UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2014
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 April 18, 2014, 87,607,331 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 March 31, 2014 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 March 31, 2014, COPT owned approximately 96% of the outstanding common units and approximately 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 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)
 
March 31,
2014
 
December 31,
2013
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,729,003

 
$
2,702,693

Projects in development or held for future development
495,625

 
511,608

Total properties, net
3,224,628

 
3,214,301

Cash and cash equivalents
18,374

 
54,373

Restricted cash and marketable securities
10,965

 
11,448

Accounts receivable (net of allowance for doubtful accounts of $2,353 and $2,976, respectively)
30,152

 
27,000

Deferred rent receivable (net of allowance of $1,495 and $2,126, respectively)
91,082

 
89,456

Intangible assets on real estate acquisitions, net
55,678

 
59,258

Deferred leasing and financing costs, net
65,855

 
66,267

Mortgage and other investing receivables
55,231

 
53,663

Prepaid expenses and other assets
53,932

 
54,186

Total assets
$
3,605,897

 
$
3,629,952

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,931,831

 
$
1,927,703

Accounts payable and accrued expenses
97,451

 
98,785

Rents received in advance and security deposits
28,267

 
31,492

Dividends and distributions payable
29,122

 
29,080

Deferred revenue associated with operating leases
12,281

 
10,369

Interest rate derivatives
3,196

 
3,309

Other liabilities
13,060

 
14,207

Total liabilities
2,115,208

 
2,114,945

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
17,654

 
17,758

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; 9,431,667 shares issued and outstanding)
249,083

 
249,083

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 87,594,931 at March 31, 2014 and 87,394,512 at December 31, 2013)
876

 
874

Additional paid-in capital
1,816,467

 
1,814,015

Cumulative distributions in excess of net income
(665,708
)
 
(641,868
)
Accumulated other comprehensive income
2,072

 
3,480

Total Corporate Office Properties Trust’s shareholders’ equity
1,402,790

 
1,425,584

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
51,757

 
53,468

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
9,688

 
9,397

Noncontrolling interests in subsidiaries
70,245

 
71,665

Total equity
1,473,035

 
1,497,249

Total liabilities, redeemable noncontrolling interest and equity
$
3,605,897

 
$
3,629,952


See accompanying notes to consolidated financial statements.

3




Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2014
 
2013
Revenues
 

 
 

Rental revenue
$
98,035

 
$
91,849

Tenant recoveries and other real estate operations revenue
26,842

 
20,108

Construction contract and other service revenues
21,790

 
14,262

Total revenues
146,667

 
126,219

Expenses
 

 
 

Property operating expenses
49,772

 
40,388

Depreciation and amortization associated with real estate operations
43,596

 
27,010

Construction contract and other service expenses
18,624

 
13,477

General, administrative and leasing expenses
8,143

 
7,820

Business development expenses and land carry costs
1,326

 
1,359

Total operating expenses
121,461

 
90,054

Operating income
25,206

 
36,165

Interest expense
(20,827
)
 
(20,290
)
Interest and other income
1,285

 
946

Loss on early extinguishment of debt

 
(5,184
)
Income from continuing operations before equity in income of unconsolidated entities and income taxes
5,664

 
11,637

Equity in income of unconsolidated entities
60

 
41

Income tax expense
(64
)
 
(16
)
Income from continuing operations
5,660

 
11,662

Discontinued operations
11

 
1,261

Income before gain on sales of real estate
5,671

 
12,923

Gain on sales of real estate

 
2,354

Net income
5,671

 
15,277

Net (income) loss attributable to noncontrolling interests:
 

 
 

Common units in COPLP
(16
)
 
(429
)
Preferred units in COPLP
(165
)
 
(165
)
Other consolidated entities
(749
)
 
337

Net income attributable to COPT
4,741

 
15,020

Preferred share dividends
(4,490
)
 
(6,106
)
Net income attributable to COPT common shareholders
$
251

 
$
8,914

Net income attributable to COPT:
 

