Corporate Office Properties Trust (COPT) reported this month that since the cash flows generated by the properties that serve as collateral for a $147 million non recourse loan will be insufficient to fund debt service requirements, the company’s management has determined that it will convey the properties to the lender.
COPT reported that it expects the conveyance of the properties to occur in a series of transactions in the fourth quarter of 2013 and the first quarter of 2014.
This strategy was hinted at during the REIT’s call with analysts last quarter. John Guinee with Stifel Nicolaus asked about the company’s two CMBS loans.
“One is Washington Tech Park and then another is $145 million collateral on assets in both Colorado Springs and the Baltimore/Washington Airport market,” said Guinee. “Effectively, if those goes back to the lender at $145 bucks a foot and $225 a foot, is that a good deal for you or how do you look at that?”
“It would be a good deal for our shareholders,” replied Steve Riffee, COPT’s Executive Vice President and CFO. “It really gets down to can we create a loan scenario where it would be even more optimal for our customers and shareholders in the long run. But you are right. The sale — the put back to the lender at $225 a square foot and $145 a square foot – would be a good transaction for our shareholders.”
The $146.5 million COPT Office Portfolio loan was transferred to a special servicer in March due to “imminent default,” according to Fitch.
The loan is secured by first mortgages encumbering 14 office properties in Linthicum, MD and Colorado Springs, CO totaling 1.019 million square feet. The properties were appraised for $183.35 million at the time the loan was secured.
COPT said the properties now have an estimated aggregate fair value of approximately $100 million. COPT said it was unable to negotiate various alternatives with the lender on the debt.
The fair values of some of the properties in Colorado Springs, Colorado are lower than their carrying values. Therefore, COPT said it would recognize non-cash impairment losses of approximately $11 million, representing the amount by which the carrying amounts of the properties exceed their fair values.
COPT also expect to recognize gains on debt extinguishment of approximately $74 million, representing the amount by which the Debt will exceed the adjusted carrying amounts of the properties.
COPT said it does not expect to incur additional material charges in connection with the conveyance, and since the debt is non recourse, no further loss is expected after conveyance of the Collateral Properties.
COPT is in continuing negotiations to sell other properties in Colorado Springs that are classified as held for sale. As a result of these negotiations, management has determined that it will recognize non-cash impairment losses of approximately $5 million to adjust the carrying values of the properties to their expected fair values less costs to sell. COPT does not expect to incur additional material charges in connection with the disposition of these properties.