UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q 
(Mark one)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2013
or
o
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
(Exact name of registrant as specified in its charter)
Maryland
 
23-2947217
(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
 
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.
ý Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
ý Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes   ý No
 
As of April 18, 2013, 85,770,338 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
 
 
 
 
 



TABLE OF CONTENTS
 
FORM 10-Q
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
March 31,
2013
 
December 31,
2012
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,705,335

 
$
2,597,666

Projects in development or held for future development
484,638

 
565,378

Total properties, net
3,189,973

 
3,163,044

Assets held for sale, net
142,404

 
140,229

Cash and cash equivalents
23,509

 
10,594

Restricted cash and marketable securities
17,040

 
21,557

Accounts receivable (net of allowance for doubtful accounts of $5,351 and $4,694, respectively)
10,768

 
19,247

Deferred rent receivable
88,716

 
85,802

Intangible assets on real estate acquisitions, net
72,035

 
75,879

Deferred leasing and financing costs, net
59,856

 
59,952

Prepaid expenses and other assets
80,798

 
77,455

Total assets
$
3,685,099

 
$
3,653,759

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,957,360

 
$
2,019,168

Accounts payable and accrued expenses
90,645

 
97,922

Rents received in advance and security deposits
26,024

 
27,632

Dividends and distributions payable
29,947

 
28,698

Deferred revenue associated with operating leases
10,833

 
11,995

Distributions received in excess of investment in unconsolidated real estate joint venture
6,420

 
6,420

Interest rate derivatives
5,340

 
6,185

Other liabilities
7,631

 
8,942

Total liabilities
2,134,200

 
2,206,962

Commitments and contingencies (Note 16)


 


Redeemable noncontrolling interest
10,356

 
10,298

Equity:
 

 
 

Corporate Office Properties Trust’s shareholders’ equity:
 

 
 

Preferred Shares of beneficial interest at liquidation preference ($0.01 par value; 25,000,000 shares authorized; 12,821,667 shares issued and outstanding)
333,833

 
333,833

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 85,758,438 at March 31, 2013 and 80,952,986 at December 31, 2012)
858

 
809

Additional paid-in capital
1,772,255

 
1,653,672

Cumulative distributions in excess of net income
(632,134
)
 
(617,455
)
Accumulated other comprehensive loss
(4,410
)
 
(5,435
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,470,402

 
1,365,424

Noncontrolling interests in subsidiaries:
 

 
 

Common units in the Operating Partnership
50,604

 
52,122

Preferred units in the Operating Partnership
8,800

 
8,800

Other consolidated entities
10,737

 
10,153

Noncontrolling interests in subsidiaries
70,141

 
71,075

Total equity
1,540,543

 
1,436,499

Total liabilities, redeemable noncontrolling interest and equity
$
3,685,099

 
$
3,653,759

See accompanying notes to consolidated financial statements.

3



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2013
 
2012
Revenues
 
 
 
Rental revenue
$
95,295

 
$
89,859

Tenant recoveries and other real estate operations revenue
21,440

 
20,802

Construction contract and other service revenues
14,262

 
21,534

Total revenues
130,997

 
132,195

Expenses
 

 
 

Property operating expenses
42,575

 
41,253

Depreciation and amortization associated with real estate operations
28,252

 
27,834

Construction contract and other service expenses
13,477

 
20,607

Impairment losses (recoveries)
1,857

 
(4,836
)
General, administrative and leasing expenses
7,820

 
9,569

Business development expenses and land carry costs
1,359

 
1,576

Total operating expenses
95,340

 
96,003

Operating income
35,657

 
36,192

Interest expense
(22,307
)
 
(24,431
)
Interest and other income
946

 
1,217

Loss on early extinguishment of debt
(5,184
)
 
—

Income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes
9,112

 
12,978

Equity in income (loss) of unconsolidated entities
41

 
(89
)
Income tax expense
(16
)
 
(204
)
Income from continuing operations
9,137

 
12,685

Discontinued operations
3,786

 
(2,450
)
Income before gain on sales of real estate
12,923

 
10,235

Gain on sales of real estate
2,354

 
—

Net income
15,277

 
10,235

Net (income) loss attributable to noncontrolling interests:
 

 
 

Common units in the Operating Partnership
(429
)
 
(373
)
Preferred units in the Operating Partnership
(165
)
 
(165
)
Other consolidated entities
337

 
598

Net income attributable to Corporate Office Properties Trust
15,020

 
10,295

Preferred share dividends
(6,106
)
 
(4,025
)
Net income attributable to Corporate Office Properties Trust common shareholders
$
8,914

 
$
6,270

Net income attributable to Corporate Office Properties Trust:
 

 
 

Income from continuing operations
$
11,437

 
$
12,588

Discontinued operations, net
3,583

 
(2,293
)
Net income attributable to Corporate Office Properties Trust
$
15,020

 
$
10,295

Basic earnings per common share (1)
 

 
 

Income from continuing operations
$
0.06

 
$
0.12

Discontinued operations
0.05

 
(0.03
)
Net income attributable to COPT common shareholders
$
0.11

 
$
0.09

Diluted earnings per common share (1)
 
 
 
Income from continuing operations
$
0.06

 
$
0.12

Discontinued operations
0.05

 
(0.03
)
Net income attributable to COPT common shareholders
$
0.11

 
$
0.09

Dividends declared per common share
$
0.275

 
$
0.275

(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.

