UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q 

(Mark one)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended	June 30, 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

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Corporate Office Properties Trust

Large accelerated filer ý		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 ý		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. o Yes   ý No

As of July 18, 2014, 87,678,106 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 June 30, 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 June 30, 2014, COPT owned approximately 95.7% of the outstanding common units and approximately 95.5% 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

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

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

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

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

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

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

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

•	consolidated financial statements;

•	the following notes to the consolidated financial statements:

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

•	Note 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 COPLP.”

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

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TABLE OF CONTENTS

 

FORM 10-Q

 

		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	5
	Consolidated Statements of Equity for the Six Months Ended June 30, 2014 and 2013 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)	7
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited)	9
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 (unaudited)	10
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)	11
	Consolidated Statements of Equity for the Six Months Ended June 30, 2014 and 2013 (unaudited)	12
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)	13
Notes to Consolidated Financial Statements (unaudited)		15
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4:	Controls and Procedures	49
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	50
Item 1A:	Risk Factors	50
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3:	Defaults Upon Senior Securities	50
Item 4:	Mine Safety Disclosures	50
Item 5:	Other Information	50
Item 6:	Exhibits	50
SIGNATURES		52

2

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PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

	June 30, 2014				December 31, 2013
Assets
Properties, net:
Operating properties, net	$	2,724,242			$	2,702,693
Projects in development or held for future development	530,000				511,608
Total properties, net	3,254,242				3,214,301
Assets held for sale, net	22,868				—
Cash and cash equivalents	76,216				54,373
Restricted cash and marketable securities	11,689				11,448
Accounts receivable (net of allowance for doubtful accounts of $2,282 and $2,976, respectively)	30,911				27,000
Deferred rent receivable (net of allowance of $1,491 and $2,126, respectively)	93,270				89,456
Intangible assets on real estate acquisitions, net	51,645				59,258
Deferred leasing and financing costs, net	65,251				66,267
Mortgage and other investing receivables	56,549				53,663
Prepaid expenses and other assets	46,859				54,186
Total assets	$	3,709,500			$	3,629,952
Liabilities and equity
Liabilities:
Debt, net	$	2,099,343			$	1,927,703
Accounts payable and accrued expenses	105,205				98,785
Rents received in advance and security deposits	27,520				31,492
Dividends and distributions payable	28,342				29,080
Deferred revenue associated with operating leases	12,355				10,369
Interest rate derivatives	3,236				3,309
Other liabilities	14,818				14,207
Total liabilities	2,290,819				2,114,945
Commitments and contingencies (Note 17)
Redeemable noncontrolling interest	18,901				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; issued and outstanding of 7,431,667 at June 30, 2014 and 9,431,667 at December 31, 2013)	199,083				249,083
Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 87,668,308 at June 30, 2014 and 87,394,512 at December 31, 2013)	877				874
Additional paid-in capital	1,819,436				1,814,015
Cumulative distributions in excess of net income	(688,033		)		(641,868		)
Accumulated other comprehensive (loss) income	(761		)		3,480
Total Corporate Office Properties Trust’s shareholders’ equity	1,330,602				1,425,584
Noncontrolling interests in subsidiaries:
Common units in COPLP	50,323				53,468
Preferred units in COPLP	8,800				8,800
Other consolidated entities	10,055				9,397
Noncontrolling interests in subsidiaries	69,178				71,665
Total equity	1,399,780				1,497,249
Total liabilities, redeemable noncontrolling interest and equity	$	3,709,500			$	3,629,952

See accompanying notes to consolidated financial statements.