 
 

Income from continuing operations
$
4,728

 
$
13,849

Discontinued operations, net
13

 
1,171

Net income attributable to COPT
$
4,741

 
$
15,020

Basic earnings per common share (1)
 

 
 

Income from continuing operations
$
0.00

 
$
0.09

Discontinued operations
0.00

 
0.02

Net income attributable to COPT common shareholders
$
0.00

 
$
0.11

Diluted earnings per common share (1)
 

 
 

Income from continuing operations
$
0.00

 
$
0.09

Discontinued operations
0.00

 
0.02

Net income attributable to COPT common shareholders
$
0.00

 
$
0.11

Dividends declared per common share
$
0.275

 
$
0.275

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.
See accompanying notes to consolidated financial statements.

4



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
For the Three Months Ended March 31,
 
2014
 
2013
Net income
$
5,671

 
$
15,277

Other comprehensive income
 

 
 

Unrealized (losses) gains on interest rate derivatives
(2,123
)
 
462

Losses on interest rate derivatives included in interest expense
695

 
658

Other comprehensive (loss) income
(1,428
)
 
1,120

Comprehensive income
4,243

 
16,397

Comprehensive income attributable to noncontrolling interests
(911
)
 
(352
)
Comprehensive income attributable to COPT
$
3,332

 
$
16,045

 
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, 2012 (80,952,986 common shares outstanding)
$
333,833

 
$
809

 
$
1,653,672

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

 
$
1,436,499

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

 
3

 
3,172

 

 

 
(3,175
)
 

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

 
45

 
117,868

 

 

 

 
117,913

Exercise of share options (16,453 shares)

 

 
301

 

 

 

 
301

Share-based compensation

 
1

 
1,999

 

 

 

 
2,000

Restricted common share redemptions (60,960 shares)

 

 
(1,576
)
 

 

 

 
(1,576
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP

 

 
(2,229
)
 

 

 
2,229

 

Comprehensive income

 

 

 
15,020

 
1,025

 
1,142

 
17,187

Dividends

 

 

 
(29,699
)
 

 

 
(29,699
)
Distributions to owners of common and preferred units in COPLP

 

 

 

 

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

 

 

 

 

 
85

 
85

Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 
(848
)
 

 

 

 
(848
)
Tax loss from share-based compensation

 

 
(104
)
 

 

 

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

 
$
858

 
$
1,772,255

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

 
$
1,540,543

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013 (87,394,512 common shares outstanding)
$
249,083

 
$
874

 
$
1,814,015

 
$
(641,868
)
 
$
3,480

 
$
71,665

 
$
1,497,249

Conversion of common units to common shares (48,498 shares)

 

 
651

 

 

 
(651
)
 

Exercise of share options (26,614 shares)

 

 
568

 

 

 

 
568

Share-based compensation

 
2

 
1,854

 

 

 

 
1,856

Restricted common share redemptions (40,965 shares)

 

 
(1,092
)
 

 

 

 
(1,092
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP

 

 
(69
)
 

 

 
69

 

Comprehensive income

 

 

 
4,741

 
(1,408
)
 
408

 
3,741

Dividends

 

 

 
(28,581
)
 

 

 
(28,581
)
Distributions to owners of common and preferred units in COPLP

 

 

 

 

 
(1,246
)
 
(1,246
)
Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 
540

 

 

 

 
540

Balance at March 31, 2014 (87,594,931 common shares outstanding)
$
249,083

 
$
876

 
$
1,816,467

 
$
(665,708
)
 
$
2,072

 
$
70,245

 
$
1,473,035

See accompanying notes to consolidated financial statements.

