OREANDA-NEWS. Fitch Ratings has affirmed the following credit ratings for Corporate Office Properties Trust (NYSE: OFC) and its operating partnership, Corporate Office Properties, L.P. (collectively COPT, or the company):

Corporate Office Properties Trust
--Issuer Default Rating (IDR) at 'BBB-';
--Preferred Stock at 'BB'.

Corporate Office Properties, L.P.
--IDR at 'BBB-';
--Senior unsecured line of credit at 'BBB-';
--Senior unsecured term loans at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Strong Franchise/Defense-Driven Portfolio

COPT generates 79% of net operating income (NOI) from its strategic tenant niche, which includes properties occupied primarily by government agencies or defense contractors. As a result, COPT's assets are generally located near strategic defense locations (e.g. Fort Meade, Redstone Arsenal), which drives geographic concentration in the Washington, DC and Baltimore region. These strategic locations drive strong tenant investment in the assets and create stickiness, as retention rates have approximated 70% historically.

Tenant missions also center on R&D and high-tech areas that are critical to national cyber security in the United States. Together with COPT's long-standing relationships with the federal government and contractors, these strategic locations create meaningful barriers to entry.

Portfolio Realignment Complete

COPT completed its strategic reallocation plan that commenced in 2011 via the sale of non-core assets which, when combined with follow-on equity issuance, improved its balance sheet to levels consistent with investment-grade office REITs. The remaining transaction is the conveyance of a \\$132 million encumbered portfolio (\\$150 million of secured debt) to the special servicer during 2015. This transaction will further improve financial flexibility, lower corporate leverage, and facilitate reinvestment in the company's strategic niche properties.

Uneven Operating Fundamentals

Defense contractor downsizing, offset by good leasing activity, held same-store occupancy roughly flat since the beginning of 2014 at 90.7% as of March 31, 2015. Fundamentals remain uneven across COPT's markets, including the Baltimore/Washington Corridor and Northern Virginia markets, which collectively comprise 67% of portfolio square feet. The company had soft leasing indicators evidenced by negative cash leasing spreads in 2014 and first quarter 2015 (1Q15). However, GAAP leasing spreads continue to be positive across the portfolio and accelerated to 7.3% in 2014 and 2.7% in 1Q15. Fitch expects that occupancy will remain unchanged as new leasing activity offsets upcoming vacancies.

Informed Demand Mitigates Development Risk

COPT's growth strategy centers primarily on new development, as it has a strong relationship with, and insights regarding demand from, the U.S. Government for new space requirements. The (re)development pipeline totaled \\$294 million at March 31, 2015 and the development pipeline was 65% pre-leased to both government agencies and defense contractors supporting these entities. The cost to complete the pipeline is modest at 3.2% and despite potential growth toward 5%, Fitch expects development risk will continue to be mitigated by COPT's unique relationships which provide implicit pre-leasing.

The company remains well-positioned to capture future demand from cyber security-driven growth, which should offset weakness in regional markets and potential future downsizing from defense contractors. COPT leased approximately 900,000 square feet of first generation development and redevelopment space in 2014, which follows 900,000 in 2013 and a record 1.2 million in 2012.

Fitch expects development to be funded primarily with proceeds from asset sales. The company plans on selling primarily non-core assets in markets such as Baltimore and Northern Virginia.

Conveyances Improve Credit Profile

In December 2013, the company sold its 15-asset Colorado Springs portfolio for \\$133.9 million and conveyed 14 properties for \\$146.9 million in December 2013, reflecting the value of in-place debt and accrued interest. COPT anticipates conveying a separate \\$132 million portfolio to the special servicer in 2015 following vacancies by Northrop Grumman and CSC in April 2014, which will facilitate further headline de-levering. Fitch is not concerned about potential franchise risk at this time; however, additional conveyances would be viewed negatively (there are none expected) given the potential for weakened access to mortgage debt.

Elevated Leverage

Leverage (pro forma for the conveyance of assets encumbered by \\$150 million of secured debt) was 7.0x as of March 31, 2015, up from 6.5x as of both Dec. 31 2014 and 2013. March 31, 2015 leverage would have been 6.8x when excluding the debt incurred with an acquisition that occurred at the end of March 2015. Fitch expects leverage will remain in the high 6's for 2015 -2017 due to development assets coming on line and contributing to NOI, offset by stabilized asset dispositions. Projected leverage is elevated for the 'BBB-' Issuer Default Rating.

Fixed charge coverage (FCC; pro forma for the conveyance of assets encumbered by \\$150 million of secured debt) was 2.3x for the trailing 12 months (TTM) ended March 31, 2015 and Dec. 31, 2014, an increase from 2.1x in 2013. Fitch expects that coverage will approach 2.6x over the next 12-24 months, driven by recurring operating EBITDA growth via developments and continued access to debt capital at favorable rates. Projected coverage is good for the rating.

Adequate Financial Liquidity

COPT has an adequate liquidity profile with total sources of liquidity covering total uses of liquidity by 1.8x for the April 1, 2015 - Dec. 31, 2016 period.

Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under the unsecured revolving credit facility, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro rata debt maturities, expected recurring capital expenditures, and remaining development costs.

Weak Unencumbered Asset Coverage of Unsecured Debt
The company's unencumbered asset coverage of unsecured debt (using a stressed 9.0% capitalization rate) was 1.7x as of March 31, 2015, down from 2.2x as of Dec. 31, 2013. Fitch expects this ratio to improve to around 2.0x over the next several years as acquisition and development EBITDA come on line.

Conservative AFFO Payout Ratio

COPT's AFFO payout ratio was 77% in 2014, which allows the company to generate approximately \\$30 million of internal liquidity to fund growth and repay debt. Fitch expects the company to increase the dividend over the next 12 - 24 months; however, Fitch expects the AFFO ratio to remain below 80%.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for COPT include:
--Same-store revenue growth between 1.0% to 1.5% from 2015 -2017, reflecting expected vacancies and pressure on re-leasing spreads given a below-average retention rate;
--Development spending of \\$325 million in 2015, followed by \\$300 million and \\$200 million in 2016 - 2017;
--Portfolio conveyance to the special servicer, reducing secured debt by \\$150 million and net assets by \\$132 million;
--\\$300 million of dispositions in aggregate from 2015 - 2017 to partially fund development at 8.0% cap rates;
--\\$100 million of common equity issued over the period to help fund development; however, equity issuance is at management's discretion and Fitch notes that OFC's common shares are currently trading at a 19.8% discount to consensus mean net asset value according to SNL Financial.

RATING SENSITIVITIES

The following factors may have a positive impact on COPT's ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.0x (pro forma leverage was 7.0x at March 31, 2015);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (pro forma fixed charge coverage was 2.3x for the trailing twelve months ended March 31, 2015);
--Fitch's expectation of UA/UD maintaining above 2.5x based on a stressed 9% cap rate (UA/UD was 1.7x at March 31, 2015).

The following factors may have a negative impact on the company's ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.8x;
--Fitch's expectation of UA/UD sustaining below 1.8x;
--Material macroeconomic weakness affecting the defense industry, such that a larger portion of COPT's portfolio would be comprised of traditional suburban office assets.