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	June 30, 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)

Commission file number 333-189188 (Corporate Office Properties, L.P.)

Corporate Office Properties Trust

Corporate Office Properties, L.P.

(Exact name of registrant as specified in its charter)

Corporate Office Properties Trust		Maryland		23-2947217
		(State or other jurisdiction of		(IRS Employer
		incorporation or organization)		Identification No.)
Corporate Office Properties, L.P.		Delaware		23-2930022
		(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.

Corporate Office Properties Trust ý Yes   o No

Corporate Office Properties, L.P. o Yes   ý 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).

Corporate Office Properties Trust ý Yes   o No

Corporate Office Properties, L.P. ý Yes   o No

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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.

Corporate Office Properties Trust

Large accelerated filer x		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Corporate Office Properties, L.P.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer x		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)

Corporate Office Properties Trust o Yes   ý No

Corporate Office Properties, L.P. Trust o Yes   ý No

As of July 22, 2013, 87,357,273 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2013 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.

COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of June 30, 2013 COPT owned 96% of the outstanding common units and 96% of the outstanding preferred units in COPLP. The remaining common and preferred units are owned by certain trustees of COPT and certain non-affiliated investors. As the sole general partner of COPLP, COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership which are reflected in the disclosure in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. COPT is a real estate investment trust, whose only material asset is its ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of COPLP, issuing public equity from time to time and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP generates the capital required by COPT’s business through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

Noncontrolling interests and shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements. COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships, limited liability companies (“LLCs”), business trusts and corporations; the differences between shareholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real estate partnerships, LLCs, business trusts and corporations. The only other significant differences between the consolidated financial statements of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan

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(comprised primarily of mutual funds and equity securities) and the corresponding liability to the plan’s participants that are held directly by COPT.

We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:

•	combined reports better reflect how management and the analyst community view the business as a single operating unit;

•	combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

•	combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

•	combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

•	consolidated financial statements;

•	the following notes to the consolidated financial statements:

•	Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries; and

•	Note 15, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries.

•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and

•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Operating Partnership.”

This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

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TABLE OF CONTENTS

 

FORM 10-Q

 

		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	5
	Consolidated Statements of Equity for the Six Months Ended June 30, 2013 and 2012 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)	7
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (unaudited)	9
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	10
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	11
	Consolidated Statements of Equity for the Six Months Ended June 30, 2013 and 2012 (unaudited)	12
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)	13
Notes to Consolidated Financial Statements (unaudited)		15
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4:	Controls and Procedures	52
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	53
Item 1A:	Risk Factors	53
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3:	Defaults Upon Senior Securities	53
Item 4:	Mine Safety Disclosures	53
Item 5:	Other Information	53
Item 6:	Exhibits	53
SIGNATURES		55

2

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PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

	June 30, 2013				December 31, 2012
Assets
Properties, net:
Operating properties, net	$	2,703,009			$	2,597,666
Projects in development or held for future development	508,295				565,378
Total properties, net	3,211,304				3,163,044
Assets held for sale, net	136,896				140,229
Cash and cash equivalents	9,196				10,594
Restricted cash and marketable securities	19,472				21,557
Accounts receivable (net of allowance for doubtful accounts of $5,216 and $4,694, respectively)	23,751				19,247
Deferred rent receivable	89,811				85,802
Intangible assets on real estate acquisitions, net	68,046				75,879
Deferred leasing and financing costs, net	57,488				59,952
Prepaid expenses and other assets	83,671				77,455
Total assets	$	3,699,635			$	3,653,759
Liabilities and equity
Liabilities:
Debt, net	$	2,093,106			$	2,019,168
Accounts payable and accrued expenses	84,181				97,922
Rents received in advance and security deposits	24,095				27,632
Dividends and distributions payable	28,602				28,698
Deferred revenue associated with operating leases	9,649				11,995
Distributions received in excess of investment in unconsolidated real estate joint venture	6,420				6,420
Interest rate derivatives	3,555				6,185
Other liabilities	8,169				8,942
Total liabilities	2,257,777				2,206,962
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest	15,571				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; shares issued and outstanding of 9,431,667 at June 30, 2013 and 12,821,667 at December 31, 2012)	249,083				333,833
Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 85,845,403 at June 30, 2013 and 80,952,986 at December 31, 2012)	858				809
Additional paid-in capital	1,772,470				1,653,672
Cumulative distributions in excess of net income	(668,892		)		(617,455		)
Accumulated other comprehensive income (loss)	3,631				(5,435		)
Total Corporate Office Properties Trust’s shareholders’ equity	1,357,150				1,365,424
Noncontrolling interests in subsidiaries:
Common units in COPLP	49,112				52,122
Preferred units in COPLP	8,800				8,800
Other consolidated entities	11,225				10,153
Noncontrolling interests in subsidiaries	69,137				71,075
Total equity	1,426,287				1,436,499
Total liabilities, redeemable noncontrolling interest and equity	$	3,699,635			$	3,653,759