4


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
For the Three Months Ended March 31,
 
2013
 
2012
Net income
$
15,277

 
$
10,235

Other comprehensive income (loss)
 

 
 

Unrealized gains (losses) on interest rate derivatives
462

 
(1,987
)
Losses on interest rate derivatives included in net income
658

 
1,474

Other comprehensive income (loss)
1,120

 
(513
)
Comprehensive income
16,397

 
9,722

Comprehensive (income) loss attributable to noncontrolling interests
(352
)
 
105

Comprehensive income attributable to Corporate Office Properties Trust
$
16,045

 
$
9,827

 
See accompanying notes to consolidated financial statements.


5


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
 
Preferred
Shares
 
Common
Shares
 
Additional
Paid-in
Capital
 
Cumulative
Distributions in
Excess of Net
Income
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2011 (72,011,324 common shares outstanding)
$
216,333

 
$
720

 
$
1,451,078

 
$
(534,041
)
 
$
(1,733
)
 
$
73,542

 
$
1,205,899

Conversion of common units to common shares (34,550 shares)
—

 
—

 
444

 
—

 
—

 
(444
)
 
—

Costs associated with common shares issued to the public
—

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Exercise of share options (5,667 shares)
—

 
—

 
82

 
—

 
—

 
—

 
82

Share-based compensation
—

 
—

 
3,746

 
—

 
—

 
—

 
3,746

Restricted common share redemptions (97,094 shares)
—

 
—

 
(2,373
)
 
—

 
—

 
—

 
(2,373
)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership
—

 
—

 
(88
)
 
—

 
—

 
88

 
—

Comprehensive income
—

 
—

 
—

 
10,295

 
(468
)
 
469

 
10,296

Dividends
—

 
—

 
—

 
(23,845
)
 
—

 
—

 
(23,845
)
Distributions to owners of common and preferred units in the Operating Partnership
—

 
—

 
—

 
—

 
—

 
(1,338
)
 
(1,338
)
Adjustment to arrive at fair value of noncontrolling interest
—

 
—

 
(903
)
 
—

 
—

 
—

 
(903
)
Balance at March 31, 2012 (72,037,627 common shares outstanding)
$
216,333

 
$
720

 
$
1,451,981

 
$
(547,591
)
 
$
(2,201
)
 
$
72,317

 
$
1,191,559

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012 (80,952,986 common shares outstanding)
$
333,833

 
$
809

 
$
1,653,672

 
$
(617,455
)
 
$
(5,435
)
 
$
71,075

 
$
1,436,499

Conversion of common units to common shares (248,644 shares)
—

 
3

 
3,172

 
—

 
—

 
(3,175
)
 
—

Common shares issued to the public (4,485,000 shares)
—

 
45

 
117,868

 
—

 
—

 
—

 
117,913

Exercise of share options (16,453 shares)
—

 
—

 
301

 
—

 
—

 
—

 
301

Share-based compensation
—

 
1

 
1,999

 
—

 
—

 
—

 
2,000

Restricted common share redemptions (60,960 shares)
—

 
—

 
(1,576
)
 
—

 
—

 
—

 
(1,576
)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership
—

 
—

 
(2,229
)
 
—

 
—

 
2,229

 
—

Comprehensive income
—

 
—

 
—

 
15,020

 
1,025

 
1,142

 
17,187

Dividends
—

 
—

 
—

 
(29,699
)
 
—

 
—

 
(29,699
)
Distributions to owners of common and preferred units in the Operating Partnership
—

 
—

 
—

 
—

 
—

 
(1,215
)
 
(1,215
)
Contributions from noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
85

 
85

Adjustment to arrive at fair value of noncontrolling interest
—

 
—

 
(848
)
 
—

 
—

 
—

 
(848
)
Increase in tax benefit from share-based compensation
—

 
—

 
(104
)
 
—

 
—

 
—

 
(104
)
Balance at March 31, 2013 (85,758,438 common shares outstanding)
$
333,833

 
$
858

 
$
1,772,255

 
$
(632,134
)
 
$
(4,410
)
 
$
70,141

 
$
1,540,543

See accompanying notes to consolidated financial statements.

6


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
119,348

 
$
129,184

Construction contract and other service revenues received
15,695

 
18,170

Property operating expenses paid
(38,865
)
 
(39,659
)
Construction contract and other service expenses paid
(15,588
)
 
(12,454
)
General, administrative, leasing, business development and land carry costs paid
(8,521
)
 
(7,997
)
Interest expense paid
(18,018
)
 
(19,896
)
Previously accreted interest expense paid
(2,263
)
 
—

Settlement of interest rate derivatives
—

 
(29,738
)
Proceeds from sale of trading marketable securities
—

 
7,041

Exit costs on property dispositions
—

 
(1,108
)
Payments in connection with early extinguishment of debt
(4,803
)
 
—

Interest and other income received
320

 
252

Income taxes paid
6

 
(8
)
Net cash provided by operating activities
47,311

 
43,787

Cash flows from investing activities
 

 
 

Purchases of and additions to properties
 

 
 

