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
September 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. 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).

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 October 22, 2013, 87,381,395 of Corporate Office Properties Trust’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 September 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 September 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 16, 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)
 
September 30,
2013
 
December 31,
2012
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,713,579

 
$
2,597,666

Projects in development or held for future development
526,167

 
565,378

Total properties, net
3,239,746

 
3,163,044

Assets held for sale, net
133,984

 
140,229

Cash and cash equivalents
27,318

 
10,594

Restricted cash and marketable securities
14,698

 
21,557

Accounts receivable (net of allowance for doubtful accounts of $5,344 and $4,694, respectively)
17,724

 
19,247

Deferred rent receivable
90,104

 
85,802

Intangible assets on real estate acquisitions, net
64,372

 
75,879

Deferred leasing and financing costs, net
63,246

 
59,952

Mortgage and other investing receivables
40,321

 
33,396

Prepaid expenses and other assets
64,075

 
44,059

Total assets
$
3,755,588

 
$
3,653,759

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,135,031

 
$
2,019,168

Accounts payable and accrued expenses
85,291

 
97,922

Rents received in advance and security deposits
28,539

 
27,632

Dividends and distributions payable
29,077

 
28,698

Deferred revenue associated with operating leases
8,545

 
11,995

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

 
6,420

Interest rate derivatives
3,595

 
6,185

Other liabilities
8,234

 
8,942

Total liabilities
2,304,732

 
2,206,962

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
16,789

 
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 September 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 87,381,395 at September 30, 2013 and 80,952,986 at December 31, 2012)
874

 
809

Additional paid-in capital
1,812,801

 
1,653,672

Cumulative distributions in excess of net income
(700,368
)
 
(617,455
)
Accumulated other comprehensive income (loss)
2,925

 
(5,435
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,365,315

 
1,365,424

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
50,815

 
52,122

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
9,137

 
10,153

Noncontrolling interests in subsidiaries
68,752

 
71,075

Total equity
1,434,067

 
1,436,499

Total liabilities, redeemable noncontrolling interest and equity
$
3,755,588

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 

 
 

 
 
 
 
Rental revenue
$
97,442

 
$
92,287

 
$
289,628

 
$
271,634

Tenant recoveries and other real estate operations revenue
21,598

 
22,075

 
65,499

 
63,597

Construction contract and other service revenues
16,991

 
15,283

 
52,048

 
53,812

Total revenues
136,031

 
129,645

 
407,175

 
389,043

Expenses
 

 
 

 
 

 
 

Property operating expenses
43,482

 
41,474

 
129,409

 
122,102

Depreciation and amortization associated with real estate operations
29,210

 
28,604

 
86,239

 
84,633

Construction contract and other service expenses
16,306

 
14,410

 
49,165

 
51,302

Impairment losses
16,300

 
46,096

 
16,300

 
41,260

General, administrative and leasing expenses
8,027

 
6,377

 
22,430

 
24,797

Business development expenses and land carry costs
1,383

 
1,632

 
4,069

 
4,506

Total operating expenses
114,708

 
138,593

 
307,612

 
328,600

Operating income (loss)
21,323

 
(8,948
)
 
99,563

 
60,443

Interest expense
(21,242
)
 
(23,239
)
 
(66,851
)
 
(71,909
)
Interest and other (loss) income
(3
)
 
1,095

 
2,949

 
3,152

Loss on early extinguishment of debt
(374
)
 
(768
)
 
(27,028
)
 
(937
)
(Loss) income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes
(296
)
 
(31,860
)
 
8,633

 
(9,251
)
Equity in income (loss) of unconsolidated entities
44

 
(246
)
 
211

 
(522
)
Income tax expense
(24
)
 
(106
)
 
(61
)
 
(327
)
(Loss) income from continuing operations
(276
)
 
(32,212
)
 
8,783

 
(10,100
)
Discontinued operations
(1,724
)
 
11,447

 
(2,594
)
 
11,410

(Loss) income before gain on sales of real estate
(2,000
)
 
(20,765
)
 
6,189

 
1,310

Gain on sales of real estate
—

 
—

 
2,683

 
21

Net (loss) income
(2,000
)
 
(20,765
)
 
8,872

 
1,331

Net loss (income) attributable to noncontrolling interests:
 

 
 

 
 

 
 

Common units in COPLP
232

 
1,533

 
474

 
738

Preferred units in COPLP
(165
)
 
(165
)
 
(495
)
 
(495
)
Other consolidated entities
(1,031
)
 