See accompanying notes to consolidated financial statements.

3

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013				2012				2013				2012
Revenues
Rental revenue	$	97,266			$	89,954			$	192,186			$	179,347
Tenant recoveries and other real estate operations revenue	22,463				20,715				43,901				41,522
Construction contract and other service revenues	20,795				16,995				35,057				38,529
Total revenues	140,524				127,664				271,144				259,398
Expenses
Property operating expenses	43,408				39,441				85,927				80,628
Depreciation and amortization associated with real estate operations	28,866				28,295				57,029				56,029
Construction contract and other service expenses	19,382				16,285				32,859				36,892
Impairment recoveries	—				—				—				(4,836		)
General, administrative and leasing expenses	6,583				8,851				14,403				18,420
Business development expenses and land carry costs	1,327				1,298				2,686				2,874
Total operating expenses	99,566				94,170				192,904				190,007
Operating income	40,958				33,494				78,240				69,391
Interest expense	(23,302		)		(24,239		)		(45,609		)		(48,670		)
Interest and other income	2,006				840				2,952				2,057
Loss on early extinguishment of debt	(21,470		)		(169		)		(26,654		)		(169		)
(Loss) income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes	(1,808		)		9,926				8,929				22,609
Equity in income (loss) of unconsolidated entities	126				(187		)		167				(276		)
Income tax expense	(21		)		(17		)		(37		)		(221		)
(Loss) income from continuing operations	(1,703		)		9,722				9,059				22,112
Discontinued operations	(3,031		)		2,118				(870		)		(37		)
(Loss) income before gain on sales of real estate	(4,734		)		11,840				8,189				22,075
Gain on sales of real estate	329				21				2,683				21
Net (loss) income	(4,405		)		11,861				10,872				22,096
Net loss (income) attributable to noncontrolling interests:
Common units in COPLP	671				(422		)		242				(795		)
Preferred units in COPLP	(165		)		(165		)		(330		)		(330		)
Other consolidated entities	(1,466		)		31				(1,129		)		629
Net (loss) income attributable to Corporate Office Properties Trust	(5,365		)		11,305				9,655				21,600
Preferred share dividends	(4,885		)		(4,167		)		(10,991		)		(8,192		)
Issuance costs associated with redeemed preferred shares	(2,904		)		—				(2,904		)		—
Net (loss) income attributable to Corporate Office Properties Trust common shareholders	$	(13,154	)		$	7,138			$	(4,240	)		$	13,408
Net (loss) income attributable to Corporate Office Properties Trust:
(Loss) income from continuing operations	$	(2,398	)		$	9,284			$	10,593			$	21,594
Discontinued operations, net	(2,967		)		2,021				(938		)		6
Net (loss) income attributable to Corporate Office Properties Trust	$	(5,365	)		$	11,305			$	9,655			$	21,600
Basic earnings per common share (1)
(Loss) income from continuing operations	$	(0.12	)		$	0.07			$	(0.04	)		$	0.18
Discontinued operations	(0.04		)		0.03				(0.01		)		—
Net (loss) income attributable to COPT common shareholders	$	(0.16	)		$	0.10			$	(0.05	)		$	0.18
Diluted earnings per common share (1)
(Loss) income from continuing operations	$	(0.12	)		$	0.07			$	(0.04	)		$	0.18
Discontinued operations	(0.04		)		0.03				(0.01		)		—
Net (loss) income attributable to COPT common shareholders	$	(0.16	)		$	0.10			$	(0.05	)		$	0.18
Dividends declared per common share	$	0.2750			$	0.2750			$	0.550			$	0.550