Construction, development and redevelopment
(44,361
)
 
(35,476
)
Tenant improvements on operating properties
(5,263
)
 
(7,934
)
Other capital improvements on operating properties
(9,327
)
 
(3,360
)
Proceeds from sales of properties
—

 
61,230

Mortgage and other loan receivables funded or acquired
(2,231
)
 
(3,506
)
Leasing costs paid
(3,436
)
 
(2,853
)
Other
4,442

 
(310
)
Net cash (used in) provided by investing activities
(60,176
)
 
7,791

Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
99,000

 
71,000

Other debt proceeds
68,132

 
260,097

Repayments of debt
 
 
 
Revolving Credit Facility
(99,000
)
 
(337,000
)
Scheduled principal amortization
(2,512
)
 
(3,207
)
Other debt repayments
(125,877
)
 
(50
)
Deferred financing costs paid
(1,109
)
 
(2,044
)
Net proceeds from issuance of common shares
118,389

 
77

Common share dividends paid
(22,276
)
 
(29,686
)
Preferred share dividends paid
(6,106
)
 
(4,025
)
Distributions paid to noncontrolling interests in the Operating Partnership
(1,370
)
 
(1,939
)
Restricted share redemptions
(1,576
)
 
(2,373
)
Other
85

 
—

Net cash provided by (used in) financing activities
25,780

 
(49,150
)
Net increase in cash and cash equivalents
12,915

 
2,428

Cash and cash equivalents
 

 
 

Beginning of period
10,594

 
5,559

End of period
$
23,509

 
$
7,987

See accompanying notes to consolidated financial statements.
 


7


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)

 
For the Three Months Ended March 31,
 
2013
 
2012
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
15,277

 
$
10,235

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and other amortization
28,782

 
31,705

Impairment losses
1,857

 
5,479

Settlement of previously accreted interest expense
(2,263
)
 
—

Amortization of deferred financing costs
1,528

 
1,572

Increase in deferred rent receivable
(4,236
)
 
(2,559
)
Amortization of net debt discounts
710

 
775

Gain on sales of real estate
(2,354
)
 
(4,138
)
Share-based compensation
1,649

 
3,402

Loss on early extinguishment of debt
381

 
—

Other
(2,717
)
 
(1,423
)
Changes in operating assets and liabilities:
 

 
 
Decrease in accounts receivable
8,479

 
14,792

Decrease in restricted cash and marketable securities
201

 
15,091

Decrease (increase) in prepaid expenses and other assets
4,180

 
(9,612
)
(Decrease) increase in accounts payable, accrued expenses and other liabilities
(2,555
)
 
8,372

Decrease in rents received in advance and security deposits
(1,608
)
 
(1,901
)
Decrease in interest rate derivatives in connection with cash settlement
—

 
(28,003
)
Net cash provided by operating activities
$
47,311

 
$
43,787

Supplemental schedule of non-cash investing and financing activities:
 

 
 

(Decrease) increase in accrued capital improvements, leasing and other investing activity costs
$
(5,353
)
 
$
11,828

Increase (decrease) in fair value of derivatives applied to AOCL and noncontrolling interests
$
1,105

 
$
(528
)
Dividends/distribution payable
$
29,947

 
$
24,544

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
3,175

 
$
444

Adjustments to noncontrolling interests resulting from changes in Operating Partnership ownership
$
2,229

 
$
88

Increase in redeemable noncontrolling interest and decrease in shareholders’ equity in connection with adjustment to arrive at fair value of noncontrolling interest
$
848

 
$
903

 
See accompanying notes to consolidated financial statements.


8


Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company,” “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of March 31, 2013, our investments in real estate included the following:

•
210 operating office properties totaling 19.1 million square feet;
•
10 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.3 million square feet upon completion, including one partially operational property included above;
•
land held or under pre-construction totaling 1,703 acres (including 561 controlled but not owned) that we believe are potentially developable into approximately 19.7 million square feet; and
•
a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.
 
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), of which we are the managing general partner.  The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”).  A summary of our Operating Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of March 31, 2013 follows: 
Common Units
96
%
Series H Preferred Units
100
%
Series I Preferred Units
0
%
Series J Preferred Units
100
%
Series K Preferred Units
100
%
Series L Preferred Units
100
%
 
Three of our trustees also controlled, either directly or through ownership by other entities or family members, an additional 4% of the Operating Partnership’s common units (“common units”) as of March 31, 2013.
 
In addition to owning real estate, the Operating Partnership 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.
 
2.     Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which we have 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 significant 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 the entity’s operations 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.
 
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.


9


These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2012 included in our 2012 Annual Report on Form 10-K.  The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations.  All adjustments are of a normal recurring nature except for errors described below.  The consolidated financial statements have been prepared using the accounting policies described in our 2012 Annual Report on Form 10-K.

Reclassifications
 
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. 

