance costs, was 3.70%.


(11)	The carrying value of these notes reflects an unamortized discount totaling $2.2 million as of September 30, 2019 and $2.6 million as of December 31, 2018. The effective interest rate under the notes, including amortization of the issuance costs, was 5.49%.


(12)	The carrying value of these notes reflects an unamortized discount totaling $638,000 as of September 30, 2019 and $943,000 as of December 31, 2018. The effective interest rate under the notes, including amortization of the issuance costs, was 3.85%.

(13) The carrying value of these notes reflects an unamortized discount totaling $2.2 million as of September 30, 2019 and $2.4 million as of December 31, 2018. The effective interest rate under the notes, including amortization of the issuance costs, was 5.15%.


(14)	This note carries an interest rate that, upon assumption, was below market rates and it therefore was recorded at its fair value based on applicable effective interest rates. The carrying value of this note reflects an unamortized discount totaling $240,000 as of September 30, 2019 and $294,000 as of December 31, 2018.

All debt is owed by COPLP. While COPT is not directly obligated by any debt, it has guaranteed COPLP’s Revolving Credit Facility, Term Loan Facilities and Unsecured Senior Notes.

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

We capitalized interest costs of $2.9 million in the three months ended September 30, 2019, $1.4 million in the three months ended September 30, 2018, $7.3 million in the nine months ended September 30, 2019 and $4.2 million in the nine months ended September 30, 2018.

The following table sets forth information pertaining to the fair value of our debt (in thousands):



	September 30, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Fixed-rate debt
Unsecured Senior Notes	$	1,192,439	$	1,226,437	$	1,191,046	$	1,219,603
Other fixed-rate debt	145,341		150,500		148,308		147,106
Variable-rate debt	524,521		532,161		484,555		486,497
	$	1,862,301	$	1,909,098	$	1,823,909	$	1,853,206

10. Interest Rate Derivatives

The following table sets forth the key terms and fair values of our interest rate swap derivatives, each of which was designated as a cash flow hedge of interest rate risk (dollars in thousands):



							Fair Value at
Notional Amount			Fixed Rate	Floating Rate Index	Effective Date	Expiration Date	September 30, 2019			December 31, 2018
$	100,000		1.7300%	One-Month LIBOR	9/1/2015	8/1/2019	$	—		$	472
12,538		(1)	1.3900%	One-Month LIBOR	10/13/2015	10/1/2020	32			239
100,000			1.9013%	One-Month LIBOR	9/1/2016	12/1/2022	(1,547		)	1,968
100,000			1.9050%	One-Month LIBOR	9/1/2016	12/1/2022	(1,558		)	1,967
50,000			1.9079%	One-Month LIBOR	9/1/2016	12/1/2022	(784		)	971
11,200		(2)	1.6780%	One-Month LIBOR	8/1/2019	8/1/2026	(202		)	—
75,000			3.1760%	Three-Month LIBOR	6/30/2020	6/30/2030	(11,204		)	(2,676		)
75,000			3.1920%	Three-Month LIBOR	6/30/2020	6/30/2030	(11,315		)	(2,783		)
75,000			2.7440%	Three-Month LIBOR	6/30/2020	6/30/2030	(8,215		)	—
							$	(34,793	)	$	158


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


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

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
Derivatives	Balance Sheet Location	September 30, 2019			December 31, 2018
Interest rate swaps designated as cash flow hedges	Prepaid expenses and other assets, net	$	32		$	5,617
Interest rate swaps designated as cash flow hedges	Interest rate derivatives (liabilities)	$	(34,825	)	$	(5,459	)

The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):



	Amount of (Loss) Gain Recognized in AOCL on Derivatives										Amount of Gain Reclassified from AOCL into Interest Expense on Statement of Operations
	For the Three Months Ended September 30,					For the Nine Months Ended September 30,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Derivatives in Hedging Relationships	2019			2018		2019			2018		2019		2018		2019		2018
Interest rate derivatives	$	(11,047	)	$	1,325	$	(33,437	)	$	7,913	$	307	$	207	$	1,434	$	9

Over the next 12 months, we estimate that approximately $612,000 in losses will be reclassified from accumulated other comprehensive loss (“AOCL”) as an increase to interest expense.

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 September 30, 2019, we are not in default with any of

these provisions. As of September 30, 2019, the fair value of interest rate derivatives in a liability position related to these agreements was $34.9 million, excluding the effects of accrued interest and credit valuation adjustments. As of September 30, 2019, we had not posted any collateral related to these agreements. If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value, which was $34.9 million as of September 30, 2019.

11. Redeemable Noncontrolling Interests

Our partners in two real estate joint ventures, LW Redstone Company, LLC and Stevens Investors, LLC (discussed further in Note 6), have the right to require us to acquire their respective interests at fair value; accordingly, we classify the fair value of our partners’ interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets. The table below sets forth the activity for these redeemable noncontrolling interests (in thousands):



	For the Nine Months Ended September 30,
	2019			2018
Beginning balance	$	26,260		$	23,125
Contributions from noncontrolling interests	—			186
Distributions to noncontrolling interests	(1,656		)	(1,114		)
Net income attributable to noncontrolling interests	2,729			1,903
Adjustment to arrive at fair value of interests	1,344			1,331
Ending balance	$	28,677		$	25,431

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

COPLP Limited Partner Preferred Units

COPLP has 352,000 Series I Preferred Units outstanding to an unrelated party with an aggregate liquidation preference of $8.8 million ($25.00 per unit), plus any accrued and unpaid distributions of return thereon. On July 31, 2019, we amended the terms of these units to:


•	reduce the priority annual cumulative return from 7.5% of the units’ liquidation preference to 3.5% effective September 23, 2019, and eliminate provisions for future increases previously in place;


•	extend the earliest date that COPLP may redeem the units. As amended, the units may be redeemed for cash by COPLP at COPLP’s option on or after January 1, 2020, provided that COPLP provides notice to the unit holder six months prior to the effective date of the redemption; and


•	establish that COPLP provide notice to the unit holder for defined periods of time in advance of the sale of certain property or repayment or refinancing of certain debt, after which, in certain instances, the unit holder would have the ability to require COPLP to redeem the units at their liquidation preference.