3

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2014				2013				2014				2013
Revenues
Rental revenue	$	94,332			$	94,421			$	192,367			$	186,270
Tenant recoveries and other real estate operations revenue	21,627				21,311				48,469				41,419
Construction contract and other service revenues	23,861				20,795				45,651				35,057
Total revenues	139,820				136,527				286,487				262,746
Expenses
Property operating expenses	43,772				41,333				93,544				81,721
Depreciation and amortization associated with real estate operations	30,895				27,673				74,491				54,683
Construction contract and other service expenses	23,136				19,382				41,760				32,859
Impairment losses	1,302				—				1,302				—
General, administrative and leasing expenses	7,528				6,583				15,671				14,403
Business development expenses and land carry costs	1,351				1,327				2,677				2,686
Total operating expenses	107,984				96,298				229,445				186,352
Operating income	31,836				40,229				57,042				76,394
Interest expense	(23,478		)		(21,102		)		(44,305		)		(41,392		)
Interest and other income	1,299				2,006				2,584				2,952
Loss on early extinguishment of debt	(270		)		(21,470		)		(270		)		(26,654		)
Income (loss) from continuing operations before equity in (loss) income of unconsolidated entities and income taxes	9,387				(337		)		15,051				11,300
Equity in (loss) income of unconsolidated entities	(47		)		126				13				167
Income tax expense	(92		)		(21		)		(156		)		(37		)
Income (loss) from continuing operations	9,248				(232		)		14,908				11,430
Discontinued operations	(198		)		(4,502		)		(187		)		(3,241		)
Income (loss) before gain on sales of real estate	9,050				(4,734		)		14,721				8,189
Gain on sales of real estate	—				329				—				2,683
Net income (loss)	9,050				(4,405		)		14,721				10,872
Net (income) loss attributable to noncontrolling interests:
Common units in COPLP	(158		)		671				(174		)		242
Preferred units in COPLP	(165		)		(165		)		(330		)		(330		)
Other consolidated entities	(837		)		(1,466		)		(1,586		)		(1,129		)
Net income (loss) attributable to COPT	7,890				(5,365		)		12,631				9,655
Preferred share dividends	(4,344		)		(4,885		)		(8,834		)		(10,991		)
Issuance costs associated with redeemed preferred shares	(1,769		)		(2,904		)		(1,769		)		(2,904		)
Net income (loss) attributable to COPT common shareholders	$	1,777			$	(13,154	)		$	2,028			$	(4,240	)
Net income (loss) attributable to COPT:
Income (loss) from continuing operations	$	8,077			$	(990	)		$	12,805			$	12,859
Discontinued operations, net	(187		)		(4,375		)		(174		)		(3,204		)
Net income (loss) attributable to COPT	$	7,890			$	(5,365	)		$	12,631			$	9,655
Basic earnings per common share (1)
Income (loss) from continuing operations	$	0.02			$	(0.10	)		$	0.02			$	(0.02	)
Discontinued operations	0.00				(0.06		)		0.00				(0.03		)
Net income (loss) attributable to COPT common shareholders	$	0.02			$	(0.16	)		$	0.02			$	(0.05	)
Diluted earnings per common share (1)
Income (loss) from continuing operations	$	0.02			$	(0.10	)		$	0.02			$	(0.02	)
Discontinued operations	0.00				(0.06		)		0.00				(0.03		)
Net income (loss) attributable to COPT common shareholders	$	0.02			$	(0.16	)		$	0.02			$	(0.05	)
Dividends declared per common share	$	0.275			$	0.275			$	0.550			$	0.550

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

See accompanying notes to consolidated financial statements.

4

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2014				2013				2014				2013
Net income (loss)	$	9,050			$	(4,405	)		$	14,721			$	10,872
Other comprehensive (loss) income
Unrealized (losses) gains on interest rate derivatives	(3,630		)		7,830				(5,753		)		8,292
Losses on interest rate derivatives included in interest expense	719				674				1,414				1,332
Other comprehensive (loss) income	(2,911		)		8,504				(4,339		)		9,624
Comprehensive income	6,139				4,099				10,382				20,496
Comprehensive income attributable to noncontrolling interests	(1,081		)		(1,422		)		(1,992		)		(1,774		)
Comprehensive income attributable to COPT	$	5,058			$	2,677			$	8,390			$	18,722

 

See accompanying notes to consolidated financial statements.