(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

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013				2012				2013				2012
Net (loss) income	$	(4,405	)		$	11,861			$	10,872			$	22,096
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives	7,830				(2,639		)		8,292				(4,626		)
Losses on interest rate derivatives included in net income	674				928				1,332				2,402
Other comprehensive income (loss)	8,504				(1,711		)		9,624				(2,224		)
Comprehensive income	4,099				10,150				20,496				19,872
Comprehensive income attributable to noncontrolling interests	(1,422		)		(359		)		(1,774		)		(254		)
Comprehensive income attributable to Corporate Office Properties Trust	$	2,677			$	9,791			$	18,722			$	19,618

 

See accompanying notes to consolidated financial statements.

5

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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 Income (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 (54,550 shares)	—				—				696				—				—				(696		)		—
Preferred shares issued to the public (6,900,000 shares)	172,500				—				(6,835		)		—				—				—				165,665
Costs associated with common shares issued to the public	—				—				(5		)		—				—				—				(5		)
Exercise of share options (12,667 shares)	—				—				189				—				—				—				189
Share-based compensation	—				1				7,180				—				—				—				7,181
Restricted common share redemptions (133,081 shares)	—				—				(3,219		)		—				—				—				(3,219		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—				—				524				—				—				(524		)		—
Comprehensive income	—				—				—				21,600				(1,984		)		1,413				21,029
Dividends	—				—				—				(47,821		)		—				—				(47,821		)
Distributions to owners of common and preferred units in COPLP	—				—				—				—				—				(2,672		)		(2,672		)
Distributions to noncontrolling interest in other consolidated entities	—				—				—				—				—				(648		)		(648		)
Adjustment to arrive at fair value of noncontrolling interest	—				—				(1,827		)		—				—				—				(1,827		)
Balance at June 30, 2012 (72,084,932 common shares outstanding)	$	388,833			$	721			$	1,447,781			$	(560,262	)		$	(3,717	)		$	70,415			$	1,343,771
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 (279,019 shares)	—				3				3,575				—				—				(3,578		)		—
Common shares issued to the public (4,485,000 shares)	—				45				117,868				—				—				—				117,913
Redemption of preferred shares (3,390,000 shares)	(84,750		)		—				2,904				(2,904		)		—				—				(84,750		)
Exercise of share options (32,756 shares)	—				—				636				—				—				—				636
Share-based compensation	—				1				3,847				—				—				—				3,848
Restricted common share redemptions (68,762 shares)	—				—				(1,784		)		—				—				—				(1,784		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—				—				(2,495		)		—				—				2,495				—
Comprehensive income	—				—				—				9,655				9,066				1,490				20,211
Dividends	—				—				—				(58,188		)		—				—				(58,188		)
Distributions to owners of common and preferred units in COPLP	—				—				—				—				—				(2,422		)		(2,422		)
Contributions from noncontrolling interests in other consolidated entities	—				—				—				—				—				85				85
Distributions to noncontrolling interests in other consolidated entities	—				—				—				—				—				(8		)		(8		)
Adjustment to arrive at fair value of noncontrolling interest	—				—				(5,631		)		—				—				—				(5,631		)
Increase in tax benefit from share-based compensation	—				—				(122		)		—				—				—				(122		)
Balance at June 30, 2013 (85,845,403 common shares outstanding)	$	249,083			$	858			$	1,772,470			$	(668,892	)		$	3,631			$	69,137			$	1,426,287

See accompanying notes to consolidated financial statements.

