When Manekin Corp. began scouting out buyers for its eight-building Commons Corporate Center in Hanover earlier this year, it shouldn't have been surprised to find Corporate Office Properties Trust knocking at its door.
That's because at a time when many once high-flying REITs have been put on ice because access to capital has been all but frozen, Philadelphia-based COPT has been buying and developing properties with the energy of a squirrel preparing for winter.
Since April 1998, COPT has spent more than $420 million to buy and develop 42 buildings around Baltimore, making it one of the area's most active firms in a market where names like Rouse and Manekin typically dominate.
By comparison, REIT acquisitions nationwide shrank to $3.6 billion in the first quarter of this year vs. $22.6 billion that trusts spent in the comparable period last year, according to a study by Alliance Capital/CB Richard Ellis.
"To be successful in the suburban office sector, we believe a company has to have a lot of projects geographically close together," said Clay W. Hamlin III, the Bala Cynwyd, Pa.-based company's chief executive officer. "Be- cause when you have that, we believe a company can operate more efficiently."
To that end, COPT has concentrated its efforts on four markets: the Baltimore/Washington area, especially around BWI Airport; Blue Bell, Pa.; Harrisburg, Pa.; and Princeton, N.J. The company owns 59 buildings totaling 4.7 million square feet valued at $583 million.
In Anne Arundel County, COPT owns 3.1 million square feet of office space -- a quarter of the total -- and has become one of the county's largest landlords. It has also become one of Anne Arundel's biggest taxpayers; this year COPT will pay about $1.2 million in property taxes.
"The geographic concentration allows them to compete with much larger REITs on a regional basis," said Jeffrey P. Caira, a REIT analyst at Tucker Cleary Gull Co., a Boston securities firm.
COPT will likely be able to compete in other ways, too.
Corporate Realty Management, a COPT property management subsidiary owned jointly with Towson-based KLNB Inc., manages another 118 projects for other owners, consisting of more than 9 million square feet.
Few signs of slowing
COPT shows few signs of slowing down, thanks to a unique corporate structure, a focused strategy and an intrepid outlook toward what most 1990s publicly traded commercial real estate developers shy away from: debt.
While other trusts are looking to grow at a 10 percent clip this year, COPT's relatively small market capitalization at just more than $500 million, combined with its aggressive penchant to buy and build, should result in a 31 percent earnings gain for the year, according to a consensus from First Call.
"Most REITs haven't grown in the past year at all," Hamlin said. "We've gone from a company with $200 million in assets to one with $600 million."
The decision to rely more on debt than equity -- COPT's balance sheet includes 55 percent debt, compared with about 40 percent on the average for most REITs -- also has allowed the company to continue developing as other REITs have been forced to the sidelines.
COPT has more than $64 million worth of new development under way, which will add 447,000 square feet to its portfolio, and another $220 million worth of new projects in the pipeline, which will add as much as 1.5 million square feet.
"The REIT market has shifted from acquisitions to development, and not everyone is able to make that shift," Caira said.
"Fortunately for them, COPT has considerable development experience."
Projects await
COPT expects that its development projects in the pipeline -- including a $17 million, four-story building being constructed for Internet stockbroker Ameritrade Holding Corp. in Annapolis Junction -- will carry it through the next couple of years.
"They've been consistently aggressive in putting up new Class A office space, which has allowed us to attract some cutting-edge technology companies to the county," said William A. Badger Jr., acting president and chief executive officer of the Anne Arundel Economic Development Corp., a nonprofit contractor to the county.
"Quite frankly, I don't know if we would have gotten a lot of the prospects we did without COPT," he added. "They've had a major impact on the county."
Earnings responding
COPT's new development projects and hunger to acquire existing buildings have translated into significant earnings growth.
In the REIT's second quarter that ended June 30, COPT generated a 42 percent increase in funds from operations (FFO) per share to 27 cents.
The $7.9 million in funds from operations -- a standard measure of a REIT's performance -- easily doubled the $3.3 million the company posted in the three months that ended June 1998.
"I see a lot of potential for growth for them," said Sara Grootwassink, a Johnston, Lemon & Co. real estate analyst in Washington.