6



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
116,386

 
$
119,348

Construction contract and other service revenues received
17,289

 
15,695

Property operating expenses paid
(42,739
)
 
(38,865
)
Construction contract and other service expenses paid
(11,397
)
 
(15,588
)
General, administrative, leasing, business development and land carry costs paid
(9,906
)
 
(8,521
)
Interest expense paid
(18,403
)
 
(18,018
)
Previously accreted interest expense paid

 
(2,263
)
Payments in connection with early extinguishment of debt
(101
)
 
(4,803
)
Interest and other income received
217

 
320

Income taxes refund
192

 
6

Net cash provided by operating activities
51,538

 
47,311

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(42,625
)
 
(44,361
)
Tenant improvements on operating properties
(4,357
)
 
(5,263
)
Other capital improvements on operating properties
(9,115
)
 
(9,327
)
Mortgage and other loan receivables funded
(395
)
 
(2,231
)
Leasing costs paid
(4,422
)
 
(3,436
)
Other
59

 
4,442

Net cash used in investing activities
(60,855
)
 
(60,176
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility

 
99,000

Other debt proceeds
5,700

 
68,132

Repayments of debt
 
 
 
Revolving Credit Facility

 
(99,000
)
Scheduled principal amortization
(1,855
)
 
(2,512
)
Other debt repayments
(50
)
 
(125,877
)
Deferred financing costs paid
(9
)
 
(1,109
)
Net proceeds from issuance of common shares
568

 
118,389

Common share dividends paid
(24,036
)
 
(22,276
)
Preferred share dividends paid
(4,490
)
 
(6,106
)
Distributions paid to noncontrolling interests in COPLP
(1,253
)
 
(1,370
)
Restricted share redemptions
(1,092
)
 
(1,576
)
Other
(165
)
 
85

Net cash (used in) provided by financing activities
(26,682
)
 
25,780

Net (decrease) increase in cash and cash equivalents
(35,999
)
 
12,915

Cash and cash equivalents
 

 
 

Beginning of period
54,373

 
10,594

End of period
$
18,374

 
$
23,509

See accompanying notes to consolidated financial statements.
 


7



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2014
 
2013
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
5,671

 
$
15,277

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

 
 

Depreciation and other amortization
44,101

 
28,782

Impairment losses
1

 
1,857

Settlement of previously accreted interest expense

 
(2,263
)
Amortization of deferred financing costs
1,167

 
1,528

Decrease (increase) in deferred rent receivable
398

 
(4,236
)
Amortization of net debt discounts
171

 
710

Loss (gain) on sales of real estate
4

 
(2,354
)
Share-based compensation
1,555

 
1,649

Loss on early extinguishment of debt
(78
)
 
381

Other
(1,032
)
 
(580
)
Changes in operating assets and liabilities:
 

 
 
(Increase) decrease in accounts receivable
(1,769
)
 
6,342

Decrease in restricted cash and marketable securities
283

 
201

(Increase) decrease in prepaid expenses and other assets
(494
)
 
4,180

Increase (decrease) in accounts payable, accrued expenses and other liabilities
4,785

 
(2,555
)
Decrease in rents received in advance and security deposits
(3,225
)
 
(1,608
)
Net cash provided by operating activities
$
51,538

 
$
47,311

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Decrease in accrued capital improvements, leasing and other investing activity costs
$
(7,985
)
 
$
(5,353
)
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income (loss) and noncontrolling interests
$
(1,443
)
 
$
1,105

Dividends/distribution payable
$
29,122

 
$
29,947

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
651

 
$
3,175

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
69

 
$
2,229

(Decrease) increase in redeemable noncontrolling interest and (increase) decrease in shareholders’ equity to carry redeemable noncontrolling interest at fair value
$
(540
)
 
$
848

 
See accompanying notes to consolidated financial statements.