5

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

	Preferred Shares				Common Shares				Additional Paid-in Capital				Cumulative Distributions in Excess of Net Income				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interests				Total
Balance at December 31, 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 (279,019 shares)	—				3				3,575				—				—				(3,578		)		—
Common shares issued to the public (4,485,000 shares)	—				45				117,868				—				—				—				117,913
Exercise of share options (32,756 shares)	—				—				636				—				—				—				636
Share-based compensation	—				1				3,847				—				—				—				3,848
Restricted common share redemptions (68,762 shares)	—				—				(1,784		)		—				—				—				(1,784		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—				—				(2,495		)		—				—				2,495				—
Comprehensive income	—				—				—				9,655				9,066				1,490				20,211
Dividends	—				—				—				(58,188		)		—				—				(58,188		)
Distributions to owners of common and preferred units in COPLP	—				—				—				—				—				(2,422		)		(2,422		)
Contributions from noncontrolling interests in other consolidated entities	—				—				—				—				—				85				85
Distributions to noncontrolling interest in other consolidated entities	—				—				—				—				—				(8		)		(8		)
Adjustment to arrive at fair value of redeemable noncontrolling interest	—				—				(5,631		)		—				—				—				(5,631		)
Tax loss from share-based compensation	—				—				(122		)		—				—				—				(122		)
Balance at June 30, 2013 (85,845,403 common shares outstanding)	$	249,083			$	858			$	1,772,470			$	(668,892	)		$	3,631			$	69,137			$	1,426,287
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
Redemption of preferred shares (2,000,000 shares)	(50,000		)		—				1,769				(1,769		)		—				—				(50,000		)
Conversion of common units to common shares (78,498 shares)	—				—				1,047				—				—				(1,047		)		—
Costs associated with common shares issued to the public	—				—				(7		)		—				—				—				(7		)
Exercise of share options (51,289 shares)	—				—				1,185				—				—				—				1,185
Share-based compensation	—				3				3,542				—				—				—				3,545
Restricted common share redemptions (49,454 shares)	—				—				(1,326		)		—				—				—				(1,326		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—				—				(72		)		—				—				72				—
Comprehensive income	—				—				—				12,631				(4,241		)		976				9,366
Dividends	—				—				—				(57,027		)		—				—				(57,027		)
Distributions to owners of common and preferred units in COPLP	—				—				—				—				—				(2,483		)		(2,483		)
Contributions from noncontrolling interests in other consolidated entities	—				—				—				—				—				3				3
Distributions to noncontrolling interests in other consolidated entities	—				—				—				—				—				(8		)		(8		)
Adjustment to arrive at fair value of redeemable noncontrolling interest	—				—				(717		)		—				—				—				(717		)
Balance at June 30, 2014 (87,668,308 common shares outstanding)	$	199,083			$	877			$	1,819,436			$	(688,033	)		$	(761	)		$	69,178			$	1,399,780

See accompanying notes to consolidated financial statements.

6

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited) 

	For the Six Months Ended June 30,
	2014				2013
Cash flows from operating activities
Revenues from real estate operations received	$	232,877			$	233,068
Construction contract and other service revenues received	35,105				28,898
Property operating expenses paid	(78,621		)		(75,566		)
Construction contract and other service expenses paid	(34,588		)		(33,404		)
General, administrative, leasing, business development and land carry costs paid	(16,904		)		(14,988		)
Interest expense paid	(35,365		)		(41,825		)
Previously accreted interest expense paid	—				(11,116		)
Payments in connection with early extinguishment of debt	(104		)		(23,932		)
Interest and other income received	346				390
Income taxes refund	204				6
Net cash provided by operating activities	102,950				61,531
Cash flows from investing activities
Construction, development and redevelopment	(105,459		)		(99,779		)
Tenant improvements on operating properties	(10,842		)		(10,496		)
Other capital improvements on operating properties	(16,482		)		(11,738		)
Proceeds from dispositions of properties	1,971				12,344
Mortgage and other loan receivables funded	(565		)		(2,756		)
Leasing costs paid	(7,772		)		(6,048		)
Other	(892		)		3,144
Net cash used in investing activities	(140,041		)		(115,329		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	115,000				374,000
Unsecured senior notes	297,342				347,081
Other debt proceeds	9,931				80,232
Repayments of debt
Revolving Credit Facility	(115,000		)		(226,000		)
Scheduled principal amortization	(3,437		)		(5,003		)
Other debt repayments	(133,010		)		(486,803		)
Deferred financing costs paid	(653		)		(2,099		)
Net proceeds from issuance of common shares	1,178				118,768
Redemption of preferred shares	(50,000		)		(84,750		)
Common share dividends paid	(48,118		)		(45,852		)
Preferred share dividends paid	(9,626		)		(12,355		)
Distributions paid to noncontrolling interests in COPLP	(2,641		)		(2,503		)
Restricted share redemptions	(1,326		)		(1,784		)
Other	(706		)		(532		)
Net cash provided by financing activities	58,934				52,400
Net increase (decrease) in cash and cash equivalents	21,843				(1,398		)
Cash and cash equivalents
Beginning of period	54,373				10,594
End of period	$	76,216			$	9,196

See accompanying notes to consolidated financial statements.