Revisions

As reported in our 2012 Annual Report on Form 10-K, we identified the following errors in 2012:

•
the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012.  The effect of this error was an overstatement of our income tax benefit and an understatement of our net loss for the year ended December 31, 2011 of $4.0 million.  Based on an evaluation against our projected annual net income at that time, this error was previously reported as an out-of-period adjustment in the three months ended March 31, 2012;
•
an over-accrual of incentive compensation cost, the effect of which was an overstatement of general and administrative expenses and an overstatement of net loss for the calendar quarter and year ended December 31, 2011 of $711,000. Based on an evaluation against our projected annual net income at that time, this error was previously reported as an out-of-period adjustment in the three months ended March 31, 2012;
•
the misapplication of accounting guidance requiring that we recognize loss allocations to a noncontrolling interest holder in a consolidated real estate joint venture associated with decreases in such holder's claim on the book value of the joint venture’s assets, despite the fact that the real estate held by the joint venture was under development and the joint venture had no underlying losses. The effect of this error was an understatement of losses attributable to noncontrolling interests in other consolidated entities of $1.8 million for the nine months ended September 30, 2012 and $1.4 million for the year ended December 31, 2011; and
•
the misapplication of accounting guidance pertaining to our reporting for a noncontrolling interest in a consolidated real estate joint venture formed in March 2010 for which the holder of such interest has the right to require us to acquire the interest at fair value. Accounting guidance requires that this noncontrolling interest be classified outside of permanent equity and reported at fair value as of the end of each reporting period, with changes in such fair value reported as equity transactions with no impact to net income or comprehensive income. This error resulted in an overstatement of equity and offsetting understatement of the line entitled “redeemable noncontrolling interest” in the mezzanine section of our consolidated balance sheet of $8.9 million as of December 31, 2011. This error had no effect on our consolidated statements of operations, including our reported net income (losses) or earnings per share.

With respect to the errors in the first two bullets above, we assessed the materiality of these errors on the financial statements in connection with previously filed periodic reports, in accordance with ASC 250 (SEC’s Staff Accounting Bulletin No. 99, “Materiality”), and concluded at such time that the errors were not material to any prior annual or interim periods. In assessing the cumulative effect of all such errors, we have considered ASC 250 (SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”), and accordingly, the financial statements as of, and for the year ended, December 31, 2011 were revised in our 2012 Annual Report on Form 10-K. We have revised amounts pertaining to the first quarter of 2012 herein and will revise amounts pertaining to the remaining 2012 calendar quarters ended June 30, 2012 and September 30, 2012 in future quarterly filings on Form 10-Q. The following are selected line items from our financial statements as of, and for the three months ended, March 31, 2012 illustrating the affect of adjustments to revise the financial statements (the “As Previously Reported” columns include the effects of other reclassifications and retrospective changes in presentation discussed in our 2012 Annual Report on Form 10 (in thousands):

10


 
Consolidated Balance Sheet as of March 31, 2012
 
Per March 31, 2012 10-Q
 
As Revised
 
Change
 
Reclassifications
 
Revisions
Redeemable noncontrolling interest
$
—

 
$
9,237

 
$
9,237

 
$
—

 
$
9,237

Preferred Shares, reported at par value
$
81

 
$
—

 
$
(81
)
 
$
(81
)
 
$
—

Preferred Shares, reported at liquidation value
$
—

 
$
216,333

 
$
216,333

 
$
216,333

 
$
—

Additional paid-in capital
$
1,670,451

 
$
1,451,981

 
$
(218,470
)
 
$
(216,252
)
 
$
(2,218
)
Cumulative distributions in excess of net income
$
(549,456
)
 
$
(547,591
)
 
$
1,865

 
$
—

 
$
1,865

Noncontrolling interests in common units in the Operating Partnership
$
53,883

 
$
53,999

 
$
116

 
$
—

 
$
116

Noncontrolling interests in other consolidated entities
$
18,518

 
$
9,518

 
$
(9,000
)
 
$
—

 
$
(9,000
)
Total equity
$
1,200,796

 
$
1,191,559

 
$
(9,237
)
 
$
—

 
$
(9,237
)
Total liabilities, redeemable noncontrolling interest and equity
$
3,797,368

 
$
3,797,368

 
$
—

 
$
—

 
$
—


 
Consolidated Statements of Operations for the
 
Three Months Ended March 31, 2012
 
Per March 31, 2012 10-Q
 
Per March 31, 2013 10-Q
 
Change
 
Discontinued Operations
 
Other Reclassifications
 
Revisions
Total revenues
$
143,473

 
$
132,195

 
$
(11,278
)
 
$
(11,278
)
 
$
—

 
$
—

Expenses
 
 
 
 


 
 
 
 
 
 
Property operating expenses
$
47,202

 
$
41,253

 
$
(5,949
)
 
$
(4,108
)
 
$
(1,841
)
 
$
—

Depreciation and amortization associated with real estate operations
31,066

 
27,834

 
(3,232
)
 
(3,232
)
 
—

 
—

Construction contract and other service expenses
20,607

 
20,607

 
—

 
—

 
—

 
—

Impairment losses (recoveries)
5,126

 
(4,836
)
 
(9,962
)
 
(9,962
)
 
—

 
—

General, administrative and leasing expenses
7,017

 
9,569

 
2,552

 
—

 
1,841

 
711

Business development expenses and land carry costs
1,594

 
1,576

 
(18
)
 
(18
)
 
—

 
—

Total operating expenses
$
112,612

 
$
96,003

 
$
(16,609
)
 
$
(17,320
)
 