8





Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
March 31,
2014
 
December 31,
2013
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,729,003

 
$
2,702,693

Projects in development or held for future development
495,625

 
511,608

Total properties, net
3,224,628

 
3,214,301

Cash and cash equivalents
18,374

 
54,373

Restricted cash and marketable securities
3,400

 
3,981

Accounts receivable (net of allowance for doubtful accounts of $2,353 and $2,976, respectively)
30,152

 
27,000

Deferred rent receivable (net of allowance of $1,495 and $2,126, respectively)
91,082

 
89,456

Intangible assets on real estate acquisitions, net
55,678

 
59,258

Deferred leasing and financing costs, net
65,855

 
66,267

Mortgage and other investing receivables
55,231

 
53,663

Prepaid expenses and other assets
53,932

 
54,186

Total assets
$
3,598,332

 
$
3,622,485

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,931,831

 
$
1,927,703

Accounts payable and accrued expenses
97,451

 
98,785

Rents received in advance and security deposits
28,267

 
31,492

Distributions payable
29,122

 
29,080

Deferred revenue associated with operating leases
12,281

 
10,369

Interest rate derivatives
3,196

 
3,309

Other liabilities
5,495

 
6,740

Total liabilities
2,107,643

 
2,107,478

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
17,654

 
17,758

Equity:
 

 
 

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

 
 

Preferred units
 
 
 
General partner, 9,431,667 preferred units outstanding at March 31, 2014 and December 31, 2013
249,083

 
249,083

Limited partner, 352,000 preferred units outstanding at March 31, 2014 and December 31, 2013
8,800

 
8,800

Common units, 87,594,931 and 87,394,512 held by the general partner and 3,929,202 and 3,977,700 held by limited partners at March 31, 2014 and December 31, 2013, respectively
1,203,297

 
1,226,318

Accumulated other comprehensive income
2,133

 
3,605

Total Corporate Office Properties, L.P.’s equity
1,463,313

 
1,487,806

Noncontrolling interests in subsidiaries
9,722

 
9,443

Total equity
1,473,035

 
1,497,249

Total liabilities, redeemable noncontrolling interest and equity
$
3,598,332

 
$
3,622,485

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 March 31,
 
2014
 
2013
Revenues
 

 
 

Rental revenue
$
98,035

 
$
91,849

Tenant recoveries and other real estate operations revenue
26,842

 
20,108

Construction contract and other service revenues
21,790

 
14,262

Total revenues
146,667

 
126,219

Expenses
 

 
 

Property operating expenses
49,772

 
40,388

Depreciation and amortization associated with real estate operations
43,596

 
27,010

Construction contract and other service expenses
18,624

 
13,477

General, administrative and leasing expenses
8,143

 
7,820

Business development expenses and land carry costs
1,326

 
1,359

Total operating expenses
121,461

 
90,054

Operating income
25,206

 
36,165

Interest expense
(20,827
)
 
(20,290
)
Interest and other income
1,285

 
946

Loss on early extinguishment of debt

 
(5,184
)
Income from continuing operations before equity in income of unconsolidated entities and income taxes
5,664

 
11,637

Equity in income of unconsolidated entities
60

 
41

Income tax expense
(64
)
 
(16
)
Income from continuing operations
5,660

 
11,662

Discontinued operations
11

 
1,261

Income before gain on sales of real estate
5,671

 
12,923

Gain on sales of real estate

 
2,354

Net income
5,671

 
15,277

Net (income) loss attributable to noncontrolling interests in consolidated entities
(737
)
 
336

Net income attributable to COPLP
4,934

 
15,613

Preferred unit distributions
(4,655
)
 
(6,271
)
Net loss attributable to COPLP common unitholders
$
279

 
$
9,342

Net income attributable to COPLP:
 

 
 

Income from continuing operations
$
4,921

 
$
14,385

Discontinued operations, net
13

 
1,228

Net income attributable to COPLP
$
4,934

 
$
15,613

Basic earnings per common unit (1)
 

 
 

Income from continuing operations
$
0.00

 
$
0.09

Discontinued operations
0.00

 
0.02

Net income attributable to COPLP common unitholders
$
0.00

 
$
0.11

Diluted earnings per common unit (1)
 

 
 

