COPT is `little jewel' of the REIT industry

With nimble moves and lots of leverage, it's going places

August 22, 1999|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

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.

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