 

7

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2014				2013
Reconciliation of net income to net cash provided by operating activities:
Net income	$	14,721			$	10,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	75,839				58,244
Impairment losses	1,329				9,052
Settlement of previously accreted interest expense	—				(11,116		)
Amortization of deferred financing costs	2,289				2,971
Increase in deferred rent receivable	(1,754		)		(6,598		)
Amortization of net debt discounts	400				1,328
Loss (gain) on sales of real estate	4				(2,683		)
Share-based compensation	3,056				3,296
Loss on early extinguishment of debt	282				2,722
Other	(1,664		)		(2,472		)
Changes in operating assets and liabilities:
Increase in accounts receivable	(3,916		)		(4,384		)
Increase in restricted cash and marketable securities	(113		)		(969		)
Decrease in prepaid expenses and other assets	3,213				5,884
Increase (decrease) in accounts payable, accrued expenses and other liabilities	13,236				(1,079		)
Decrease in rents received in advance and security deposits	(3,972		)		(3,537		)
Net cash provided by operating activities	$	102,950			$	61,531
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(7,153	)		$	(12,750	)
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive (loss) income and noncontrolling interests	$	(4,369	)		$	9,592
Dividends/distribution payable	$	28,342			$	28,602
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	1,047			$	3,578
Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	72			$	2,495
Increase in redeemable noncontrolling interest and decrease in shareholders’ equity to carry redeemable noncontrolling interest at fair value	$	717			$	5,631

 

See accompanying notes to consolidated financial statements.

8

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except unit data)

(unaudited)

	June 30, 2014				December 31, 2013
Assets
Properties, net:
Operating properties, net	$	2,724,242			$	2,702,693
Projects in development or held for future development	530,000				511,608
Total properties, net	3,254,242				3,214,301
Assets held for sale, net	22,868				—
Cash and cash equivalents	76,216				54,373
Restricted cash and marketable securities	4,068				3,981
Accounts receivable (net of allowance for doubtful accounts of $2,282 and $2,976, respectively)	30,911				27,000
Deferred rent receivable (net of allowance of $1,491 and $2,126, respectively)	93,270				89,456
Intangible assets on real estate acquisitions, net	51,645				59,258
Deferred leasing and financing costs, net	65,251				66,267
Mortgage and other investing receivables	56,549				53,663
Prepaid expenses and other assets	46,859				54,186
Total assets	$	3,701,879			$	3,622,485
Liabilities and equity
Liabilities:
Debt, net	$	2,099,343			$	1,927,703
Accounts payable and accrued expenses	105,205				98,785
Rents received in advance and security deposits	27,520				31,492
Distributions payable	28,342				29,080
Deferred revenue associated with operating leases	12,355				10,369
Interest rate derivatives	3,236				3,309
Other liabilities	7,197				6,740
Total liabilities	2,283,198				2,107,478
Commitments and contingencies (Note 17)
Redeemable noncontrolling interest	18,901				17,758
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, preferred units outstanding of 7,431,667 at June 30, 2014 and 9,431,667 at December 31, 2013	199,083				249,083
Limited partner, 352,000 preferred units outstanding at June 30, 2014 and December 31, 2013	8,800				8,800
Common units, 87,668,308 and 87,394,512 held by the general partner and 3,899,202 and 3,977,700 held by limited partners at June 30, 2014 and December 31, 2013, respectively	1,182,635				1,226,318
Accumulated other comprehensive (loss) income	(825		)		3,605
Total Corporate Office Properties, L.P.’s equity	1,389,693				1,487,806
Noncontrolling interests in subsidiaries	10,087				9,443
Total equity	1,399,780				1,497,249
Total liabilities, redeemable noncontrolling interest and equity	$	3,701,879			$	3,622,485

See accompanying notes to consolidated financial statements.

9

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per unit data)

(unaudited)