Income from continuing operations
$
0.00

 
$
0.09

Discontinued operations
0.00

 
0.02

Net income attributable to COPLP common unitholders
$
0.00

 
$
0.11

Distributions declared per common unit
$
0.275

 
$
0.275

(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 March 31,
 
2014
 
2013
Net income
$
5,671

 
$
15,277

Other comprehensive income
 

 
 

Unrealized (losses) gains on interest rate derivatives
(2,123
)
 
462

Losses on interest rate derivatives included in interest expense
695

 
658

Other comprehensive (loss) income
(1,428
)
 
1,120

Comprehensive income
4,243

 
16,397

Comprehensive (income) loss attributable to noncontrolling interests
(782
)
 
290

Comprehensive income attributable to COPLP
$
3,461

 
$
16,687

 
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, 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

 

 

 

 
16,453

 
301

 

 

 
301

Share-based compensation

 

 

 

 
116,315

 
2,000

 

 

 
2,000

Restricted common unit redemptions

 

 

 

 
(60,960
)
 
(1,576
)
 

 

 
(1,576
)
Comprehensive loss

 
165

 

 
6,106

 

 
9,342

 
1,074

 
500

 
17,187

Distributions to owners of common and preferred units

 
(165
)
 

 
(6,106
)
 

 
(24,643
)
 

 

 
(30,914
)
Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 
85

 
85

Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 

 

 

 
(848
)
 

 

 
(848
)
Tax loss from share-based compensation

 

 

 

 

 
(104
)
 

 

 
(104
)
Balance at March 31, 2013
352,000

 
$
8,800

 
12,821,667

 
$
333,833

 
89,577,336

 
$
1,191,776

 
$
(4,634
)
 
$
10,768

 
$
1,540,543

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
352,000

 
$
8,800

 
9,431,667

 
$
249,083

 
91,372,212

 
$
1,226,318

 
$
3,605

 
$
9,443

 
$
1,497,249

Issuance of common units resulting from exercise of share options

 

 

 

 
26,614

 
568

 

 

 
568

Share-based compensation

 

 

 

 
166,272

 
1,856

 

 

 
1,856

Restricted common unit redemptions

 

 

 

 
(40,965
)
 
(1,092
)
 

 

 
(1,092
)
Comprehensive income

 
165

 

 
4,490

 

 
279

 
(1,472
)
 
279

 
3,741

Distributions to owners of common and preferred units

 
(165
)
 

 
(4,490
)
 

 
(25,172
)
 

 

 
(29,827
)
Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 

 

 

 
540

 

 

 
540

Balance at March 31, 2014
352,000

 
$
8,800

 
9,431,667

 
$
249,083

 
91,524,133

 
$
1,203,297

 
$
2,133

 
$
9,722

 
$
1,473,035

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 Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
116,386

 
$
119,348

Construction contract and other service revenues received
17,289

 
15,695

Property operating expenses paid
(42,739
)
 
(38,865
)
Construction contract and other service expenses paid
(11,397
)
 
(15,588
)
General, administrative, leasing, business development and land carry costs paid
(9,906
)
 
(8,521
)
Interest expense paid
(18,403
)
 
(18,018
)
Previously accreted interest expense paid

 
(2,263
)
Payments in connection with early extinguishment of debt
(101
)
 
(4,803
)
Interest and other income received
217

 
320

Income taxes refund
192

 
6

Net cash provided by operating activities
51,538

 
47,311

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(42,625
)
 
(44,361
)
Tenant improvements on operating properties
(4,357
)
 
(5,263
)
Other capital improvements on operating properties
(9,115
)
 
(9,327
)
Mortgage and other loan receivables funded
(395
)
 
(2,231
)
Leasing costs paid
(4,422
)
 
(3,436
)
Other
59

 
4,442

Net cash used in investing activities
(60,855
)
 
(60,176
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility

 
99,000

Other debt proceeds
5,700

 
68,132

Repayments of debt
 
 
 