6

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited) 

	For the Six Months Ended June 30,
	2013				2012
Cash flows from operating activities
Revenues from real estate operations received	$	233,068			$	248,742
Construction contract and other service revenues received	28,898				46,933
Property operating expenses paid	(75,566		)		(76,328		)
Construction contract and other service expenses paid	(33,404		)		(37,296		)
General, administrative, leasing, business development and land carry costs paid	(14,988		)		(13,076		)
Interest expense paid	(41,825		)		(45,435		)
Previously accreted interest expense paid	(11,116		)		—
Settlement of interest rate derivatives	—				(29,738		)
Proceeds from sale of trading marketable securities	—				18,975
Exit costs on property dispositions	—				(1,248		)
Payments in connection with early extinguishment of debt	(23,932		)		(156		)
Interest and other income received	390				529
Income taxes paid	6				(8		)
Net cash provided by operating activities	61,531				111,894
Cash flows from investing activities
Purchases of and additions to properties
Construction, development and redevelopment	(99,779		)		(71,504		)
Tenant improvements on operating properties	(10,496		)		(13,797		)
Other capital improvements on operating properties	(11,738		)		(5,514		)
Proceeds from dispositions of properties	12,344				130,814
Mortgage and other loan receivables funded or acquired	(2,756		)		(8,933		)
Leasing costs paid	(6,048		)		(5,489		)
Other	3,144				(991		)
Net cash (used in) provided by investing activities	(115,329		)		24,586
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	374,000				101,000
Other debt proceeds	427,313				273,909
Repayments of debt
Revolving Credit Facility	(226,000		)		(568,000		)
Scheduled principal amortization	(5,003		)		(6,303		)
Other debt repayments	(486,803		)		(37,035		)
Deferred financing costs paid	(2,099		)		(2,111		)
Net proceeds from issuance of preferred shares	—				165,902
Net proceeds from issuance of common shares	118,768				185
Redemption of preferred shares	(84,750		)		—
Common share dividends paid	(45,852		)		(49,507		)
Preferred share dividends paid	(12,355		)		(8,051		)
Distributions paid to noncontrolling interests in COPLP	(2,503		)		(3,269		)
Restricted share redemptions	(1,784		)		(3,219		)
Other	(532		)		(838		)
Net cash provided by (used in) financing activities	52,400				(137,337		)
Net decrease in cash and cash equivalents	(1,398		)		(857		)
Cash and cash equivalents
Beginning of period	10,594				5,559
End of period	$	9,196			$	4,702

See accompanying notes to consolidated financial statements.

 

7

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2013				2012
Reconciliation of net income to net cash provided by operating activities:
Net income	$	10,872			$	22,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	58,244				64,000
Impairment losses	9,052				7,693
Settlement of previously accreted interest expense	(11,116		)		—
Amortization of deferred financing costs	2,971				3,169
Increase in deferred rent receivable	(6,598		)		(4,937		)
Amortization of net debt discounts	1,328				1,565
Gain on sales of real estate	(2,683		)		(4,056		)
Share-based compensation	3,296				6,559
Loss on early extinguishment of debt	2,722				—
Other	(3,634		)		(917		)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(3,222		)		15,031
(Increase) decrease in restricted cash and marketable securities	(969		)		14,082
Decrease in prepaid expenses and other assets	5,884				18,232
Decrease in accounts payable, accrued expenses and other liabilities	(1,079		)		(196		)
Decrease in rents received in advance and security deposits	(3,537		)		(2,424		)
Decrease in interest rate derivatives in connection with cash settlement	—				(28,003		)
Net cash provided by operating activities	$	61,531			$	111,894
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(12,750	)		$	(12,081	)
Increase (decrease) in fair value of derivatives applied to accumulated comprehensive income (loss) and noncontrolling interests	$	9,592			$	(2,255	)
Dividends/distribution payable	$	28,602			$	24,695
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	3,578			$	696
Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	2,495			$	524
Increase in redeemable noncontrolling interest and decrease in shareholders’ equity in connection with adjustment to arrive at fair value of noncontrolling interest	$	5,631			$	1,827

 

See accompanying notes to consolidated financial statements.