COPT was posting impressive earnings numbers, its portfolio stood at 97 percent occupied, and it renewed 99 percent of the leases that expired, while boosting rents an average of 24 percent.
COPT executives attribute part of the company's success to its concentration geographically and on blue-chip tenants. Its top 20 tenants, including the U.S. government, Unisys Corp., AT&T; Corp., International Business Machines Corp. and Ciena Corp., occupy two-thirds of the company's space on typically longer-term leases.
"What tends to happen is they [the tenants] don't go anywhere as long as you take good care of them," said COPT President and Chief Operating Officer Randall M. Griffin. "It becomes rather a matter of whether you can as a company accommodate their growth."
"That's a strength for them," Caira said.
Shares are down
COPT's largest shareholder is pleased with the trust's performance as well, even though its common stock has dropped this year from about $10.50 per share to $8.1875.
"I think the execution of their business plan has been terrific," said Edward A. Crooke, a COPT board member and vice chairman of Baltimore Gas and Electric Co.'s parent, Constellation Energy Group Inc., which holds 41.5 percent of the shares.
"COPT has expanded its investments, its occupancy is very strong, and their operations are exceeding our expectations," Crooke added.
COPT has succeeded in expanding as other REITs are struggling to find capital, holding firm or liquidating assets because unlike other trusts, they don't rely on Wall Street as their primary source of funds.
Instead of selling common shares on the open market, COPT has chosen a financial cocktail that includes borrowing from lenders such as Deutsche Banc Alex. Brown, issuing operating partnership units that are convertible to stock, and preferred shares.
"Most REITs are forced to maintain a low leverage ratio because that's what Wall Street demanded when they went public," Hamlin said.
"As a result, a lot of REITs do really well on the real estate side of the business but aren't able to get capital. We've been able to avoid that."
Unlike other REITs, COPT isn't handcuffed to debt ratios that prohibit trusts from loading up on debt when new equity can't be raised from the sale of stock.
COPT doesn't have the same sort of debt constraints because it took a somewhat back-door approach to becoming a REIT. Its roots go back to 1991, when as a publicly traded company known as Royale Investments Inc. it owned shopping centers.
But six years later, when Royale absorbed an office-dominated portfolio owned by TriNet Realty Corp. founder Jay Shidler, it shifted its focus and became COPT. Today, it is working slowly to sell off the retail projects.
The move would turn out to be an important one, allowing COPT, unlike most other REITs, to avoid relying on Wall Street for capital and growth.
But in largely eschewing Wall Street stock offerings, COPT has relied primarily on debt, the demon of 1980s real estate developers that sunk the likes of Olympia & York and other seemingly well-capitalized players.
But in Hamlin's and Griffin's mind, COPT's $332.1 million in total debt isn't a problem, and not just because a majority of it is fixed at an average 7.25 percent or because the company's earnings are nearly 2.5 times as much as its debt payments.
"There's no question that having 60 percent leverage is riskier than having 30 percent," Hamlin said. "But I would tell you that we are a company with a stable tenant base, and with the leases we have in place, 60 percent debt is very conservative."
Analysts tend to agree, though some wince at the unorthodox REIT formula and relatively heavy reliance on borrowing.
"They have a lot of debt, but I'm comfortable with it because much of it is secured and a good portion of it is fixed debt," said Johnston, Lemon's Grootwassink.
"But it does hamper them somewhat because a lot of mutual funds and institutions won't invest in a company with more than 50 percent debt to market capitalization."
However, while COPT has had little difficulty getting the money it has needed, don't look for the company to take its show too far down the road anytime soon.
"Why should we go to Detroit or somewhere, when we can stay in the [geographic] triangle we have and focus and become a $1.5 to $2 billion company?" Griffin asked.
Instead, COPT is studying places such as the Interstate 270 corridor and Frederick in Maryland, parts of Delaware and its old stomping grounds, Philadelphia.
"We're a really unique company these days in the REIT industry, which frankly is getting a little boring," Hamlin said.
"People are talking about internal growth because they have to. But meanwhile, we're a little jewel in the industry."
Pub Date: 8/22/99