Revolving Credit Facility

 
(99,000
)
Scheduled principal amortization
(1,855
)
 
(2,512
)
Other debt repayments
(50
)
 
(125,877
)
Deferred financing costs paid
(9
)
 
(1,109
)
Net proceeds from issuance of common units
568

 
118,389

Common unit distributions paid
(25,124
)
 
(23,481
)
Preferred unit distributions paid
(4,655
)
 
(6,271
)
Restricted unit redemptions
(1,092
)
 
(1,576
)
Other
(165
)
 
85

Net cash (used in) provided by financing activities
(26,682
)
 
25,780

Net (decrease) increase in cash and cash equivalents
(35,999
)
 
12,915

Cash and cash equivalents
 

 
 

Beginning of period
54,373

 
10,594

End of period
$
18,374

 
$
23,509

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 Three Months Ended March 31,
 
2014
 
2013
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
5,671

 
$
15,277

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

 
 

Depreciation and other amortization
44,101

 
28,782

Impairment losses
1

 
1,857

Settlement of previously accreted interest expense

 
(2,263
)
Amortization of deferred financing costs
1,167

 
1,528

Decrease (increase) in deferred rent receivable
398

 
(4,236
)
Amortization of net debt discounts
171

 
710

Loss (gain) on sales of real estate
4

 
(2,354
)
Share-based compensation
1,555

 
1,649

Loss on early extinguishment of debt
(78
)
 
381

Other
(1,032
)
 
(580
)
Changes in operating assets and liabilities:
 

 
 
(Increase) decrease in accounts receivable
(1,769
)
 
6,342

Decrease in restricted cash and marketable securities
381

 
483

(Increase) decrease in prepaid expenses and other assets
(494
)
 
4,180

Increase (decrease) in accounts payable, accrued expenses and other liabilities
4,687

 
(2,837
)
Decrease in rents received in advance and security deposits
(3,225
)
 
(1,608
)
Net cash provided by operating activities
$
51,538

 
$
47,311

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Decrease in accrued capital improvements, leasing and other investing activity costs
$
(7,985
)
 
$
(5,353
)
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income (loss) and noncontrolling interests
$
(1,443
)
 
$
1,105

Distributions payable
$
29,122

 
$
29,947

(Decrease) increase in redeemable noncontrolling interest and (increase) decrease in equity to carry redeemable noncontrolling interest at fair value
$
(540
)
 
$
848

 
See accompanying notes to consolidated financial statements.



14



Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We focus primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of March 31, 2014, our properties included the following:

183 operating office properties totaling 17.5 million square feet;
12 office properties under, or contractually committed for, construction or redevelopment that we estimate will total approximately 1.6 million square feet upon completion, including two partially operational properties included above;
land held or under pre-construction totaling 1,716 acres (including 56 acres controlled but not owned) that we believe are potentially developable into approximately 19.7 million square feet; and
a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.
 
COPLP owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”).  In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Interests in COPLP are in the form of common and preferred units. As of March 31, 2014, COPT owned 95.7% of the outstanding COPLP common units (“common units”) and 96.4% of the outstanding COPLP preferred units (“preferred units”); the remaining common and preferred units in COPLP were owned by third parties. Three of COPT’s trustees controlled, either directly or through ownership by other entities or family members, 3.4% of COPLP’s common units as of March 31, 2014. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation are substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to COPT’s executive officers as COPLP’s executive officers, and although, as a partnership, COPLP does not have a board of trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
  
2.     Summary of Significant Accounting Policies
 
Basis of Presentation
 
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control.  The COPLP consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control.  We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if they are deemed to be the primary beneficiary of such entities.  We eliminate all significant intercompany balances and transactions in consolidation.

 We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an

15



entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
 
These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2013 included in our 2013 Annual Report on Form 10-K.  The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations.  All adjustments are of a normal recurring nature.  The consolidated financial statements have been prepared using the accounting policies described in our 2013 Annual Report on Form 10-K.