Common Shares/Units

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

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

During the nine months ended September 30, 2019, certain COPLP limited partners converted 103,039 common units in COPLP for an equal number of common shares in COPT.

We declared dividends per COPT common share and distributions per COPLP common unit of $0.275 in the three months ended September 30, 2019 and 2018 and $0.825 in the nine months ended September 30, 2019 and 2018.

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

13. Information by Business Segment

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

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

The table below reports segment financial information for our reportable segments (in thousands):



	Operating Property Segments
	Defense/Information Technology Locations
	Fort Meade/BW Corridor			Northern Virginia Defense/IT			Lackland Air Force Base			Navy Support Locations			Redstone Arsenal			Data Center Shells			Total Defense/IT Locations			Regional Office			Wholesale Data Center			Other			Total
Three Months Ended September 30, 2019
Revenues from real estate operations	$	63,436		$	13,551		$	12,703		$	8,183		$	4,171		$	5,913		$	107,957		$	15,508		$	6,565		$	704		$	130,734
Property operating expenses	(20,743		)	(4,965		)	(7,149		)	(3,581		)	(1,717		)	(518		)	(38,673		)	(7,343		)	(3,374		)	(324		)	(49,714		)
UJV NOI allocable to COPT	—			—			—			—			—			1,601			1,601			—			—			—			1,601
NOI from real estate operations	$	42,693		$	8,586		$	5,554		$	4,602		$	2,454		$	6,996		$	70,885		$	8,165		$	3,191		$	380		$	82,621
Additions to long-lived assets	$	10,770		$	2,922		$	—		$	2,003		$	446		$	—		$	16,141		$	6,339		$	61		$	19		$	22,560
Transfers from non-operating properties	$	1,381		$	118		$	2,120		$	—		$	4,152		$	9,483		$	17,254		$	—		$	(1,012	)	$	—		$	16,242
Three Months Ended September 30, 2018
Revenues from real estate operations	$	61,396		$	13,960		$	11,254		$	7,899		$	3,734		$	6,689		$	104,932		$	15,272		$	7,781		$	1,003		$	128,988
Property operating expenses	(19,847		)	(5,518		)	(6,432		)	(3,208		)	(1,569		)	(574		)	(37,148		)	(7,425		)	(3,965		)	(802		)	(49,340		)
UJV NOI allocable to COPT	—			—			—			—			—			1,206			1,206			—			—			—			1,206
NOI from real estate operations	$	41,549		$	8,442		$	4,822		$	4,691		$	2,165		$	7,321		$	68,990		$	7,847		$	3,816		$	201		$	80,854
Additions to long-lived assets	$	11,211		$	2,305		$	—		$	1,758		$	33		$	—		$	15,307		$	5,670		$	370		$	(88	)	$	21,259
Transfers from non-operating properties	$	14,698		$	1,550		$	—		$	(17	)	$	13		$	30,286		$	46,530		$	—		$	155		$	—		$	46,685
Nine Months Ended September 30, 2019
Revenues from real estate operations	$	187,778		$	42,294		$	36,368		$	24,523		$	12,078		$	21,891		$	324,932		$	45,359		$	22,996		$	2,208		$	395,495
Property operating expenses	(62,422		)	(14,951		)	(19,756		)	(10,271		)	(4,855		)	(1,630		)	(113,885		)	(22,349		)	(9,830		)	(981		)	(147,045		)
UJV NOI allocable to COPT	—			—			—			—			—			4,071			4,071			—			—			—			4,071
NOI from real estate operations	$	125,356		$	27,343		$	16,612		$	14,252		$	7,223		$	24,332		$	215,118		$	23,010		$	13,166		$	1,227		$	252,521
Additions to long-lived assets	$	22,204		$	6,072		$	—		$	7,948		$	1,282		$	—		$	37,506		$	15,198		$	312		$	63		$	53,079
Transfers from non-operating properties	$	7,759		$	4,647		$	10,456		$	—		$	13,363		$	122,115		$	158,340		$	—		$	(1,012	)	$	—		$	157,328
Segment assets at September 30, 2019	$	1,271,668		$	398,137		$	147,505		$	186,243		$	118,839		$	298,675		$	2,421,067		$	393,747		$	205,550		$	3,708		$	3,024,072
Nine Months Ended September 30, 2018
Revenues from real estate operations	$	186,171		$	39,639		$	35,079		$	23,896		$	11,019		$	18,475		$	314,279		$	45,852		$	23,963		$	2,334		$	386,428
Property operating expenses	(61,550		)	(15,150		)	(20,524		)	(9,943		)	(4,518		)	(2,167		)	(113,852		)	(22,472		)	(12,373		)	(1,040		)	(149,737		)
UJV NOI allocable to COPT	—			—			—			—			—			3,607			3,607			—			—			—			3,607
NOI from real estate operations	$	124,621		$	24,489		$	14,555		$	13,953		$	6,501		$	19,915		$	204,034		$	23,380		$	11,590		$	1,294		$	240,298
Additions to long-lived assets	$	26,483		$	5,431		$	—		$	4,316		$	463		$	—		$	36,693		$	14,915		$	487		$	227		$	52,322
Transfers from non-operating properties	$	34,919		$	2,243		$	—		$	(17	)	$	483		$	61,075		$	98,703		$	—		$	2,300		$	—		$	101,003
Segment assets at September 30, 2018	$	1,280,837		$	394,066		$	126,047		$	189,406		$	105,315		$	359,653		$	2,455,324		$	396,624		$	219,041		$	3,997		$	3,074,986

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 September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Segment revenues from real estate operations	$	130,734	$	128,988	$	395,495	$	386,428
Construction contract and other service revenues	28,697		8,423		87,946		53,202
Total revenues	$	159,431	$	137,411	$	483,441	$	439,630

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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
UJV NOI allocable to COPT	$	1,601		$	1,206		$	4,071		$	3,607
Less: Income from UJV allocable to COPT attributable to depreciation and amortization expense and interest expense	(1,202		)	(830		)	(2,859		)	(2,482		)
Add: Equity in loss of unconsolidated non-real estate entities	(3		)	(2		)	(5		)	(5		)
Equity in income of unconsolidated entities	$	396		$	374		$	1,207		$	1,120

