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





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




(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.





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


2



PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements


Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
June 30,
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




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



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



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



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



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





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



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



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



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



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



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