Reclassifications
 
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.  These reclassifications occurred in conjunction with the transfer of properties to, and from, discontinued operations during 2013.

Recent Accounting Pronouncement

In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity. This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity. The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance will be effective for annual and interim periods beginning on or after December 15, 2014. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. All entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We are in the process of evaluating this guidance.

3.     Fair Value Measurements

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2013 Annual Report on Form 10-K.
 
Recurring Fair Value Measurements
 
Our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest as of March 31, 2014, we used a discount rate of 15.5%. The discount rate factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture. A significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  As discussed in Note 6, we estimated the fair values of our mortgage and other investing receivables based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 8, we estimated the fair value of our unsecured senior notes and exchangeable senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
 

16



For additional fair value information, please refer to Note 6 for mortgage loans receivable, Note 8 for debt and Note 9 for interest rate derivatives. 

COPT and Subsidiaries

The table below sets forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2014 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Marketable securities in deferred compensation plan (1)
 
 

 
 

 
 

 
 

Mutual funds
 
$
7,249

 
$

 
$

 
$
7,249

Common stocks
 
115

 

 

 
115

Other
 
201

 

 

 
201

Interest rate derivatives (2)
 

 
5,038

 

 
5,038

Warrants to purchase common stock (2)
 

 
537

 

 
537

Total Assets
 
$
7,565

 
$
5,575

 
$

 
$
13,140

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$

 
$
7,565

 
$

 
$
7,565

Interest rate derivatives
 

 
3,196

 

 
3,196

Total Liabilities
 
$

 
$
10,761

 
$

 
$
10,761

Redeemable noncontrolling interest
 
$

 
$

 
$
17,654

 
$
17,654


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

COPLP and Subsidiaries

The table below sets forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2014 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Interest rate derivatives (1)
 
$

 
$
5,038

 
$

 
$
5,038

Warrants to purchase common stock (1)
 

 
537

 

 
537

Total Assets
 
$

 
$
5,575

 
$

 
$
5,575

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$

 
$
3,196

 
$

 
$
3,196

Redeemable noncontrolling interest
 
$

 
$

 
$
17,654

 
$
17,654


(1) Included in the line entitled “prepaid expenses and other assets” on COPLP’s consolidated balance sheet.


17



Nonrecurring Fair Value Measurements
 
During the three months ended March 31, 2013, we recognized a non-cash impairment loss of $1.9 million for the amount by which the carrying values of certain properties exceeded their estimated fair values. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining the fair value of the property (dollars in thousands):
 
 
 
 
 
 
 
Fair Value of Property Held as of March 31, 2013
 
Impairment Losses
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Recognized in
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Three Months
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Ended
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
March 31, 2013
Assets:
 
 

 
 

 
 

 
 

 
 
Properties, net
 
$

 
$

 
$
7,250

 
$
7,250

 
$
1,857


The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above as of March 31, 2013 (dollars in thousands):
Valuation Technique
 
Fair Value on 
Measurement Date
 
 Unobservable Input
 
Range (Weighted Average)
Bids for property indicative of value
 
$
7,250

 
Indicative bid
 
(1)

(1) This fair value measurement was developed as a result of negotiations between us and a purchaser of a property.


4.    Properties, net
 
Operating properties, net consisted of the following (in thousands): 
 
March 31,
2014
 
December 31,
2013
Land
$
436,381

 
$
430,472

Buildings and improvements
2,927,800

 
2,869,870

Less: accumulated depreciation
(635,178
)
 
(597,649
)
Operating properties, net
$
2,729,003

 
$
2,702,693

 
During the three months ended March 31, 2014, we recognized $12.9 million in additional depreciation expense resulting from our revision of the useful life of a property in Greater Philadelphia that was removed from service for redevelopment.