$
—

 
$
711

Operating income
$
30,861

 
$
36,192

 
$
5,331

 
$
6,042

 
$
—

 
$
(711
)
Interest expense
$
(25,224
)
 
$
(24,431
)
 
$
793

 
$
793

 
$
—

 
$
—

Income tax (expense) benefit
$
(4,173
)
 
$
(204
)
 
$
3,969

 
$
—

 
$
—

 
$
3,969

Income from continuing operations
$
2,592

 
$
12,685

 
$
10,093

 
$
6,835

 
$
—

 
$
3,258

Discontinued operations
$
4,385

 
$
(2,450
)
 
$
(6,835
)
 
$
(6,835
)
 
$
—

 
$
—

Net income
$
6,977

 
$
10,235

 
$
3,258

 
$
—

 
$
—

 
$
3,258

Net income attributable to noncontrolling interests in common units in the Operating Partnership
$
(159
)
 
$
(373
)
 
$
(214
)
 
$
—

 
$
—

 
$
(214
)
Net income attributable to noncontrolling interests in other consolidated entities
$
24

 
$
598

 
$
574

 
$
—

 
$
—

 
$
574

Net income attributable to Corporate Office Properties Trust
$
6,677

 
$
10,295

 
$
3,618

 
$
—

 
$
—

 
$
3,618

Basic and diluted earnings per common share:
 
 
 
 

 
 
 
 
 
 
Income from continuing operations
$
(0.02
)
 
$
0.12

 
$
0.14

 
$
0.09

 
$
—

 
$
0.05

Discontinued operations
0.06

 
(0.03
)
 
(0.09
)
 
(0.09
)
 
—

 
—

Net income attributable to COPT common shareholders
$
0.04

 
$
0.09

 
$
0.05

 
$
—

 
$
—

 
$
0.05


11



Recent Accounting Pronouncements

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2013 related to the reporting of the effect of significant reclassifications from accumulated other comprehensive income. This guidance requires an entity to report, either parenthetically on the face of the financial statements or in a single footnote, changes in the components of accumulated other comprehensive income for the period. An entity is required to separately report the amount of such changes attributable to reclassifications (and the statements of operations line affected by such reclassifications) and the amount of such changes attributable to current period other comprehensive income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. Our adoption of this guidance did not affect our consolidated financial statements or disclosures.

3.     Fair Value Measurements

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2012 Annual Report on Form 10-K.
 
Recurring Fair Value Measurements
 
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2013 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
 
$
6,606

 
$
—

 
$
—

 
$
6,606

Common stocks
 
239

 
—

 
—

 
239

Other
 
213

 
—

 
—

 
213

Common stock (1)
 
743

 
—

 
—

 
743

Interest rate derivatives (2)
 
—

 
260

 
—

 
260

Warrants to purchase common stock (2)
 
—

 
420

 
—

 
420

Assets
 
$
7,801

 
$
680

 
$
—

 
$
8,481

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$
7,058

 
$
—

 
$
—

 
$
7,058

Interest rate derivatives
 
—

 
5,340

 
—

 
5,340

Liabilities
 
$
7,058

 
$
5,340

 
$
—

 
$
12,398

Redeemable noncontrolling interest
 
$
—

 
$
—

 
$
10,356

 
$
10,356


(1) Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheet.

As discussed further in Note 5, our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest, we used a discount rate of 15.5%, which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  We estimated the fair values of our mortgage loans receivable as discussed in Note 6 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

12


payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 7 to the consolidated financial statements, we estimated the fair value of our exchangeable senior notes based on quoted market prices 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 at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement of 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 6 for mortgage loans receivable, Note 7 for debt and Note 8 for interest rate derivatives. 

Nonrecurring Fair Value Measurements
 
Three Months Ended March 31, 2013

During the three months ended March 31, 2013, we shortened the holding period for a property in the Baltimore/Washington Corridor that we expect to sell. We determined that the carrying amount of this property will not likely be recovered from the cash flows from the operation and sale of the property over the likely remaining holding period. Accordingly, we recognized a non-cash impairment loss of $1.9 million for the amount by which the carrying value of the property exceeded its estimated fair value. The table below sets forth the fair value hierarchy of the valuation technique used by us in determining the fair value of the property (dollars in thousands):
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Impairment
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Losses
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
Recognized
Assets (1):
 
 

 
 

 
 

 
 

 
 

Properties, net
 
$
—

 
$
—

 
$
7,250

 
$
7,250

 
$
1,857


(1) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):
Description
 
Fair Value on 
Measurement Date
 
Valuation Technique
 
 Unobservable Input
 
Range (Weighted Average)
Property on which impairment loss was recognized
 
$
7,250

 
Bid for property indicative of value
 
Indicative bid (1)
 
(1)

(1) This fair value measurement was developed by a third party source, subject to our corroboration for reasonableness.

Three Months Ended March 31, 2012

During the three months ended March 31, 2012, we recognized non-cash impairment losses of $5.5 million for the amount by which the carrying values of certain properties exceeded their estimated fair values. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the three months ended March 31, 2012 (dollars in thousands):
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Impairment
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Losses
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
Recognized (1)
Assets (2):
 
 

 
 

 
 

 
 

 
 

Properties, net
 
$
—

 
$
—

 
$
92,176

 
$
92,176

 
$
5,479


(1) Represents impairment losses, excluding exit costs incurred of $1.1 million.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.