As previously discussed, we provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Construction contract and other service revenues	$	28,697		$	8,423		$	87,946		$	53,202
Construction contract and other service expenses	(27,802		)	(8,058		)	(85,130		)	(51,215		)
NOI from service operations	$	895		$	365		$	2,816		$	1,987

The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to net income as reported on our consolidated statements of operations (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
NOI from real estate operations	$	82,621		$	80,854		$	252,521		$	240,298
NOI from service operations	895			365			2,816			1,987
Interest and other income	1,842			1,486			5,977			4,284
Gain on sales of real estate	—			—			84,469			(27		)
Equity in income of unconsolidated entities	396			374			1,207			1,120
Income tax benefit	131			291			113			173
Depreciation and other amortization associated with real estate operations	(34,692		)	(34,195		)	(104,290		)	(100,897		)
Impairment losses	(327		)	—			(327		)	—
General, administrative and leasing expenses	(7,929		)	(6,899		)	(26,066		)	(21,819		)
Business development expenses and land carry costs	(964		)	(1,567		)	(2,947		)	(4,415		)
Interest expense	(17,126		)	(19,181		)	(54,275		)	(56,910		)
Less: UJV NOI allocable to COPT included in equity in income of unconsolidated entities	(1,601		)	(1,206		)	(4,071		)	(3,607		)
Net income	$	23,246		$	20,322		$	155,127		$	60,187

The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):



	September 30, 2019		September 30, 2018
Segment assets	$	3,024,072	$	3,074,986
Operating properties lease liabilities included in segment assets	16,645		—
Non-operating property assets	597,301		420,109
Other assets	217,351		155,271
Total COPT consolidated assets	$	3,855,369	$	3,650,366

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

14. Construction Contract and Other Service Revenues

We disaggregate our construction contract and other service revenues by compensation arrangement and by service type as we believe it best depicts the nature, timing and uncertainty of our revenue. The table below reports construction contract and other service revenues by compensation arrangement (in thousands):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Construction contract revenues:
Guaranteed maximum price	$	16,217	$	1,840	$	54,365	$	31,865
Firm fixed price	2,349		3,653		6,009		16,376
Cost-plus fee	9,906		2,719		26,935		4,273
Other	225		211		637		688
	$	28,697	$	8,423	$	87,946	$	53,202

The table below reports construction contract and other service revenues by service type (in thousands):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Construction contract revenues:
Construction	$	27,988	$	8,160	$	86,487	$	50,743
Design	484		52		822		1,771
Other	225		211		637		688
	$	28,697	$	8,423	$	87,946	$	53,202

We recognized a (decrease) increase in revenue from performance obligations satisfied (or partially satisfied) in previous periods of $(1,000) in the three months ended September 30, 2018, and $18,000 and $318,000 in the nine months ended September 30, 2019 and 2018, respectively.

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 Nine Months Ended September 30,
	2019		2018
Beginning balance	$	6,701	$	4,577
Ending balance	$	15,494	$	5,571

Contract assets, which we refer to herein as construction costs in excess of billings, are included in prepaid expenses and other assets, net reported on our consolidated balance sheets. The beginning and ending balances of our contract assets were as follows (in thousands):



	For the Nine Months Ended September 30,
	2019		2018
Beginning balance	$	3,189	$	4,884
Ending balance	$	16,743	$	2,821

Contract liabilities are included in other liabilities reported on our consolidated balance sheets. Changes in contract liabilities were as follows (in thousands):



	For the Nine Months Ended September 30,
	2019		2018
Beginning balance	$	568	$	27,402
Ending balance	$	725	$	560
Portion of beginning balance recognized in revenue during:
Three months ended September 30	$	—	$	—
Nine months ended September 30	$	445	$	27,296

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

Revenue allocated to the remaining performance obligations under existing contracts as of September 30, 2019 that will be recognized as revenue in future periods was $27.5 million, approximately $23 million of which we expect to recognize during the remainder of 2019.

We have no deferred incremental costs incurred to obtain or fulfill our construction contracts or other service revenues and had no impairment losses on construction contracts receivable or unbilled construction revenue in the three or nine months ended September 30, 2019 and 2018.

15. Share-Based Compensation

Restricted Shares

During the nine months ended September 30, 2019, certain employees and non-employee members of our Board of Trustees (“Trustees”) were granted a total of 185,095 restricted common shares with an aggregate grant date fair value of $4.9 million (weighted average of $26.41 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 nine months ended September 30, 2019, forfeiture restrictions lapsed on 175,973 previously issued common shares; these shares had a weighted average grant date fair value of $28.05 per share, and the aggregate intrinsic value of the shares on the vesting dates was $4.6 million.

Deferred Share Awards

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

Performance Share Awards (“PSUs”)

We issued 44,757 common shares on January 18, 2019 to executives in settlement of PSUs granted in 2016, representing 157% of the target award for those PSUs.

PIUs

Commencing in 2019, we offered our executives and Trustees the opportunity to select PIUs as a form of long-term compensation in lieu of, or in combination with, other forms of share-based compensation awards (restricted shares, deferred share awards and PSUs). PIUs are a special class of common unit structured to qualify as “profit interests” for tax purposes. Our executives and certain of our Trustees selected PIUs as their form of share-based compensation for their 2019 grants. 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 nine months ended September 30, 2019, our executives and certain non-employee Trustees were granted a total of 61,820 TB-PIUs with an aggregate grant date fair value of $1.6 million (weighted average of $26.01 per TB-PIU). TB-PIUs granted to executives vest in equal one-third increments over a three-year period beginning on the first anniversary of the date of grant. TB-PIUs granted to non-employee Trustees vest on the first anniversary of the grant date, provided that the Trustee remains in his or her position. Prior to vesting, TB-PIUs carry substantially the same rights to distributions as non-PIU common units but carry no redemption rights.

PB-PIUs

On January 1, 2019, we granted our executives 193,682 PB-PIUs with a three-year performance period concluding on the earlier of December 31, 2021 or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of earned awards at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:



Percentile Rank		Earned Awards Payout %
75th or greater		100% of PB-PIUs granted
50th (target)		50% of PB-PIUs granted
25th		25% of PB-PIUs granted
Below 25th		0% of PB-PIUs granted

If the percentile rank exceeds the 25th percentile and is between 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. During the performance period, PB-PIUs carry rights to distributions equal to 10% of the distribution rights of non-PIU common units but carry no redemption rights.