Projects we had in development or held for future development consisted of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
Land
$
238,904

 
$
245,676

Construction in progress, excluding land
256,721

 
265,932

Projects in development or held for future development
$
495,625

 
$
511,608


2014 Construction Activities

During the three months ended March 31, 2014, we placed into service an aggregate of 355,000 square feet in two newly constructed office properties located in Northern Virginia and Huntsville, Alabama. As of March 31, 2014, we had eight office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.2 million square feet upon completion, including four in the Baltimore/Washington Corridor, three in Northern Virginia and one in San Antonio. We also had four office properties under redevelopment that we estimate will total 403,000 square feet upon completion, including two in Greater Philadelphia, one in the Baltimore/Washington Corridor and one in St. Mary’s County, Maryland.


18



5.    Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of March 31, 2014 (dollars in thousands):
 
 
 
 
Nominal
 
 
 
 
 
 
 
 
 
 
 
 
Ownership
 
 
 
March 31, 2014
(1)
 
 
Date
 
% as of
 
 
 
Total
 
Encumbered
 
Total
 
 
Acquired
 
3/31/2014
 
Nature of Activity
 
Assets
 
Assets
 
Liabilities
LW Redstone Company, LLC
 
3/23/2010
 
85%
 
Operates four buildings and developing others (2)
 
$
135,231

 
$
68,360

 
$
36,272

M Square Associates, LLC
 
6/26/2007
 
50%
 
Operates two buildings and developing others (3)
 
60,728

 
48,358

 
40,536

COPT-FD Indian Head, LLC
 
10/23/2006
 
75%
 
Holding land parcel (4)
 
6,436

 

 

 
 
 
 
 
 
 
 
$
202,395

 
$
116,718

 
$
76,808

(1)
Excludes amounts eliminated in consolidation.
(2)
This joint venture’s property is in Huntsville, Alabama.
(3)
This joint venture’s properties are in College Park, Maryland (in the Baltimore/Washington Corridor).
(4)
This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 17.

6.     Mortgage and Other Investing Receivables
 
Mortgage and other investing receivables, including accrued interest thereon, consisted of the following (in thousands):
 
 
March 31,
2014
 
December 31,
2013
Notes receivable from City of Huntsville
$
45,381

 
$
44,055

Mortgage loan receivable
9,850

 
9,608

 
$
55,231

 
$
53,663

 
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5).  The mortgage loan receivable reflected above consisted of one loan secured by a property in Greater Baltimore. We did not have an allowance for credit losses in connection with our mortgage and other investing receivables as of March 31, 2014 or December 31, 2013.  The fair value of these receivables approximated their carrying amounts as of March 31, 2014 and December 31, 2013.

7.    Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets consisted of the following (in thousands):
 
 
March 31,
2014
 
December 31,
2013
Prepaid expenses
$
13,813

 
$
19,308

Lease incentives
11,900

 
8,435

Furniture, fixtures and equipment, net
7,068

 
6,556

Interest rate derivatives
5,038

 
6,594

Construction contract costs incurred in excess of billings
4,990

 
2,462

Deferred tax asset, net (1)
4,241

 
4,305

Other equity method investments
2,266

 
2,258

Other assets
4,616

 
4,268

Prepaid expenses and other assets
$
53,932

 
$
54,186


(1) Includes a valuation allowance of $2.1 million.

Other assets, as reported above, include operating notes receivable due from tenants with terms exceeding one year totaling $1.7 million as of March 31, 2014 and December 31, 2013; we carried allowances for estimated losses for $124,000 of the March 31, 2014 balance and $87,000 of the December 31, 2013 balance.


19



8.    Debt
 
Our debt consisted of the following (dollars in thousands):
 
Maximum
 
 
 
 
 
 
 
 
 
 Availability at
 
Carrying Value at
 
 
 
Scheduled Maturity
 
March 31,
2014
 
March 31,
2014
 
December 31,
2013
 
Stated Interest Rates as of
 
as of
 
 
 
 
March 31, 2014
 
March 31, 2014
Mortgage and Other Secured Loans: