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





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




(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.





TABLE OF CONTENTS
 
FORM 10-Q
 
 
PAGE
 
 
 
 
Consolidated Financial Statements of Corporate Office Properties Trust
 
 
 
 
 
 
Consolidated Financial Statements of Corporate Office Properties, L.P.
 
 
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 


2



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




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



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



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



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



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





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



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



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



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



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



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