13


The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):
Description
 
Fair Value on 
Measurement Date
 
Valuation Technique
 
 Unobservable Input
 
Range (Weighted Average)
Properties on which impairment losses were recognized
 
$
92,176

 
Bid for properties indicative of value
 
Indicative bid (1)
 
(1)
 
 
 
 
Contract of sale
 
Contract price (1)
 
(1)
 
 
 
 
Discounted cash flow
 
Discount rate
 
11.0% (2)
 
 
 
 
 
 
Terminal capitalization rate
 
9.0% (2)
 
 
 
 
 
 
Market rent growth rate
 
3.0% (2)
 
 
 
 
 
 
Expense growth rate
 
3.0% (2)
 
 
 
 
Yield Analysis
 
Yield
 
12% (2)
 
 
 
 
 
 
Market rent rate
 
$8.50 per square foot (2)
 
 
 
 
 
 
Leasing costs
 
$20.00 per square foot (2)
(1) These fair value measurements were developed by third party sources, subject to our corroboration for reasonableness.
(2) Only one value applied for this unobservable input.

4.    Properties, net
 
Operating properties, net consisted of the following (in thousands):
 
 
March 31,
2013
 
December 31,
2012
Land
$
431,152

 
$
427,766

Buildings and improvements
2,850,482

 
2,725,875

Less: accumulated depreciation
(576,299
)
 
(555,975
)
Operating properties, net
$
2,705,335

 
$
2,597,666

 
Projects we had in development or held for future development consisted of the following (in thousands):
 
March 31,
2013
 
December 31,
2012
Land
$
234,357

 
$
236,324

Construction in progress, excluding land
250,281

 
329,054

Projects in development or held for future development
$
484,638

 
$
565,378


2012 Construction Activities

During three months ended March 31, 2013, we placed into service an aggregate of 236,000 square feet in three newly constructed office properties located in the Baltimore/Washington Corridor, Northern Virginia and Huntsville, Alabama. As of March 31, 2013, we had nine office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion, including three in the Baltimore/Washington Corridor, three in Huntsville, Alabama and three in Northern Virginia. We also had redevelopment underway on one office property in Greater Philadelphia that we estimate will total 183,000 square feet upon completion.



14


5.    Real Estate Joint Ventures
 
During the three months ended March 31, 2013, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting.  Information pertaining to this joint venture investment is set forth below (dollars in thousands):
Investment Balance at (1)
 
Date
 
 
 
Nature of
 
Maximum Exposure
March 31, 2013
 
December 31, 2012
 
Acquired
 
Ownership
 
Activity
 
to Loss (2)
$
(6,420
)
 
$
(6,420
)
 
9/29/2005
 
20%
 
Operates 16 Buildings
 
$
—


(1)   The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $4.0 million at March 31, 2013 and $4.5 million December 31, 2012 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of loss recognition under the equity method effective October 2012, as discussed below.  A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same and we continue to no longer recognize income or losses under the equity method.
(2)    Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us.  Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages.  Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 16).
 
The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):
 
March 31,
2013
 
December 31,
2012
Properties, net
$
58,130

 
$
58,460

Other assets
5,120

 
4,376

Total assets
$
63,250

 
$
62,836

 
 
 
 
Liabilities (primarily debt)
$
75,417

 
$
72,693

Owners’ equity
(12,167
)
 
(9,857
)
Total liabilities and owners’ equity
$
63,250

 
$
62,836

 
The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands):
 
 
For the Three Months Ended March 31,
 
 
2013
 
2012
Revenues
 
$
1,792

 
$
1,894

Property operating expenses
 
(786
)
 
(737
)
Interest expense
 
(2,774
)
 
(1,125
)
Depreciation and amortization expense
 
(542
)
 
(570
)
Net loss
 
$
(2,310
)
 
$
(538
)
 

15


As discussed further in our 2012 Annual Report on Form 10-K, in 2012, the holder of mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to our having neither the obligation nor intent to support the joint venture.

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at March 31, 2013 (dollars in thousands):
 
 
 
 
Ownership
 
 
 
March 31, 2013
(1)
 
 
Date
 
% at
 
 
 
Total
 
Pledged
 
Total
 
 
Acquired
 
3/31/2013
 
Nature of Activity
 
Assets
 
Assets
 
Liabilities
LW Redstone Company, LLC
 
3/23/2010
 
85%
 
Developing business park (2)
 
$
95,447

 
$
23,199

 
$
23,973

M Square Associates, LLC
 
6/26/2007
 
50%
 
Operating two buildings and developing others (3)
 
61,059

 
47,361

 
42,675

Arundel Preserve #5, LLC
 
7/2/2007
 
50%
 
Operating one building (4)
 
39,462

 
35,114

 
20,177

COPT-FD Indian Head, LLC
 
10/23/2006
 
75%
 
Holding land parcel (5)
 
6,447

 
—

 
—

MOR Forbes 2 LLC
 
12/24/2002
 
50%
 
Operating one building (6)
 
3,926

 
—

 
95

 
 
 
 
 
 
 
 
$
206,341

 
$
105,674

 
$
86,920

(1) Excludes amounts eliminated in consolidation.
(2) This joint venture’s property is in Huntsville, Alabama.
(3) This joint venture’s properties are in College Park, Maryland (in the Suburban Maryland region).
(4) This joint venture’s property is in Hanover, Maryland (in the Baltimore/Washington Corridor).
(5) This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.
(6) This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).
 