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2014				2013				2014				2013
Revenues
Rental revenue	$	94,332			$	94,421			$	192,367			$	186,270
Tenant recoveries and other real estate operations revenue	21,627				21,311				48,469				41,419
Construction contract and other service revenues	23,861				20,795				45,651				35,057
Total revenues	139,820				136,527				286,487				262,746
Expenses
Property operating expenses	43,772				41,333				93,544				81,721
Depreciation and amortization associated with real estate operations	30,895				27,673				74,491				54,683
Construction contract and other service expenses	23,136				19,382				41,760				32,859
Impairment losses	1,302				—				1,302				—
General, administrative and leasing expenses	7,528				6,583				15,671				14,403
Business development expenses and land carry costs	1,351				1,327				2,677				2,686
Total operating expenses	107,984				96,298				229,445				186,352
Operating income	31,836				40,229				57,042				76,394
Interest expense	(23,478		)		(21,102		)		(44,305		)		(41,392		)
Interest and other income	1,299				2,006				2,584				2,952
Loss on early extinguishment of debt	(270		)		(21,470		)		(270		)		(26,654		)
Income (loss) from continuing operations before equity in (loss) income of unconsolidated entities and income taxes	9,387				(337		)		15,051				11,300
Equity in (loss) income of unconsolidated entities	(47		)		126				13				167
Income tax expense	(92		)		(21		)		(156		)		(37		)
Income (loss) from continuing operations	9,248				(232		)		14,908				11,430
Discontinued operations	(198		)		(4,502		)		(187		)		(3,241		)
Income before gain on sales of real estate	9,050				(4,734		)		14,721				8,189
Gain on sales of real estate	—				329				—				2,683
Net income (loss)	9,050				(4,405		)		14,721				10,872
Net income attributable to noncontrolling interests in consolidated entities	(837		)		(1,473		)		(1,574		)		(1,137		)
Net income (loss) attributable to COPLP	8,213				(5,878		)		13,147				9,735
Preferred unit distributions	(4,509		)		(5,050		)		(9,164		)		(11,321		)
Issuance costs associated with redeemed preferred units	(1,769		)		(2,904		)		(1,769		)		(2,904		)
Net income (loss) attributable to COPLP common unitholders	$	1,935			$	(13,832	)		$	2,214			$	(4,490	)
Net income (loss) attributable to COPLP:
Income (loss) from continuing operations	$	8,408			$	(1,311	)		$	13,329			$	13,074
Discontinued operations, net	(195		)		(4,567		)		(182		)		(3,339		)
Net income (loss) attributable to COPLP	$	8,213			$	(5,878	)		$	13,147			$	9,735
Basic earnings per common unit (1)
Income (loss) from continuing operations	$	0.02			$	(0.10	)		$	0.02			$	(0.02	)
Discontinued operations	0.00				(0.06		)		0.00				(0.03		)
Net income (loss) attributable to COPLP common unitholders	$	0.02			$	(0.16	)		$	0.02			$	(0.05	)
Diluted earnings per common unit (1)
Income (loss) from continuing operations	$	0.02			$	(0.10	)		$	0.02			$	(0.02	)
Discontinued operations	0.00				(0.06		)		0.00				(0.03		)
Net income (loss) attributable to COPLP common unitholders	$	0.02			$	(0.16	)		$	0.02			$	(0.05	)
Distributions declared per common unit	$	0.275			$	0.275			$	0.550			$	0.550

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

See accompanying notes to consolidated financial statements.

10

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited) 

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2014				2013				2014				2013
Net income (loss)	$	9,050			$	(4,405	)		$	14,721			$	10,872
Other comprehensive (loss) income
Unrealized (losses) gains on interest rate derivatives	(3,630		)		7,830				(5,753		)		8,292
Losses on interest rate derivatives included in interest expense	719				674				1,414				1,332
Other comprehensive (loss) income	(2,911		)		8,504				(4,339		)		9,624
Comprehensive income	6,139				4,099				10,382				20,496
Comprehensive income attributable to noncontrolling interests	(884		)		(1,579		)		(1,666		)		(1,289		)
Comprehensive income attributable to COPLP	$	5,255			$	2,520			$	8,716			$	19,207

 

See accompanying notes to consolidated financial statements.