8

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except unit data)

(unaudited)

	June 30, 2013				December 31, 2012
Assets
Properties, net:
Operating properties, net	$	2,703,009			$	2,597,666
Projects in development or held for future development	508,295				565,378
Total properties, net	3,211,304				3,163,044
Assets held for sale, net	136,896				140,229
Cash and cash equivalents	9,196				10,594
Restricted cash and marketable securities	12,396				14,781
Accounts receivable (net of allowance for doubtful accounts of $5,216 and $4,694, respectively)	23,751				19,247
Deferred rent receivable	89,811				85,802
Intangible assets on real estate acquisitions, net	68,046				75,879
Deferred leasing and financing costs, net	57,488				59,952
Prepaid expenses and other assets	83,671				77,455
Total assets	$	3,692,559			$	3,646,983
Liabilities and equity
Liabilities:
Debt, net	$	2,093,106			$	2,019,168
Accounts payable and accrued expenses	84,181				97,922
Rents received in advance and security deposits	24,095				27,632
Distributions payable	28,602				28,698
Deferred revenue associated with operating leases	9,649				11,995
Distributions received in excess of investment in unconsolidated real estate joint venture	6,420				6,420
Interest rate derivatives	3,555				6,185
Other liabilities	1,093				2,166
Total liabilities	2,250,701				2,200,186
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest	15,571				10,298
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, 9,431,667 preferred units outstanding at June 30, 2013 and 12,821,667 preferred units outstanding at December 31, 2012	249,083				333,833
Limited partner, 352,000 preferred units outstanding at June 30, 2013 and December 31, 2012	8,800				8,800
Common units, 85,845,403 and 80,952,986 held by the general partner and 3,788,523 and 4,067,542 held by limited partners at June 30, 2013 and December 31, 2012, respectively	1,153,376				1,089,391
Accumulated other comprehensive income (loss)	3,763				(5,708		)
Total Corporate Office Properties, L.P.’s equity	1,415,022				1,426,316
Noncontrolling interests in subsidiaries	11,265				10,183
Total equity	1,426,287				1,436,499
Total liabilities, redeemable noncontrolling interest and equity	$	3,692,559			$	3,646,983

See accompanying notes to consolidated financial statements.

9

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per unit data)

(unaudited)

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013				2012				2013				2012
Revenues
Rental revenue	$	97,266			$	89,954			$	192,186			$	179,347
Tenant recoveries and other real estate operations revenue	22,463				20,715				43,901				41,522
Construction contract and other service revenues	20,795				16,995				35,057				38,529
Total revenues	140,524				127,664				271,144				259,398
Expenses
Property operating expenses	43,408				39,441				85,927				80,628
Depreciation and amortization associated with real estate operations	28,866				28,295				57,029				56,029
Construction contract and other service expenses	19,382				16,285				32,859				36,892
Impairment recoveries	—				—				—				(4,836		)
General, administrative and leasing expenses	6,583				8,851				14,403				18,420
Business development expenses and land carry costs	1,327				1,298				2,686				2,874
Total operating expenses	99,566				94,170				192,904				190,007
Operating income	40,958				33,494				78,240				69,391
Interest expense	(23,302		)		(24,239		)		(45,609		)		(48,670		)
Interest and other income	2,006				840				2,952				2,057
Loss on early extinguishment of debt	(21,470		)		(169		)		(26,654		)		(169		)
(Loss) income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes	(1,808		)		9,926				8,929				22,609
Equity in income (loss) of unconsolidated entities	126				(187		)		167				(276		)
Income tax expense	(21		)		(17		)		(37		)		(221		)
(Loss) income from continuing operations	(1,703		)		9,722				9,059				22,112
Discontinued operations	(3,031		)		2,118				(870		)		(37		)
(Loss) income before gain on sales of real estate	(4,734		)		11,840				8,189				22,075
Gain on sales of real estate	329				21				2,683				21
Net (loss) income	(4,405		)		11,861				10,872				22,096
Net (income) loss attributable to noncontrolling interests in consolidated entities	(1,473		)		1				(1,137		)		571
Net (loss) income attributable to COPLP	(5,878		)		11,862				9,735				22,667
Preferred unit distributions	(5,050		)		(4,332		)		(11,321		)		(8,522		)
Issuance costs associated with redeemed preferred units	(2,904		)		—				(2,904		)		—
Net (loss) income attributable to COPLP common unitholders	$	(13,832	)		$	7,530			$	(4,490	)		$	14,145
Net (loss) income attributable to COPLP:
(Loss) income from continuing operations	$	(2,782	)		$	9,753			$	10,703			$	22,719
Discontinued operations, net	(3,096		)		2,109				(968		)		(52		)
Net (loss) income attributable to COPLP	$	(5,878	)		$	11,862			$	9,735			$	22,667
Basic earnings per common unit (1)
(Loss) income from continuing operations	$	(0.12	)		$	0.07			$	(0.04	)		$	0.18
Discontinued operations	(0.04		)		0.03				(0.01		)		—
Net (loss) income attributable to COPLP common unitholders	$	(0.16	)		$	0.10			$	(0.05	)		$	0.18
Diluted earnings per common unit (1)
(Loss) income from continuing operations	$	(0.12	)		$	0.07			$	(0.04	)		$	0.18
Discontinued operations	(0.04		)		0.03				(0.01		)		—
Net (loss) income attributable to COPLP common unitholders	$	(0.16	)		$	0.10			$	(0.05	)		$	0.18
Distributions declared per common unit	$	0.2750			$	0.2750			$	0.550			$	0.550

(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

See accompanying notes to consolidated financial statements.

10

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited) 

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013				2012				2013				2012
Net (loss) income	$	(4,405	)		$	11,861			$	10,872			$	22,096
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives	7,830				(2,639		)		8,292				(4,626		)
Losses on interest rate derivatives included in net income	674				928				1,332				2,402
Other comprehensive income (loss)	8,504				(1,711		)		9,624				(2,224		)
Comprehensive income	4,099				10,150				20,496				19,872
Comprehensive (income) loss attributable to noncontrolling interests	(1,579		)		108				(1,289		)		696
Comprehensive income attributable to Corporate Office Properties, L.P.	$	2,520			$	10,258			$	19,207			$	20,568

 

See accompanying notes to consolidated financial statements.

11

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

	Limited Partner Preferred Units							General Partner Preferred Units							Common Units
	Units			Amount				Units			Amount				Units			Amount				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interests in Subsidiaries				Total Equity
Balance at December 31, 2011	352,000			$	8,800			8,121,667			$	216,333			76,313,112			$	972,107			$	(1,837	)		$	10,496			$	1,205,899
Issuance of preferred units resulting from public issuance of preferred shares	—			—				6,900,000			172,500				—			(6,835		)		—				—				165,665
Costs of common units resulting from public issuance of common shares	—			—				—			—				—			(5		)		—				—				(5		)
Issuance of common units resulting from exercise of share options	—			—				—			—				12,667			189				—				—				189
Share-based compensation	—			—				—			—				139,472			7,181				—				—				7,181
Restricted common unit redemptions	—			—				—			—				(133,081	)		(3,219		)		—				—				(3,219		)
Comprehensive income	—			330				—			8,192				—			14,145				(2,099		)		461				21,029
Distributions to owners of common and preferred units	—			(330		)		—			(8,192		)		—			(41,971		)		—				—				(50,493		)
Distributions to noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				(648		)		(648		)
Adjustment to arrive at fair value of noncontrolling interest	—			—				—			—				—			(1,827		)		—				—				(1,827		)
Balance at June 30, 2012	352,000			$	8,800			15,021,667			$	388,833			76,332,170			$	939,765			$	(3,936	)		$	10,309			$	1,343,771
Balance at December 31, 2012	352,000			$	8,800			12,821,667			$	333,833			85,020,528			$	1,089,391			$	(5,708	)		$	10,183			$	1,436,499
Issuance of common units resulting from public issuance of common shares	—			—				—			—				4,485,000			117,913				—				—				117,913
Issuance of common units resulting from exercise of share options	—			—				—			—				32,756			636				—				—				636
Redemption of preferred units resulting from redemption of preferred shares	—			—				(3,390,000	)		(84,750		)		—			—				—				—				(84,750		)
Share-based compensation	—			—				—			—				164,404			3,848				—				—				3,848
Restricted common unit redemptions	—			—				—			—				(68,762	)		(1,784		)		—				—				(1,784		)
Comprehensive income	—			330				—			10,991				—			(1,586		)		9,471				1,005				20,211
Distributions to owners of common and preferred units	—			(330		)		—			(10,991		)		—			(49,289		)		—				—				(60,610		)
Distributions to noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				(8		)		(8		)
Contributions from noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				85				85
Adjustment to arrive at fair value of noncontrolling interest	—			—				—			—				—			(5,631		)		—				—				(5,631		)
Increase in tax benefit from share-based compensation	—			—				—			—				—			(122		)		—				—				(122		)
Balance at June 30, 2013	352,000			$	8,800			9,431,667			$	249,083			89,633,926			$	1,153,376			$	3,763			$	11,265			$	1,426,287