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.

6.    Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets consisted of the following (in thousands):
 
 
March 31,
2013
 
December 31,
2012
Mortgage and other investing receivables
$
38,441

 
$
33,396

Prepaid expenses
14,023

 
19,270

Furniture, fixtures and equipment, net
7,616

 
7,991

Deferred tax asset
6,493

 
6,612

Lease incentives
5,366

 
5,578

Other assets
8,859

 
4,608

Prepaid expenses and other assets
$
80,798

 
$
77,455

 
Mortgage and Other Investing Receivables
 
Mortgage and other investing receivables consisted of the following (in thousands):
 
 
March 31,
2013
 
December 31,
2012
Notes receivable from City of Huntsville
$
38,441

 
$
33,252

Mortgage loan receivable
—

 
144

 
$
38,441

 
$
33,396

 
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5).  We did not have an allowance for credit losses in connection with our notes receivable at March 31, 2013 or December 31, 2012.  The fair value of our mortgage and other investing receivables totaled $38.4 million at March 31, 2013 and $33.4 million at December 31, 2012.

Operating Notes Receivable
 
We had operating notes receivable due from tenants with terms exceeding one year totaling $261,000 at March 31, 2013 and $271,000 at December 31, 2012.  We carried allowances for estimated losses for most of these balances.

16



7.    Debt
 
Our debt consisted of the following (dollars in thousands):
 
Maximum
 
 
 
 
 
 
 
 
 
 Availability at
 
Carrying Value at
 
 
 
Scheduled Maturity
 
March 31,
2013
 
March 31,
2013
 
December 31,
2012
 
Stated Interest Rates at
 
 Dates at
 
 
 
 
March 31, 2013
 
March 31, 2013
Mortgage and Other Secured Loans:
 

 
 

 
 

 
 
 
 
Fixed rate mortgage loans (1)
N/A

 
$
931,952

 
$
948,414

 
3.96% - 7.87% (2)
 
2013-2034
Variable rate secured loans
N/A

 
38,270

 
38,475

 
LIBOR + 2.25% (3)
 
2015
Other construction loan facilities
$
70,800

 
35,400

 
29,557

 
LIBOR + 1.95% to 2.75% (4)
 
2013-2015
Total mortgage and other secured loans
 

 
1,005,622

 
1,016,446

 
 
 
 
Revolving Credit Facility
800,000

 
—

 
—

 
LIBOR + 1.75% to 2.50%
 
September 1, 2014
Term Loan Facilities (5)
770,000

 
770,000

 
770,000

 
LIBOR + 1.65% to 2.60% (6)
 
2015-2019
Unsecured notes payable
N/A

 
1,766

 
1,788

 
0% (7)
 
2026
4.25% Exchangeable Senior Notes (8)
N/A

 
179,972

 
230,934

 
4.25%
 
April 2030
Total debt
 

 
$
1,957,360

 
$
2,019,168

 
 
 
 

(1)  
Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption 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 $877,000 at March 31, 2013 and $1.3 million at December 31, 2012.
(2)
The weighted average interest rate on these loans was 5.97% at March 31, 2013.
(3) 
The interest rate on the loan outstanding was 2.45% at March 31, 2013.
(4) 
The weighted average interest rate on these loans was 2.51% at March 31, 2013.
(5)  
We have the ability to borrow an aggregate of an additional $180.0 million under these term loan facilities, provided that there is no default under the facilities and subject to the approval of the lenders.
(6) 
The weighted average interest rate on these loans was 1.93% at March 31, 2013.
(7)  
These notes carry interest rates that were below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates.  The carrying value of these notes reflects an unamortized discount totaling $845,000 at March 31, 2013 and $873,000 at December 31, 2012.
(8) 
As described further in our 2012 Annual Report on Form 10-K, these notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at the Operating Partnership’s discretion, our common shares at an exchange rate (subject to adjustment) of 20.8513 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2013 and is equivalent to an exchange price of $47.96 per common share).  During the three months ended March 31, 2013, we repaid $53.7 million principal amount of these notes and recognized a $5.3 million loss on early extinguishment of debt. The carrying value of these notes included a principal amount of $186.3 million and an unamortized discount totaling $6.3 million at March 31, 2013 and a principal amount of $240.0 million and an unamortized discount totaling $9.1 million at December 31, 2012.  The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%.  Because the closing price of our common shares at March 31, 2013 and December 31, 2012 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount.  The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized (in thousands):
 
 
For the Three Months Ended March 31,
 
2013
 
2012
Interest expense at stated interest rate
$
2,304

 
$
2,550

Interest expense associated with amortization of discount
864

 
892

Total
$
3,168

 
$
3,442


We capitalized interest costs of $2.4 million in the three months ended March 31, 2013 and $3.8 million in the three months ended March 31, 2012.