235

 
(2,160
)
 
864

Net (loss) income attributable to COPT
(2,964
)
 
(19,162
)
 
6,691

 
2,438

Preferred share dividends
(4,490
)
 
(6,546
)
 
(15,481
)
 
(14,738
)
Issuance costs associated with redeemed preferred shares
—

 
(1,827
)
 
(2,904
)
 
(1,827
)
Net loss attributable to COPT common shareholders
$
(7,454
)
 
$
(27,535
)
 
$
(11,694
)
 
$
(14,127
)
Net (loss) income attributable to COPT:
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(1,266
)
 
$
(29,963
)
 
$
9,327

 
$
(8,369
)
Discontinued operations, net
(1,698
)
 
10,801

 
(2,636
)
 
10,807

Net (loss) income attributable to COPT
$
(2,964
)
 
$
(19,162
)
 
$
6,691

 
$
2,438

Basic earnings per common share (1)
 

 
 

 
 

 
 

Loss from continuing operations
$
(0.07
)
 
$
(0.54
)
 
$
(0.11
)
 
$
(0.35
)
Discontinued operations
(0.02
)
 
0.15

 
(0.03
)
 
0.15

Net loss attributable to COPT common shareholders
$
(0.09
)
 
$
(0.39
)
 
$
(0.14
)
 
$
(0.20
)
Diluted earnings per common share (1)
 

 
 

 
 
 
 
Loss from continuing operations
$
(0.07
)
 
$
(0.54
)
 
$
(0.11
)
 
$
(0.35
)
Discontinued operations
(0.02
)
 
0.15

 
(0.03
)
 
0.15

Net loss attributable to COPT common shareholders
$
(0.09
)
 
$
(0.39
)
 
$
(0.14
)
 
$
(0.20
)
Dividends declared per common share
$
0.2750

 
$
0.2750

 
$
0.8250

 
$
0.8250

(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 September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income
$
(2,000
)
 
$
(20,765
)
 
$
8,872

 
$
1,331

Other comprehensive (loss) income
 

 
 

 
 

 
 

Unrealized (losses) gains on interest rate derivatives
(2,482
)
 
(2,760
)
 
5,810

 
(7,386
)
Losses on interest rate derivatives included in net (loss) income
689

 
632

 
2,021

 
3,034

Equity in other comprehensive income of equity method investee
1,070

 
—

 
1,070

 
—

Other comprehensive (loss) income
(723
)
 
(2,128
)
 
8,901

 
(4,352
)
Comprehensive (loss) income
(2,723
)
 
(22,893
)
 
17,773

 
(3,021
)
Comprehensive (income) loss attributable to noncontrolling interests
(948
)
 
1,763

 
(2,722
)
 
1,509

Comprehensive (loss) income attributable to COPT
$
(3,671
)
 
$
(21,130
)
 
$
15,051

 
$
(1,512
)
 
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 (94,550 shares)
—

 
1

 
1,187

 
—

 
—

 
(1,188
)
 
—

Preferred shares issued to the public (6,900,000 shares)
172,500

 
—

 
(6,838
)
 
—

 
—

 
—

 
165,662

Redemption of preferred shares (2,200,000 shares)
(55,000
)
 
—

 
1,827

 
(1,827
)
 
—

 
—

 
(55,000
)
Costs associated with common shares issued to the public
—

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Exercise of share options (44,624 shares)
—

 
—

 
666

 
—

 
—

 
—

 
666

Share-based compensation
—

 
1

 
9,191

 
—

 
—

 
—

 
9,192

Restricted common share redemptions (135,777 shares)
—

 
—

 
(3,279
)
 
—

 
—

 
—

 
(3,279
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
373

 
—

 
—

 
(373
)
 
—

Comprehensive loss
—

 
—

 
—

 
2,438

 
(3,955
)
 
299

 
(1,218
)
Dividends
—

 
—

 
—

 
(74,203
)
 
—

 
—

 
(74,203
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(3,993
)
 
(3,993
)
Distributions to noncontrolling interest in other consolidated entities
—

 
—

 
—

 
—

 
—

 
(648
)
 
(648
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
(2,827
)
 
—

 
—

 
—

 
(2,827
)
Tax benefit from share-based compensation
—

 
—

 
43

 
—

 
—

 
—

 
43

Balance at September 30, 2012 (72,157,635 common shares outstanding)
$
333,833

 
$
722

 
$
1,451,416

 
$
(607,633
)
 
$
(5,688
)
 