See accompanying notes to consolidated financial statements.

12

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2013				2012
Cash flows from operating activities
Revenues from real estate operations received	$	233,068			$	248,742
Construction contract and other service revenues received	28,898				46,933
Property operating expenses paid	(75,566		)		(76,328		)
Construction contract and other service expenses paid	(33,404		)		(37,296		)
General, administrative, leasing, business development and land carry costs paid	(14,988		)		(13,076		)
Interest expense paid	(41,825		)		(45,435		)
Previously accreted interest expense paid	(11,116		)		—
Settlement of interest rate derivatives	—				(29,738		)
Proceeds from sale of trading marketable securities	—				18,975
Exit costs on property dispositions	—				(1,248		)
Payments in connection with early extinguishment of debt	(23,932		)		(156		)
Interest and other income received	390				529
Income taxes paid	6				(8		)
Net cash provided by operating activities	61,531				111,894
Cash flows from investing activities
Purchases of and additions to properties
Construction, development and redevelopment	(99,779		)		(71,504		)
Tenant improvements on operating properties	(10,496		)		(13,797		)
Other capital improvements on operating properties	(11,738		)		(5,514		)
Proceeds from dispositions of properties	12,344				130,814
Mortgage and other loan receivables funded or acquired	(2,756		)		(8,933		)
Leasing costs paid	(6,048		)		(5,489		)
Other	3,144				(991		)
Net cash (used in) provided by investing activities	(115,329		)		24,586
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	374,000				101,000
Other debt proceeds	427,313				273,909
Repayments of debt
Revolving Credit Facility	(226,000		)		(568,000		)
Scheduled principal amortization	(5,003		)		(6,303		)
Other debt repayments	(486,803		)		(37,035		)
Deferred financing costs paid	(2,099		)		(2,111		)
Net proceeds from issuance of preferred units	—				165,902
Net proceeds from issuance of common units	118,768				185
Redemption of preferred units	(84,750		)		—
Common unit distributions paid	(48,025		)		(52,446		)
Preferred unit distributions paid	(12,685		)		(8,381		)
Restricted unit redemptions	(1,784		)		(3,219		)
Other	(532		)		(838		)
Net cash provided by (used in) financing activities	52,400				(137,337		)
Net decrease in cash and cash equivalents	(1,398		)		(857		)
Cash and cash equivalents
Beginning of period	10,594				5,559
End of period	$	9,196			$	4,702

See accompanying notes to consolidated financial statements.

13

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2013				2012
Reconciliation of net income to net cash provided by operating activities:
Net income	$	10,872			$	22,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	58,244				64,000
Impairment losses	9,052				7,693
Settlement of previously accreted interest expense	(11,116		)		—
Amortization of deferred financing costs	2,971				3,169