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

17


 
March 31, 2013
 
December 31, 2012
 
Carrying
 
Estimated
 
Carrying
 
Estimated
 
Amount
 
Fair Value
 
Amount
 
Fair Value
Fixed-rate debt
 

 
 

 
 

 
 

4.25% Exchangeable Senior Notes
$
179,972

 
$
187,150

 
$
230,934

 
$
240,282

Other fixed-rate debt
933,718

 
947,263

 
950,202

 
968,180

Variable-rate debt
843,670

 
849,555

 
838,032

 
845,558

 
$
1,957,360

 
$
1,983,968

 
$
2,019,168

 
$
2,054,020

 

8.    Interest Rate Derivatives
 
The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):
 
 
 



 

 

Fair Value at
Notional Amount
 
Fixed Rate

Floating Rate Index

Effective Date

Expiration Date

March 31,
2013

December 31,
2012
$
100,000

 
0.6123%

One-Month LIBOR

1/3/2012

9/1/2014

$
(495
)

$
(594
)
100,000

 
0.6100%

One-Month LIBOR

1/3/2012

9/1/2014

(492
)

(591
)
100,000

 
0.8320%

One-Month LIBOR

1/3/2012

9/1/2015

(1,238
)

(1,313
)
100,000

 
0.8320%

One-Month LIBOR

1/3/2012

9/1/2015

(1,238
)

(1,313
)
38,270

(1)
3.8300%

One-Month LIBOR + 2.25%

11/2/2010

11/2/2015

(1,176
)

(1,268
)
100,000


0.8055%

One-Month LIBOR

9/2/2014

9/1/2016

(329
)

(263
)
100,000


0.8100%

One-Month LIBOR

9/2/2014

9/1/2016

(339
)

(272
)
100,000


1.6730%

One-Month LIBOR

9/1/2015

8/1/2019

260


(154
)
100,000


1.7300%

One-Month LIBOR

9/1/2015

8/1/2019

(33
)

(417
)
 

 
 

 

 

 

$
(5,080
)

$
(6,185
)

(1)
The notional amount of this instrument is scheduled to amortize to $36.2 million.

Each of the one-month LIBOR interest rate swaps set forth in the table above was designated as cash flow hedges of interest rate risk.
 
The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheet (in thousands):
 
 
March 31, 2013
 
December 31, 2012
Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swaps designated as cash flow hedges
 
Prepaid expenses and other assets
 
$
260

 
Prepaid expenses and other assets
 
$
—

Interest rate swaps designated as cash flow hedges
 
Interest rate derivatives
 
(5,340
)
 
Interest rate derivatives
 
(6,185
)
 
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
 
For the Three Months Ended March 31,
 
2013
 
2012
Amount of gain (loss) recognized in accumulated other comprehensive loss (“AOCL”) (effective portion)
$
462

 
$
(1,987
)
Amount of loss reclassified from AOCL into interest expense (effective portion)
658

 
1,474


Over the next 12 months, we estimate that approximately $2.5 million will be reclassified from 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 any of our indebtedness, we could also be declared in default on our derivative obligations.  These agreements also incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparties.  Failure to comply with the loan covenant provisions could result in our being declared

18


in default on any derivative instrument obligations covered by the agreements.  As of March 31, 2013, the fair value of interest rate derivatives in a liability position related to these agreements was $5.3 million, excluding the effects of accrued interest. As of March 31, 2013, we had not posted any collateral related to these agreements.  We are not in default with any of these provisions.  If we breached any of these provisions, we could be required to settle our obligations under the agreements at their termination value of $5.3 million.
 
9.    Redeemable Noncontrolling Interest

The table below sets forth activity in our redeemable noncontrolling interest (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Beginning balance
 
$
10,298

 
$
8,908

Net loss attributable to noncontrolling interest
 
(790
)
 
(574
)
Adjustment to arrive at fair value of interest
 
848

 
903

Ending balance
 
$
10,356

 
$
9,237


10.    Shareholders’ Equity
 
On March 19, 2013, we completed a public offering of 4,485,000 common shares at a price of $26.34 per share for net proceeds of $118.1 million after underwriter discounts but before offering expenses.

During the three months ended March 31, 2013, holders of 248,644 common units in our Operating Partnership converted their units into common shares on the basis of one common share for each common unit.

See Note 12 for disclosure of common share activity pertaining to our share-based compensation plans.

19


11.    Information by Business Segment
 
We have ten reportable operating office property segments (comprised of: the Baltimore/Washington Corridor; Northern Virginia; San Antonio; Washington, DC — Capitol Riverfront; St. Mary’s and King George Counties; Greater Baltimore; Suburban Maryland; Colorado Springs; Greater Philadelphia; and other). We also have an operating wholesale data center segment. The table below reports segment financial information for our reportable segments (in thousands).  We measure the performance of our segments through the measure we define as NOI from real estate operations, which is derived by subtracting property operating expenses from revenues from real estate operations.
 
Operating Office Property Segments
 
 
 
 
 
Baltimore/
Washington
Corridor
 
Northern
Virginia
 
San
Antonio
 
Washington,
DC - Capitol
Riverfront
 
St. Mary’s & 
King George
Counties
 
Greater
Baltimore
 
Suburban
Maryland
 
Colorado
Springs
 
Greater
Philadelphia
 
Other
 
Operating
Wholesale
Data Center
 
Total
Three Months Ended March 31, 2013