$
67,639

 
$
1,240,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Redemption of preferred shares (3,390,000 shares)
(84,750
)
 
—

 
2,904

 
(2,904
)
 
—

 
—

 
(84,750
)
Conversion of common units to common shares (310,889 shares)
—

 
3

 
3,988

 
—

 
—

 
(3,991
)
 
—

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

 
45

 
117,916

 
—

 
—

 
—

 
117,961

Common shares issued under at-the-market program (1,500,000 shares)
—

 
15

 
38,432

 
—

 
—

 
—

 
38,447

Acquisition of property and noncontrolling interest in other consolidated entity for COPLP common units
—

 
—

 
(1,296
)
 
—

 
—

 
2,665

 
1,369

Exercise of share options (32,756 shares)
—

 
—

 
642

 
—

 
—

 
—

 
642

Share-based compensation
—

 
2

 
5,700

 
—

 
—

 
—

 
5,702

Restricted common share redemptions (71,523 shares)
—

 
—

 
(1,848
)
 
—

 
—

 
—

 
(1,848
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(773
)
 
—

 
—

 
773

 
—

Comprehensive income
—

 
—

 
—

 
6,691

 
8,360

 
1,834

 
16,885

Dividends
—

 
—

 
—

 
(86,700
)
 
—

 
—

 
(86,700
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(3,681
)
 
(3,681
)
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 redeemable noncontrolling interest
—

 
—

 
(6,414
)
 
—

 
—

 
—

 
(6,414
)
Tax benefit from share-based compensation
—

 
—

 
(122
)
 
—

 
—

 
—

 
(122
)
Balance at September 30, 2013 (87,381,395 common shares outstanding)
$
249,083

 
$
874

 
$
1,812,801

 
$
(700,368
)
 
$
2,925

 
$
68,752

 
$
1,434,067

See accompanying notes to consolidated financial statements.

6


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
359,431

 
$
363,877

Construction contract and other service revenues received
48,877

 
58,637

Property operating expenses paid
(133,799
)
 
(133,375
)
Construction contract and other service expenses paid
(53,191
)
 
(50,438
)
General, administrative, leasing, business development and land carry costs paid
(20,681
)
 
(18,526
)
Interest expense paid
(59,052
)
 
(63,811
)
Previously accreted interest expense paid
(11,116
)
 
—

Settlement of interest rate derivatives
—

 
(29,738
)
Proceeds from sale of trading marketable securities
298

 
18,975

Exit costs on property dispositions
(186
)
 
(4,066
)
Payments in connection with early extinguishment of debt
(23,969
)
 
(2,637
)
Interest and other income received
391

 
786

Income taxes paid
6

 
(8
)
Net cash provided by operating activities
107,009

 
139,676

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(156,820
)
 
(107,621
)
Tenant improvements on operating properties
(15,868
)
 
(20,924
)
Other capital improvements on operating properties
(17,528
)
 
(9,571
)
Acquisitions of operating properties
—

 
(48,308
)
Proceeds from dispositions of properties
12,447

 
290,607

Mortgage and other loan receivables funded or acquired
(4,111
)
 
(11,603
)
Leasing costs paid
(9,366
)
 
(7,289
)
Other
4,401

 
(1,527
)
Net cash (used in) provided by investing activities
(186,845
)
 
83,764

Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
457,000

 
262,000

Unsecured senior notes
592,413

 
—

Other debt proceeds
82,886

 
399,296

Repayments of debt
 
 
 
Revolving Credit Facility
(457,000
)
 
(844,000
)
Scheduled principal amortization
(7,229
)
 
(9,094
)
Other debt repayments
(542,532
)
 
(51,850
)
Deferred financing costs paid
(9,001
)
 
(3,210
)
Net proceeds from issuance of preferred shares
—

 
165,662

Net proceeds from issuance of common shares
157,307

 
661

Redemption of preferred shares
(84,750
)
 
(55,000
)
Common share dividends paid
(69,451
)
 
(69,325
)
Preferred share dividends paid
(16,845
)
 
(12,345
)
Distributions paid to noncontrolling interests in COPLP
(3,705
)
 
(4,510
)
Restricted share redemptions
(1,848
)
 
(3,279
)
Other
(685
)
 
1,004

Net cash provided by (used in) financing activities
96,560

 
(223,990
)
Net increase (decrease) in cash and cash equivalents
16,724

 
(550
)
Cash and cash equivalents
 

 
 

Beginning of period
10,594

 
5,559

End of period
$
27,318

 
$
5,009

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 Nine Months Ended September 30,
 