11

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

	Limited Partner Preferred Units							General Partner  Preferred Units							Common Units
	Units			Amount				Units			Amount				Units			Amount				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interests in Subsidiaries				Total Equity
Balance at December 31, 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			117,913				—				—				117,913
Issuance of common units resulting from exercise of share options	—			—				—			—				32,756			636				—				—				636
Share-based compensation	—			—				—			—				164,404			3,848				—				—				3,848
Restricted common unit redemptions	—			—				—			—				(68,762	)		(1,784		)		—				—				(1,784		)
Comprehensive loss	—			330				—			10,991				—			(1,586		)		9,471				1,005				20,211
Distributions to owners of common and preferred units	—			(330		)		—			(10,991		)		—			(49,289		)		—				—				(60,610		)
Distributions to noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				(8		)		(8		)
Contributions from noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				85				85
Adjustment to arrive at fair value of redeemable noncontrolling interest	—			—				—			—				—			(5,631		)		—				—				(5,631		)
Tax loss from share-based compensation	—			—				—			—				—			(122		)		—				—				(122		)
Balance at June 30, 2013	352,000			$	8,800			9,431,667			$	249,083			89,633,926			$	1,153,376			$	3,763			$	11,265			$	1,426,287
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
Redemption of preferred units resulting from redemption of preferred shares	—			—				(2,000,000	)		(50,000		)		—			—				—				—				(50,000		)
Costs associated with common shares issued to the public	—			—				—			—				—			(7		)		—				—				(7		)
Issuance of common units resulting from exercise of share options	—			—				—			—				51,289			1,185				—				—				1,185
Share-based compensation	—			—				—			—				193,463			3,545				—				—				3,545
Restricted common unit redemptions	—			—				—			—				(49,454	)		(1,326		)		—				—				(1,326		)
Comprehensive income	—			330				—			8,834				—			3,983				(4,430		)		649				9,366
Distributions to owners of common and preferred units	—			(330		)		—			(8,834		)		—			(50,346		)		—				—				(59,510		)
Distributions to noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				(8		)		(8		)
Contributions from noncontrolling interests in subsidiaries	—			—				—			—				—			—				—				3				3
Adjustment to arrive at fair value of redeemable noncontrolling interest	—			—				—			—				—			(717		)		—				—				(717		)
Balance at June 30, 2014	352,000			$	8,800			7,431,667			$	199,083			91,567,510			$	1,182,635			$	(825	)		$	10,087			$	1,399,780

See accompanying notes to consolidated financial statements.

12

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2014				2013
Cash flows from operating activities
Revenues from real estate operations received	$	232,877			$	233,068
Construction contract and other service revenues received	35,105				28,898
Property operating expenses paid	(78,621		)		(75,566		)
Construction contract and other service expenses paid	(34,588		)		(33,404		)
General, administrative, leasing, business development and land carry costs paid	(16,904		)		(14,988		)
Interest expense paid	(35,365		)		(41,825		)
Previously accreted interest expense paid	—				(11,116		)
Payments in connection with early extinguishment of debt	(104		)		(23,932		)
Interest and other income received	346				390
Income taxes refund	204				6
Net cash provided by operating activities	102,950				61,531
Cash flows from investing activities
Construction, development and redevelopment	(105,459		)		(99,779		)
Tenant improvements on operating properties	(10,842		)		(10,496		)
Other capital improvements on operating properties	(16,482		)		(11,738		)
Proceeds from dispositions of properties	1,971				12,344
Mortgage and other loan receivables funded	(565		)		(2,756		)
Leasing costs paid	(7,772		)		(6,048		)
Other	(892		)		3,144
Net cash used in investing activities	(140,041		)		(115,329		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	115,000				374,000
Unsecured senior notes	297,342				347,081
Other debt proceeds	9,931				80,232
Repayments of debt
Revolving Credit Facility	(115,000		)		(226,000		)
Scheduled principal amortization	(3,437		)		(5,003		)
Other debt repayments	(133,010		)		(486,803		)
Deferred financing costs paid	(653		)		(2,099		)
Net proceeds from issuance of common units	1,178				118,768
Redemption of preferred units	(50,000		)		(84,750		)
Common unit distributions paid	(50,429		)		(48,025		)
Preferred unit distributions paid	(9,956		)		(12,685		)
Restricted unit redemptions	(1,326		)		(1,784		)
Other	(706		)		(532		)
Net cash provided by financing activities	58,934				52,400
Net increase (decrease) in cash and cash equivalents	21,843				(1,398		)
Cash and cash equivalents
Beginning of period	54,373				10,594
End of period	$	76,216			$	9,196

See accompanying notes to consolidated financial statements.

13

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)

	For the Six Months Ended June 30,
	2014				2013
Reconciliation of net income to net cash provided by operating activities:
Net income	$	14,721			$	10,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	75,839				58,244
Impairment losses	1,329				9,052
Settlement of previously accreted interest expense	—				(11,116		)
Amortization of deferred financing costs	2,289				2,971
Increase in deferred rent receivable	(1,754		)		(6,598		)
Amortization of net debt discounts	400				1,328
Loss (gain) on sales of real estate	4				(2,683		)
Share-based compensation	3,056				3,296
Loss on early extinguishment of debt