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

These PB-PIUs had an aggregate grant date fair value of $2.4 million ($12.47 per PB-PIU) which is being recognized over the performance period. The grant date fair value was computed using a Monte Carlo model that included the following assumptions: baseline common share value of $21.03; expected volatility for common shares of 21.0%; and a risk-free interest rate of 2.51%.

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

COPT and Subsidiaries EPS

We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common shares outstanding during the period. Our computation of diluted EPS is similar except that:

•

the denominator is increased to include: (1) the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into common shares were converted; and (2) the effect of dilutive potential common shares outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation using the treasury stock or if-converted methods; and


•	the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common shares that we add to the denominator.

Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net income attributable to COPT	$	21,257		$	18,697		$	148,907		$	55,281
Income attributable to share-based compensation awards	(123		)	(114		)	(495		)	(348		)
Numerator for basic EPS on net income attributable to COPT common shareholders	21,134			18,583			148,412			54,933
Redeemable noncontrolling interests	—			—			100			—
Income attributable to share-based compensation awards	5			—			26			—
Numerator for diluted EPS on net income attributable to COPT common shareholders	$	21,139		$	18,583		$	148,538		$	54,933
Denominator (all weighted averages):
Denominator for basic EPS (common shares)	111,582			104,379			111,036			102,401
Dilutive effect of share-based compensation awards	361			231			313			165
Dilutive effect of redeemable noncontrolling interests	—			—			123			—
Dilutive effect of forward equity sale agreements	—			178			—			60
Denominator for diluted EPS (common shares)	111,943			104,788			111,472			102,626
Basic EPS	$	0.19		$	0.18		$	1.34		$	0.54
Diluted EPS	$	0.19		$	0.18		$	1.33		$	0.54

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 September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018
Conversion of common units	1,312	2,135	1,323	2,847
Conversion of redeemable noncontrolling interests	975	—	893	—
Conversion of Series I preferred units	176	176	176	176

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


•	weighted average shares related to COPT’s forward equity sale agreements for the nine months ended September 30, 2019 of 503,000;


•	weighted average restricted shares and deferred share awards for the three months ended September 30, 2019 and 2018 of 436,000 and 455,000, respectively, and for the nine months ended September 30, 2019 and 2018 of 441,000 and 452,000, respectively;


•	weighted average options for the three months ended September 30, 2019 and 2018 of 3,000 and 30,000, respectively, and for the nine months ended September 30, 2019 and 2018 of 16,000 and 45,000, respectively; and


•	weighted average unvested PIUs for the three and nine months ended September 30, 2019 of 62,000 and 47,000, respectively.

COPLP and Subsidiaries EPU

We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders allocable to unrestricted common units under the two-class method by the weighted average number of unrestricted common units outstanding during the period. Our computation of diluted EPU is similar except that:

•

the denominator is increased to include: (1) the weighted average number of potential additional common units that would have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive potential common units outstanding during the period attributable to COPT’s forward equity sale agreements, redeemable noncontrolling interests and our share-based compensation using the treasury stock or if-converted methods; and


•	the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common units that we add to the denominator.

Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in thousands, except per unit data):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net income attributable to COPLP	$	21,681		$	19,242		$	151,257		$	57,308
Preferred unit distributions	(157		)	(165		)	(487		)	(495		)
Income attributable to share-based compensation awards	(139		)	(114		)	(592		)	(348		)
Numerator for basic EPU on net income attributable to COPLP common unitholders	21,385			18,963			150,178			56,465
Redeemable noncontrolling interests	—						100			—
Income attributable to share-based compensation awards	5			—			26			—
Numerator for diluted EPU on net income attributable to COPLP common unitholders	$	21,390		$	18,963		$	150,304		$	56,465
Denominator (all weighted averages):
Denominator for basic EPU (common units)	112,894			106,514			112,359			105,248
Dilutive effect of redeemable noncontrolling interests	—			—			123			—
Dilutive effect of share-based compensation awards	361			231			313			165
Dilutive effect of forward equity sale agreements	—			178			—			60
Denominator for diluted EPU (common units)	113,255			106,923			112,795			105,473
Basic EPU	$	0.19		$	0.18		$	1.34		$	0.54
Diluted EPU	$	0.19		$	0.18		$	1.33		$	0.54

Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPU for the respective periods (in thousands):



	Weighted Average Shares Excluded from Denominator
	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018
Conversion of redeemable noncontrolling interests	975	—	893	—
Conversion of Series I preferred units	176	176	176	176

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


•	weighted average shares related to COPT’s forward equity sale agreements for the nine months ended September 30, 2019 of 503,000;


•	weighted average restricted units and deferred share awards for the three months ended September 30, 2019 and 2018 of 436,000 and 455,000, respectively, and for the nine months ended September 30, 2019 and 2018 of 441,000 and 452,000, respectively;


•	weighted average options for the three months ended September 30, 2019 and 2018 of 3,000 and 30,000, respectively, and for the nine months ended September 30, 2019 and 2018 of 16,000 and 45,000, respectively; and


•	weighted average unvested PIUs for the three and nine months ended September 30, 2019 of 62,000 and 47,000, respectively.

17. Commitments and Contingencies

Litigation and Claims

In the normal course of business, we are subject to legal actions and other claims. We record losses for specific legal proceedings and claims when we determine that a loss is probable and the amount of loss can be reasonably estimated. Management believes that it is reasonably possible that we could incur losses pursuant to such claims but do not believe such losses would materially affect our financial position, liquidity or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

Environmental

We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.

In connection with a lease and subsequent sale in 2008 and 2010 of 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 $34 million as of September 30, 2019. 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 September 30, 2019, we do not expect any such future fundings will be required.

Contractual Obligations

We had amounts remaining to be incurred under various contractual obligations as of September 30, 2019 that included the following (excluding amounts incurred and therefore reflected as liabilities reported on our consolidated balance sheets):


•	development and redevelopment obligations of $217.1 million;


•	tenant and other capital improvements of $60.8 million;


•	third party construction obligations of $13.5 million; and


•	other obligations of $1.6 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

During the nine months ended September 30, 2019:


•	we finished the period with our office and data center shell portfolio 92.7% occupied;


•	we placed into service 804,000 square feet in seven newly-constructed properties and one redeveloped property that were 100.0% leased as of September 30, 2019;

•

we sold a 90% interest in seven data center shell properties based on an aggregate property value of $265.0 million and retained a 10% interest in the properties through BREIT-COPT, a newly-formed joint venture. Our partner in the joint venture acquired the 90% interest from us for $238.5 million, most of which was used by us to repay borrowings under our Revolving Credit Facility that funded development costs; and


•	COPT issued 1.6 million common shares under its forward equity sale agreements for net proceeds of $46.5 million. COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP. The proceeds were used primarily to repay borrowings under our Revolving Credit Facility that funded development costs.

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.

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

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


•	how we expect to generate cash for short and long-term capital needs; and


•	our commitments and contingencies.

You should refer to our consolidated financial statements and the notes thereto as you read this section.

This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:


•	general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values;


•	adverse changes in the real estate markets, including, among other things, increased competition with other companies;


•	governmental actions and initiatives, including risks associated with the impact of a prolonged government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or reduced or delayed demand for additional space by our strategic customers;


•	our ability to borrow on favorable terms;


•	risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;


•	risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;


•	changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;


•	our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;


•	possible adverse changes in tax laws;


•	the dilutive effects of issuing additional common shares;


•	our ability to achieve projected results;


•	security breaches relating to cyber attacks, cyber intrusions or other factors; and


•	environmental requirements.

We undertake no obligation to publicly update or supplement forward-looking statements.

Occupancy and Leasing

Office and Data Center Shell Portfolio

The tables below set forth occupancy information pertaining to our portfolio of office and data center shell properties:



	September 30, 2019			December 31, 2018
Occupancy rates at period end
Total	92.7		%	93.0		%
Defense/IT Locations:
Fort Meade/BW Corridor	92.0		%	91.1		%
Northern Virginia Defense/IT	82.3		%	91.3		%
Lackland Air Force Base	100.0		%	100.0		%
Navy Support Locations	91.7		%	90.5		%
Redstone Arsenal	99.2		%	99.0		%
Data Center Shells	100.0		%	100.0		%
Total Defense/IT Locations	93.3		%	93.6		%
Regional Office	88.6		%	89.2		%
Other	72.1		%	77.2		%
Average contractual annual rental rate per square foot at period end (1)	$	29.56		$	30.04


(1)	Includes estimated expense reimbursements.



	Rentable Square Feet	Occupied Square Feet
	(in thousands)
December 31, 2018	18,094	16,821
Vacated upon lease expiration (1)	—	(734	)
Occupancy for new leases (2)	—	712
Constructed or redeveloped	804	804
Other changes	58	(38	)
September 30, 2019	18,956	17,565


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


(2)	Excludes occupancy of vacant square feet acquired or developed.

During the nine months ended September 30, 2019, we completed 4.2 million square feet of leasing, including: renewed leases on 1.5 million square feet, representing 75.4% of the square footage of our lease expirations (including the effect of early renewals); 2.1 million square feet of development and redevelopment space; and 622,000 square feet of vacant space.

Wholesale Data Center

Our 19.25 megawatt wholesale data center was 82.1% leased as of September 30, 2019 and 87.6% leased as of December 31, 2018. Based on known lease terminations and non-renewals, we expect that the leased percentage of this property will decline to approximately 77% (or 14.8 megawatts) by December 2019 and 70% (or 13.6 megawatts) by July 2020.

Results of Operations

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


•	office and data center shell properties:


•	stably owned and 100% operational throughout the current and prior year reporting periods. We define these as changes from “Same Properties”;


•	constructed or redeveloped and placed into service that were not 100% operational throughout the current and prior year reporting periods; and


•	disposed; and


•	our wholesale data center.

In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.

Since both of the measures discussed above exclude certain items includable in net income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. A reconciliation of NOI from real estate operations and NOI from service operations to net income reported on the consolidated statements of operations of COPT and subsidiaries is provided in Note 13 to our consolidated financial statements.

Comparison of Statements of Operations for the Three Months Ended September 30, 2019 and 2018



	For the Three Months Ended September 30,
	2019			2018			Variance
	(in thousands)
Revenues
Revenues from real estate operations	$	130,734		$	128,988		$	1,746
Construction contract and other service revenues	28,697			8,423			20,274
Total revenues	159,431			137,411			22,020
Operating expenses
Property operating expenses	49,714			49,340			374
Depreciation and amortization associated with real estate operations	34,692			34,195			497
Construction contract and other service expenses	27,802			8,058			19,744
Impairment losses	327			—			327
General, administrative and leasing expenses	7,929			6,899			1,030
Business development expenses and land carry costs	964			1,567			(603		)
Total operating expenses	121,428			100,059			21,369
Interest expense	(17,126		)	(19,181		)	2,055
Interest and other income	1,842			1,486			356
Equity in income of unconsolidated entities	396			374			22
Income tax benefit	131			291			(160		)
Net income	$	23,246		$	20,322		$	2,924

NOI from Real Estate Operations



	For the Three Months Ended September 30,
	2019			2018			Variance
	(Dollars in thousands, except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue	$	115,579		$	113,107		$	2,472
Lease termination revenue	823			759			64
Other property revenue	1,226			1,246			(20		)
Same Properties total revenues	117,628			115,112			2,516
Constructed and redeveloped properties placed in service	6,535			2,431			4,104
Wholesale data center	6,565			7,781			(1,216		)
Dispositions	—			3,389			(3,389		)
Other	6			275			(269		)
	130,734			128,988			1,746
Property operating expenses
Same Properties	(45,342		)	(44,626		)	(716		)
Constructed and redeveloped properties placed in service	(1,004		)	(415		)	(589		)
Wholesale data center	(3,374		)	(3,965		)	591
Dispositions	7			(163		)	170
Other	(1		)	(171		)	170
	(49,714		)	(49,340		)	(374		)

UJV NOI allocable to COPT
Same Properties	1,214			1,206			8
Other	387			—			387
	1,601			1,206			395

NOI from real estate operations
Same Properties	73,500			71,692			1,808
Constructed and redeveloped properties placed in service	5,531			2,016			3,515
Wholesale data center	3,191			3,816			(625		)
Dispositions	7			3,226			(3,219		)
Other	392			104			288
	$	82,621		$	80,854		$	1,767

Same Properties NOI from real estate operations by segment
Defense/IT Locations	$	64,956		$	63,505		$	1,451
Regional Office	8,163			7,846			317
Other	381			341			40
	$	73,500		$	71,692		$	1,808

Same Properties rent statistics
Average occupancy rate	91.9		%	91.4		%	0.5		%
Average straight-line rent per occupied square foot (1)	$	6.50		$	6.43		$	0.07


(1)	Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.

Our Same Properties pool consisted of 150 properties, comprising 86.2% of our office and data center shell portfolio’s square footage as of September 30, 2019. This pool of properties changed from the pool used for purposes of comparing 2018 and 2017 in our 2018 Annual Report on Form 10-K due to the addition of nine properties placed in service and 100% operational on or before January 1, 2018 and the removal of six properties in which we sold a 90% interest in June 2019.

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

NOI from Service Operations



	For the Three Months Ended September 30,
	2019		2018		Variance
	(in thousands)
Construction contract and other service revenues	$	28,697	$	8,423	$	20,274
Construction contract and other service expenses	27,802		8,058		19,744
NOI from service operations	$	895	$	365	$	530

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

Interest expense

Interest expense decreased due primarily to increased capitalized interest resulting from a higher volume of active construction and development projects.

Comparison of Statements of Operations for the Nine Months Ended September 30, 2019 and 2018



	For the Nine Months Ended September 30,
	2019			2018			Variance
	(in thousands)
Revenues
Revenues from real estate operations	$	395,495		$	386,428		$	9,067
Construction contract and other service revenues	87,946			53,202			34,744
Total revenues	483,441			439,630			43,811
Operating expenses
Property operating expenses	147,045			149,737			(2,692		)
Depreciation and amortization associated with real estate operations	104,290			100,897			3,393
Construction contract and other service expenses	85,130			51,215			33,915
Impairment losses	327			—			327
General, administrative and leasing expenses	26,066			21,819			4,247
Business development expenses and land carry costs	2,947			4,415			(1,468		)
Total operating expenses	365,805			328,083			37,722
Interest expense	(54,275		)	(56,910		)	2,635
Interest and other income	5,977			4,284			1,693
Gain on sales of real estate	84,469			(27		)	84,496
Equity in income of unconsolidated entities	1,207			1,120			87
Income tax benefit	113			173			(60		)
Net income	$	155,127		$	60,187		$	94,940

NOI from Real Estate Operations



	For the Nine Months Ended September 30,
	2019			2018			Variance
	(Dollars in thousands, except per square foot data)
Revenues
Same Properties revenues
Lease revenue, excluding lease termination revenue	$	343,211		$	338,908		$	4,303
Lease termination revenue	1,629			2,325			(696		)
Other property revenue	3,571			3,574			(3		)
Same Properties total revenues	348,411			344,807			3,604
Constructed and redeveloped properties placed in service	16,657			5,684			10,973
Wholesale data center	22,996			23,963			(967		)
Dispositions	7,208			11,173			(3,965		)
Other	223			801			(578		)
	395,495			386,428			9,067
Property operating expenses
Same Properties	(133,555		)	(134,835		)	1,280
Constructed and redeveloped properties placed in service	(2,684		)	(1,044		)	(1,640		)
Wholesale data center	(9,830		)	(12,373		)	2,543
Dispositions	(1,016		)	(1,382		)	366
Other	40			(103		)	143
	(147,045		)	(149,737		)	2,692

UJV NOI allocable to COPT
Same Properties	3,638			3,607			31
Other	433			—			433
	4,071			3,607			464
NOI from real estate operations
Same Properties	218,494			213,579			4,915
Constructed and redeveloped properties placed in service	13,973			4,640			9,333
Wholesale data center	13,166			11,590			1,576
Dispositions	6,192			9,791			(3,599		)
Other	696			698			(2		)
	$	252,521		$	240,298		$	12,223

Same Properties NOI from real estate operations by segment
Defense/IT Locations	$	194,308		$	188,940		$	5,368
Regional Office	23,010			23,284			(274		)
Other	1,176			1,355			(179		)
	$	218,494		$	213,579		$	4,915

Same Properties rent statistics
Average occupancy rate	92.0		%	91.4		%	0.6		%
Average straight-line rent per occupied square foot (1)	$	19.48		$	19.32		$	0.16


(1)	Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the periods set forth above.

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

NOI from Service Operations



	For the Nine Months Ended September 30,
	2019		2018		Variance
	(in thousands)
Construction contract and other service revenues	$	87,946	$	53,202	$	34,744
Construction contract and other service expenses	85,130		51,215		33,915
NOI from service operations	$	2,816	$	1,987	$	829

Construction contract and other service revenue and expenses increased due primarily to a higher volume of construction activity in connection with several of our tenants.

General, administrative and leasing expenses

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

Gain on sales of real estate

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

Funds from Operations

Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales and impairment losses of real estate (net of associated income tax) and real estate-related depreciation and amortization. FFO also includes adjustments to net income for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe that we use the National Association of Real Estate Investment Trusts (“Nareit”) definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains on sales and impairment losses of real estate (net of associated income tax), and real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income is the most directly comparable GAAP measure to FFO.

Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.

Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to share-based compensation awards. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.

Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that net income is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.

Diluted FFO available to common share and common unit holders, as adjusted for comparability is defined as Diluted FFO adjusted to 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; loss on interest rate derivatives; demolition costs on redevelopment and nonrecurring improvements; executive transition costs; issuance costs associated with redeemed preferred shares; and certain other expenses that we believe are not closely correlated with our operating performance. This measure also includes adjustments for the effects of the items noted above pertaining to UJVs that were allocable to our ownership interest in the UJVs. We believe this to be a useful supplemental measure alongside Diluted FFO as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that net income is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.

Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.

Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe this to be a useful supplemental measure alongside Diluted FFO per share as it excludes gains and losses from certain investing and financing activities and certain other items that we believe are not closely correlated to (or associated with) our operating performance. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.

The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.

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

The table below sets forth the computation of the above stated measures for the three and nine months ended September 30, 2019 and 2018, and provides reconciliations to the GAAP measures of COPT and subsidiaries associated with such measures:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars and shares in thousands, except per share data)
Net income	$	23,246		$	20,322		$	155,127		$	60,187
Add: Real estate-related depreciation and amortization	34,692			34,195			104,290			100,897
Add: Depreciation and amortization on UJV allocable to COPT	790			564			1,922			1,691
Add: Impairment losses on real estate	327			—			327			—
Less: Gain on sales of real estate	—			—			(84,469		)	27
FFO	59,055			55,081			177,197			162,802
Less: Noncontrolling interests-preferred units in the Operating Partnership	(157		)	(165		)	(487		)	(495		)
Less: FFO allocable to other noncontrolling interests	(1,429		)	(1,060		)	(3,588		)	(2,757		)
Basic and diluted FFO allocable to share-based compensation awards	(248		)	(214		)	(662		)	(651		)
Basic FFO available to common share and common unit holders	57,221			53,642			172,460			158,899
Redeemable noncontrolling interests	34			—			100			—
Diluted FFO available to common share and common unit holders	57,255			53,642			172,560			158,899
Executive transition costs	—			46			4			422
Demolition costs on redevelopment and nonrecurring improvements	—			251			44			299
Non-comparable professional and legal expenses	175			—			486			—
Diluted FFO comparability adjustments allocable to share-based compensation awards	—			(1		)	(2		)	(3		)
Diluted FFO available to common share and common unit holders, as adjusted for comparability	$	57,430		$	53,938		$	173,092		$	159,617

Weighted average common shares	111,582			104,379			111,036			102,401
Conversion of weighted average common units	1,312			2,135			1,323			2,847
Weighted average common shares/units - Basic FFO	112,894			106,514			112,359			105,248
Dilutive effect of share-based compensation awards	361			231			313			165
Dilutive effect of forward equity sale agreements	—			178			—			60
Redeemable noncontrolling interests	109			—			123			—
Weighted average common shares/units - Diluted FFO	113,364			106,923			112,795			105,473

Diluted FFO per share	$	0.51		$	0.50		$	1.53		$	1.51
Diluted FFO per share, as adjusted for comparability	$	0.51		$	0.50		$	1.53		$	1.51


Denominator for diluted EPS	111,943			104,788			111,472			102,626
Weighted average common units	1,312			2,135			1,323			2,847
Redeemable noncontrolling interests	109			—			—			—
Denominator for diluted FFO per share measures	113,364			106,923			112,795			105,473

Property Additions

The table below sets forth the major components of our additions to properties for the nine months ended September 30, 2019 (in thousands):



Construction, development and redevelopment	$	335,918
Tenant improvements on operating properties (1)	18,365
Capital improvements on operating properties	17,772
	$	372,055

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

Cash Flows

Net cash flow from operating activities increased $35.4 million when comparing the nine months ended September 30, 2019 and 2018 due primarily to our payment in 2018 of construction costs on a contract that the customer pre-funded to us in prior years.

Net cash flow used in investing activities decreased $43.8 million when comparing the nine months ended September 30, 2019 and 2018 due primarily to $237.2 million in property disposition proceeds mostly from our sale in 2019 of a 90% interest in properties that was offset in part by a $203.0 million increase in cash outlays for construction, development and redevelopment in the current period.

Net cash flow used in financing activities in the nine months ended September 30, 2019 was $22.6 million, and included the following:


•	dividends and/or distributions to equity holders of $93.5 million; offset in part by


•	net proceeds from the issuance of common shares (or units) of $46.4 million; and


•	net proceeds from debt borrowings of $35.7 million.

Net cash flow provided by financing activities in the nine months ended September 30, 2018 was $29.1 million, and included the following:


•	net proceeds from the issuance of common shares (or units) of $162.2 million; offset in part by


•	dividends and/or distributions to equity holders of $87.5 million;


•	net repayments of debt of $18.9 million; and


•	payments on a capital lease obligation of $15.4 million.

Liquidity and Capital Resources of COPT

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

As of September 30, 2019, COPT owned 98.7% of the outstanding common units in COPLP; the remaining common units and all of the outstanding preferred units were owned by third parties. As the sole general partner of COPLP, COPT has the full, exclusive and complete responsibility for COPLP’s day-to-day management and control.

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

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

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

For COPT to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually to at least 90% of its ordinary taxable income. As a result of this distribution requirement, it cannot rely on retained earnings to fund its ongoing operations to the same extent that some other companies can. COPT may need to continue to raise capital in the equity markets to fund COPLP’s working capital needs, development activities and acquisitions.

Liquidity and Capital Resources of COPLP

COPLP’s primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and acquisitions, to the extent they are pursued in the future. We expect COPLP to continue to use cash flow provided by operations as the primary source to meet its short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, distributions to its security holders and improvements to existing properties. As of September 30, 2019, COPLP had $34.0 million in cash and cash equivalents.

COPLP’s senior unsecured debt is currently rated investment grade by the three major rating agencies. We aim to maintain an investment grade rating to enable COPLP to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. COPLP also uses secured nonrecourse debt from institutional lenders and banks for joint venture financing. In addition, COPLP periodically raises equity from COPT when COPT accesses the public equity markets by issuing common and/or preferred shares.

COPLP uses its Revolving Credit Facility to initially finance much of its investing activities. COPLP subsequently pays down the facility using cash available from operations and proceeds from long-term borrowings, equity issuances and sales of interests in properties. The lenders’ aggregate commitment under the facility is $800.0 million, with the ability for COPLP to increase the lenders’ aggregate commitment to $1.25 billion, provided that there is no default under the facility and subject to the approval of the lenders. The facility matures in March 2023, and may be extended by two six-month periods at COPLP’s option, provided that there is no default under the facility and COPLP pays an extension fee of 0.075% of the total availability under the facility for each extension period. As of September 30, 2019, the maximum borrowing capacity under this facility totaled $800.0 million, of which $580.0 million was available.

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

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

The following table summarizes our contractual obligations as of September 30, 2019 (in thousands):



	For the Periods Ending December 31,
	2019		2020		2021		2022		2023		Thereafter		Total
Contractual obligations (1)
Debt (2)
Balloon payments due upon maturity	$	—	$	12,132	$	300,000	$	285,071	$	633,578	$	623,272	$	1,854,053
Scheduled principal payments (3)	1,011		4,024		3,955		4,272		3,252		4,252		20,766
Interest on debt (3)(4)	18,950		75,474		68,432		62,761		37,695		28,512		291,824
Development and redevelopment obligations (5)(6)	87,120		115,754		14,193		—		—		—		217,067
Third-party construction obligations (6)(7)	7,289		6,193		—		—		—		—		13,482
Tenant and other capital improvements (3)(6)(8)	11,018		37,600		12,199		—		—		—		60,817
Finance leases (principal and interest) (3)	52		862		202		64		—		—		1,180
Operating leases (3)	279		1,126		1,111		1,129		1,134		99,187		103,966
Other obligations (3)	44		178		178		178		178		799		1,555
Total contractual cash obligations	$	125,763	$	253,343	$	400,270	$	353,475	$	675,837	$	756,022	$	2,564,710


(1)	The contractual obligations set forth in this table exclude property operations contracts that may be terminated with notice of one month or less and also exclude accruals and payables incurred (with the exclusion of debt) and therefore reflected in our reported liabilities.


(2)	Represents scheduled principal amortization payments and maturities only and therefore excludes net debt discounts and deferred financing costs of $12.5 million. As of September 30, 2019, maturities included $220.0 million in 2023 that may be extended to 2024, subject to certain conditions.


(3)	We expect to pay these items using cash flow from operations.


(4)	Represents interest costs for our outstanding debt as of September 30, 2019 for the terms of such debt. For variable rate debt, the amounts reflected above used September 30, 2019 interest rates on variable rate debt in computing interest costs for the terms of such debt. We expect to pay these items using cash flow from operations.


(5)	Represents contractual obligations pertaining to new development and redevelopment activities, including our obligation to fund infrastructure costs to the City of Huntsville, Alabama in connection with our LW Redstone Company, LLC joint venture.


(6)	Due to the long-term nature of certain construction and development contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable.


(7)	Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients. We expect to be reimbursed in full for these costs by our clients.


(8)	Represents contractual obligations pertaining to capital expenditures for our operating properties. We expect to pay these costs primarily using cash flow from operating activities.

We expect to spend approximately $80 million on construction and development costs and approximately $25 million on improvements and leasing costs for operating properties (including the commitments set forth in the table above) during the remainder of 2019. We expect to fund the construction and development costs initially using primarily borrowings under our Revolving Credit Facility. We expect to fund improvements to existing operating properties using cash flow from operating activities.

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

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements during the nine months ended September 30, 2019.

Inflation

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

Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks, one of the most predominant of which is a change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.

The following table sets forth as of September 30, 2019 our debt obligations and weighted average interest rates on debt maturing each year (dollars in thousands):



	For the Periods Ending December 31,
	2019			2020			2021			2022			2023			Thereafter			Total
Debt:
Fixed rate debt (1)	$	910		$	3,718		$	303,875		$	4,033		$	416,590		$	616,884		$	1,346,010
Weighted average interest rate	3.95		%	3.96		%	3.70		%	3.98		%	3.70		%	5.00		%	4.30		%
Variable rate debt (2)	$	101		$	12,438		$	80		$	285,310		$	220,240		$	10,640		$	528,809
Weighted average interest rate (3)	3.94		%	3.94		%	3.55		%	3.49		%	3.05		%	3.55		%	3.32		%


(1)	Represents principal maturities only and therefore excludes net discounts and deferred financing costs of $12.5 million.


(2)	As of September 30, 2019, maturities included $220.0 million in 2023 that may be extended to 2024, subject to certain conditions.


(3)	The amounts reflected above used interest rates as of September 30, 2019 for variable rate debt.

The fair value of our debt was $1.9 billion as of September 30, 2019. If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $48 million as of September 30, 2019.

See Note 10 to our consolidated financial statements for information pertaining to interest rate swap contracts in place as of September 30, 2019 and their respective fair values.

Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $1.4 million in the nine months ended September 30, 2019 if the applicable LIBOR rate was 1% higher.

Item 4. Controls and Procedures

COPT

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPT’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPT’s disclosure controls and procedures as of September 30, 2019 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in Internal Control over Financial Reporting

No change in COPT’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

COPLP

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of COPLP’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of September 30, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that COPLP’s disclosure controls and procedures as of September 30, 2019 were functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in Internal Control over Financial Reporting

No change in COPLP’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company or the Operating Partnership (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).

Item 1A. Risk Factors

There have been no material changes to the risk factors included in our 2018 Annual Report on Form 10-K, as supplemented by the risk factor included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


(a)	During the three months ended September 30, 2019, 97,539 of COPLP’s common units were exchanged for 97,539 COPT common shares in accordance with COPLP’s Third Amended and Restated Limited Partnership Agreement, as amended. The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

(b) Not applicable

Item 3. Defaults Upon Senior Securities

(a) Not applicable

(b) Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits:



EXHIBIT NO.		DESCRIPTION


31.1		Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

31.2		Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

31.3		Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

31.4		Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

32.1		Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith).

32.2		Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished herewith).

32.3		Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith).

32.4		Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished herewith).

101.INS		XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document (filed herewith).

101.SCH		Inline XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.LAB		Inline XBRL Extension Labels Linkbase (filed herewith).

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the undersigned Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.



	CORPORATE OFFICE PROPERTIES TRUST		CORPORATE OFFICE PROPERTIES, L.P.
			By: Corporate Office Properties Trust,
			its General Partner

	/s/ Stephen E. Budorick		/s/ Stephen E. Budorick
	Stephen E. Budorick		Stephen E. Budorick
	President and Chief Executive Officer		President and Chief Executive Officer


	/s/ Anthony Mifsud		/s/ Anthony Mifsud
	Anthony Mifsud		Anthony Mifsud
	Executive Vice President and Chief Financial Officer		Executive Vice President and Chief Financial Officer

Dated:	November 1, 2019	Dated:	November 1, 2019

COPT Defense Properties - 10-Q quarterly report FY

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