2013
 
2012
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
8,872

 
$
1,331

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

 
 

Depreciation and other amortization
87,956

 
95,248

Impairment losses
30,940

 
60,593

Settlement of previously accreted interest expense
(11,116
)
 
—

Amortization of deferred financing costs
4,292

 
4,696

Increase in deferred rent receivable
(7,995
)
 
(7,939
)
Amortization of net debt discounts
1,207

 
2,357

Gain on sales of real estate
(2,683
)
 
(20,969
)
Share-based compensation
4,869

 
8,262

Loss (gain) on early extinguishment of debt
3,059

 
(3,436
)
Other
(2,284
)
 
(459
)
Changes in operating assets and liabilities:
 

 
 
Decrease in accounts receivable
1,523

 
10,063

Decrease in restricted cash and marketable securities
418

 
15,051

(Increase) decrease in prepaid expenses and other assets
(12,974
)
 
1,532

Increase in accounts payable, accrued expenses and other liabilities
18

 
4,124

Increase (decrease) in rents received in advance and security deposits
907

 
(2,775
)
Decrease in interest rate derivatives in connection with cash settlement
—

 
(28,003
)
Net cash provided by operating activities
$
107,009

 
$
139,676

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Decrease in accrued capital improvements, leasing and other investing activity costs
$
(13,094
)
 
$
(11,627
)
Decrease in property in connection with surrender of property in settlement of debt
$
—

 
$
12,812

Decrease in debt in connection with surrender of property in settlement of debt
$
—

 
$
16,304

Increase (decrease) in fair value of derivatives applied to accumulated other comprehensive income (loss) and noncontrolling interests
$
7,785

 
$
(4,398
)
Equity in other comprehensive income of an equity method investee
$
1,070

 
$
—

Dividends/distributions payable
$
29,077

 
$
26,954

COPLP common units issued to acquire property and noncontrolling interest in other consolidated entity
$
5,194

 
$
—

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
3,991

 
$
1,188

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
773

 
$
373

Increase in redeemable noncontrolling interest and decrease in shareholders’ equity to carry redeemable noncontrolling interest at fair value
$
6,414

 
$
2,827

 
See accompanying notes to consolidated financial statements.


8




Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
September 30,
2013
 
December 31,
2012
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,713,579

 
$
2,597,666

Projects in development or held for future development
526,167

 
565,378

Total properties, net
3,239,746

 
3,163,044

Assets held for sale, net
133,984

 
140,229

Cash and cash equivalents
27,318

 
10,594

Restricted cash and marketable securities
7,517

 
14,781

Accounts receivable (net of allowance for doubtful accounts of $5,344 and $4,694, respectively)
17,724

 
19,247

Deferred rent receivable
90,104

 
85,802

Intangible assets on real estate acquisitions, net
64,372

 
75,879

Deferred leasing and financing costs, net
63,246

 
59,952

Mortgage and other investing receivables
40,321

 
33,396

Prepaid expenses and other assets
64,075

 
44,059

Total assets
$
3,748,407

 
$
3,646,983

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,135,031

 
$
2,019,168

Accounts payable and accrued expenses
85,291

 
97,922

Rents received in advance and security deposits
28,539

 
27,632

Distributions payable
29,077

 
28,698

Deferred revenue associated with operating leases
8,545

 
11,995

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

 
6,420

Interest rate derivatives
3,595

 
6,185

Other liabilities
1,053

 
2,166

Total liabilities
2,297,551

 
2,200,186

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
16,789

 
10,298

Equity:
 

 
 

Corporate Office Properties, L.P.’s equity:
 

 
 

Preferred units
 
 
 
General partner, 9,431,667 preferred units outstanding at September 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 September 30, 2013 and December 31, 2012
8,800

 
8,800

Common units, 87,381,395 and 80,952,986 held by the general partner and 3,978,154 and 4,067,542 held by limited partners at September 30, 2013 and December 31, 2012, respectively
1,163,977

 
1,089,391

Accumulated other comprehensive income (loss)
3,026

 
(5,708
)
Total Corporate Office Properties, L.P.’s equity
1,424,886

 
1,426,316

Noncontrolling interests in subsidiaries
9,181

 
10,183

Total equity
1,434,067

 
1,436,499

Total liabilities, redeemable noncontrolling interest and equity
$
3,748,407

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 

 
 

 
 
 
 
Rental revenue
$
97,442

 
$
92,287

 
$
289,628

 
$
271,634

Tenant recoveries and other real estate operations revenue
21,598

 
22,075

 
65,499

 
63,597

Construction contract and other service revenues
16,991

 
15,283

 
52,048

 
53,812

Total revenues
136,031

 
129,645

 
407,175

 
389,043

Expenses
 

 
 

 
 

 
 

Property operating expenses
43,482

 
41,474

 
129,409

 
122,102

Depreciation and amortization associated with real estate operations
29,210

 
28,604

 
86,239

 
84,633

Construction contract and other service expenses
16,306

 
14,410

 
49,165

 
51,302

Impairment losses
16,300

 
46,096

 
16,300

 
41,260

General, administrative and leasing expenses
8,027

 
6,377

 
22,430

 
24,797

Business development expenses and land carry costs
1,383

 
1,632

 
4,069

 
4,506

Total operating expenses
114,708

 
138,593

 
307,612

 
328,600

Operating income (loss)
21,323

 
(8,948
)
 
99,563

 
60,443

Interest expense
(21,242
)
 
(23,239
)
 
(66,851
)
 
(71,909
)
Interest and other (loss) income
(3
)
 
1,095

 
2,949

 
3,152

Loss on early extinguishment of debt
(374
)
 
(768
)
 
(27,028
)
 
(937
)
(Loss) income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes
(296
)
 
(31,860
)
 
8,633

 
(9,251
)
Equity in income (loss) of unconsolidated entities
44

 
(246
)
 
211

 
(522
)
Income tax expense
(24
)
 
(106
)
 
(61
)
 
(327
)
(Loss) income from continuing operations
(276
)
 
(32,212
)
 
8,783

 
(10,100
)
Discontinued operations
(1,724
)
 
11,447

 
(2,594
)
 
11,410

(Loss) income before gain on sales of real estate
(2,000
)
 
(20,765
)
 
6,189

 
1,310

Gain on sales of real estate
—

 
—

 
2,683

 
21

Net (loss) income
(2,000
)
 
(20,765
)
 
8,872

 
1,331

Net (income) loss attributable to noncontrolling interests in consolidated entities
(1,035
)
 
(404
)
 
(2,172
)
 
167

Net (loss) income attributable to COPLP
(3,035
)
 
(21,169
)
 
6,700

 
1,498

Preferred unit distributions
(4,655
)
 
(6,711
)
 
(15,976
)
 
(15,233
)
Issuance costs associated with redeemed preferred units
—

 
(1,827
)
 
(2,904
)
 
(1,827
)
Net loss attributable to COPLP common unitholders
$
(7,690
)
 
$
(29,707
)
 
$
(12,180
)
 
$
(15,562
)
Net (loss) income attributable to COPLP:
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(1,262
)
 
$
(31,969
)
 
$
9,441

 
$
(9,250
)
Discontinued operations, net
(1,773
)
 
10,800

 
(2,741
)
 
10,748

Net (loss) income attributable to COPLP
$
(3,035
)
 
$
(21,169
)
 
$
6,700

 
$
1,498

Basic earnings per common unit (1)
 

 
 

 
 

 
 

Loss from continuing operations
$
(0.07
)
 
$
(0.54
)
 
$
(0.11
)
 
$
(0.35
)
Discontinued operations
(0.02
)
 
0.15

 
(0.03
)
 
0.14

Net loss attributable to COPLP common unitholders
$
(0.09
)
 
$
(0.39
)
 
$
(0.14
)
 
$
(0.21
)
Diluted earnings per common unit (1)
 

 
 

 
 
 
 
Loss from continuing operations
$
(0.07
)
 
$
(0.54
)
 
$
(0.11
)
 
$
(0.35
)
Discontinued operations
(0.02
)
 
0.15

 
(0.03
)
 
0.14

Net loss attributable to COPLP common unitholders
$
(0.09
)
 
$
(0.39
)
 
$
(0.14
)
 
$
(0.21
)
Distributions declared per common unit
$
0.2750

 
$
0.2750

 
$
0.8250

 
$
0.8250

(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 September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income
$
(2,000
)
 
$
(20,765
)
 
$
8,872

 
$
1,331

Other comprehensive (loss) income
 

 
 

 
 
 
 
Unrealized (losses) gains on interest rate derivatives
(2,482
)
 
(2,760
)
 
5,810

 
(7,386
)
Losses on interest rate derivatives included in net (loss) income
689

 
632

 
2,021

 
3,034

Equity in other comprehensive income of equity method investee
1,070

 
—

 
1,070

 
—

Other comprehensive (loss) income
(723
)
 
(2,128
)
 
8,901

 
(4,352
)
Comprehensive (loss) income
(2,723
)
 
(22,893
)
 
17,773

 
(3,021
)
Comprehensive (income) loss attributable to noncontrolling interests
(1,050
)
 
(360
)
 
(2,339
)
 
336

Comprehensive (loss) income attributable to COPLP
$
(3,773
)
 
$
(23,253
)
 
$
15,434

 
$
(2,685
)
 
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

 
—

 
(6,838
)
 
—

 
—

 
165,662

Redemption of preferred units resulting from redemption of preferred shares
—

 
—

 
(2,200,000
)
 
(55,000
)
 
—

 
—

 
—

 
—

 
(55,000
)
Costs of common units resulting from public issuance of common shares
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
(5
)
Issuance of common units resulting from exercise of share options
—

 
—

 
—

 
—

 
44,624

 
666

 
—

 
—

 
666

Share-based compensation
—

 
—

 
—

 
—

 
142,914

 
9,192

 
—

 
—

 
9,192

Restricted common unit redemptions
—

 
—

 
—

 
—

 
(135,777
)
 
(3,279
)
 
—

 
—

 
(3,279
)
Comprehensive loss
—

 
495

 
—

 
14,738

 
—

 
(13,735
)
 
(4,182
)
 
1,466

 
(1,218
)
Distributions to owners of common and preferred units
—

 
(495
)
 
—

 
(14,738
)
 
—

 
(62,963
)
 
—

 
—

 
(78,196
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(648
)
 
(648
)
COPT contribution to COPLP of distribution from subsidiary
—

 
—

 
—

 
—

 
—

 
1,602

 
—

 
(1,602
)
 
—

Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(2,827
)
 
—

 
—

 
(2,827
)
Tax benefit from share-based compensation
—

 
—

 
—

 
—

 
—

 
43

 
—

 
—

 
43

Balance at September 30, 2012
352,000

 
$
8,800

 
12,821,667

 
$
333,833

 
76,364,873

 
$
893,963

 
$
(6,019
)
 
$
9,712

 
$
1,240,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Redemption of preferred units resulting from redemption of preferred shares
—

 
—

 
(3,390,000
)
 
(84,750
)
 
—

 
—

 
—

 
—

 
(84,750
)
Issuance of common units resulting from public issuance of common shares
—

 
—

 
—

 
—

 
4,485,000

 
117,961

 
—

 
—

 
117,961

Issuance of common units resulting from common shares issued under at-the-market program
—

 
—

 
—

 
—

 
1,500,000

 
38,447

 
—

 
—

 
38,447

Acquisition of property and noncontrolling interest in subsidiary for COPLP common units
—

 
—

 
—

 
—

 
221,501

 
3,899

 
—

 
(2,530
)
 
1,369

Issuance of common units resulting from exercise of share options
—

 
—

 
—

 
—

 
32,756

 
642

 
—

 
—

 
642

Share-based compensation
—

 
—

 
—

 
—

 
171,287

 
5,702

 
—

 
—

 
5,702

Restricted common unit redemptions
—

 
—

 
—

 
—

 
(71,523
)
 
(1,848
)
 
—

 
—

 
(1,848
)
Comprehensive income
—

 
495

 
—

 
15,481

 
—

 
(9,276
)
 
8,734

 
1,451

 
16,885

Distributions to owners of common and preferred units
—

 
(495
)
 
—

 
(15,481
)
 
—

 
(74,405
)
 
—

 
—

 
(90,381
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8
)
 
(8
)
Contributions from noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
85

 
85

Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(6,414
)
 
—

 
—

 
(6,414
)
Tax benefit from share-based compensation
—

 
—

 
—

 
—

 
—

 
(122
)
 
—

 
—

 
(122
)
Balance at September 30, 2013
352,000

 
$
8,800

 
9,431,667

 
$
249,083

 
91,359,549

 
$
1,163,977

 
$
3,026

 
$
9,181

 
$
1,434,067

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 Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
359,431

 
$
363,877

Construction contract and other service revenues received
48,877

 
58,637

Property operating expenses paid
(133,799
)
 
(133,375
)
Construction contract and other service expenses paid
(53,191
)
 
(50,438
)
General, administrative, leasing, business development and land carry costs paid
(20,681
)
 
(18,526
)
Interest expense paid
(59,052
)
 
(63,811
)
Previously accreted interest expense paid
(11,116
)
 
—

Settlement of interest rate derivatives
—

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