COPT 09.30.2014 10Q DOCUMENT

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

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	September 30, 2014



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

Corporate Office Properties, L.P.

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 October 16, 2014, 87,711,731 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 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 September 30, 2014, COPT owned approximately 95.8% 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
PART I: FINANCIAL INFORMATION

Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	5
	Consolidated Statements of Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	7
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited)	9
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 (unaudited)	10
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	11
	Consolidated Statements of Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	12
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)



	September 30, 2014			December 31, 2013
Assets
Properties, net:
Operating properties, net	$	2,757,207		$	2,702,693
Projects in development or held for future development	513,949			511,608
Total properties, net	3,271,156			3,214,301
Cash and cash equivalents	40,018			54,373
Restricted cash and marketable securities	14,371			11,448
Accounts receivable (net of allowance for doubtful accounts of $750 and $2,976, respectively)	20,180			27,000
Deferred rent receivable (net of allowance of $1,426 and $2,126, respectively)	95,405			89,456
Intangible assets on real estate acquisitions, net	48,300			59,258
Deferred leasing and financing costs, net	65,009			66,267
Mortgage and other investing receivables	50,886			53,663
Prepaid expenses and other assets	74,863			54,186
Total assets	$	3,680,188		$	3,629,952
Liabilities and equity
Liabilities:
Debt, net	$	2,049,992		$	1,927,703
Accounts payable and accrued expenses	123,893			98,785
Rents received in advance and security deposits	33,075			31,492
Dividends and distributions payable	28,344			29,080
Deferred revenue associated with operating leases	13,420			10,369
Interest rate derivatives	2,236			3,309
Other liabilities	13,288			14,207
Total liabilities	2,264,248			2,114,945
Commitments and contingencies (Note 17)
Redeemable noncontrolling interest	18,436			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 September 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 87,711,731 at September 30, 2014 and 87,394,512 at December 31, 2013)	877			874
Additional paid-in capital	1,822,283			1,814,015
Cumulative distributions in excess of net income	(692,978		)	(641,868		)
Accumulated other comprehensive income	871			3,480
Total Corporate Office Properties Trust’s shareholders’ equity	1,330,136			1,425,584
Noncontrolling interests in subsidiaries:
Common units in COPLP	49,781			53,468
Preferred units in COPLP	8,800			8,800
Other consolidated entities	8,787			9,397
Noncontrolling interests in subsidiaries	67,368			71,665
Total equity	1,397,504			1,497,249
Total liabilities, redeemable noncontrolling interest and equity	$	3,680,188		$	3,629,952

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues
Rental revenue	$	96,207		$	94,641		$	288,574		$	280,911
Tenant recoveries and other real estate operations revenue	22,069			20,180			70,538			61,599
Construction contract and other service revenues	34,739			16,991			80,390			52,048
Total revenues	153,015			131,812			439,502			394,558
Expenses
Property operating expenses	43,056			41,361			136,600			123,082
Depreciation and amortization associated with real estate operations	30,237			28,205			104,728			82,888
Construction contract and other service expenses	33,593			16,306			75,353			49,165
Impairment losses	66			5,857			1,368			5,857
General, administrative and leasing expenses	7,211			8,027			22,882			22,430
Business development expenses and land carry costs	1,430			1,383			4,107			4,069
Total operating expenses	115,593			101,139			345,038			287,491
Operating income	37,422			30,673			94,464			107,067
Interest expense	(24,802		)	(19,342		)	(69,107		)	(60,734		)
Interest and other income (loss)	1,191			(3		)	3,775			2,949
Loss on early extinguishment of debt	(176		)	(374		)	(446		)	(27,028		)
Income from continuing operations before equity in income of unconsolidated entities and income taxes	13,635			10,954			28,686			22,254
Equity in income of unconsolidated entities	193			44			206			211
Income tax expense	(101		)	(24		)	(257		)	(61		)
Income from continuing operations	13,727			10,974			28,635			22,404
Discontinued operations	191			(12,974		)	4			(16,215		)
Income (loss) before gain on sales of real estate	13,918			(2,000		)	28,639			6,189
Gain on sales of real estate	10,630			—			10,630			2,683
Net income (loss)	24,548			(2,000		)	39,269			8,872
Net (income) loss attributable to noncontrolling interests:
Common units in COPLP	(768		)	232			(942		)	474
Preferred units in COPLP	(165		)	(165		)	(495		)	(495		)
Other consolidated entities	(895		)	(1,031		)	(2,481		)	(2,160		)
Net income (loss) attributable to COPT	22,720			(2,964		)	35,351			6,691
Preferred share dividends	(3,553		)	(4,490		)	(12,387		)	(15,481		)
Issuance costs associated with redeemed preferred shares	—			—			(1,769		)	(2,904		)
Net income (loss) attributable to COPT common shareholders	$	19,167		$	(7,454	)	$	21,195		$	(11,694	)
Net income (loss) attributable to COPT:
Income from continuing operations	$	22,537		$	9,518		$	35,342		$	22,377
Discontinued operations, net	183			(12,482		)	9			(15,686		)
Net income (loss) attributable to COPT	$	22,720		$	(2,964	)	$	35,351		$	6,691
Basic earnings per common share (1)
Income from continuing operations	$	0.22		$	0.06		$	0.24		$	0.04
Discontinued operations	0.00			(0.15		)	0.00			(0.18		)
Net income (loss) attributable to COPT common shareholders	$	0.22		$	(0.09	)	$	0.24		$	(0.14	)
Diluted earnings per common share (1)
Income from continuing operations	$	0.22		$	0.06		$	0.24		$	0.04
Discontinued operations	0.00			(0.15		)	0.00			(0.18		)
Net income (loss) attributable to COPT common shareholders	$	0.22		$	(0.09	)	$	0.24		$	(0.14	)
Dividends declared per common share	$	0.275		$	0.275		$	0.825		$	0.825

(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.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	24,548		$	(2,000	)	$	39,269		$	8,872
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives	1,015			(2,482		)	(4,738		)	5,810
Losses on interest rate derivatives included in interest expense	756			689			2,170			2,021
Equity in other comprehensive income of equity method investee	—			1,070			—			1,070
Other comprehensive income (loss)	1,771			(723		)	(2,568		)	8,901
Comprehensive income (loss)	26,319			(2,723		)	36,701			17,773
Comprehensive income attributable to noncontrolling interests	(1,968		)	(948		)	(3,960		)	(2,722		)
Comprehensive income (loss) attributable to COPT	$	24,351		$	(3,671	)	$	32,741		$	15,051

See accompanying notes to consolidated financial statements.

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 (310,889 shares)	—			3		3,988			—			—			(3,991		)	—
Common shares issued to the public (4,485,000 shares)	—			45		117,916			—			—			—			117,961
Common shares issued under at-the-market program (1,500,000 shares)	—			15		38,432			—			—			—			38,447
Acquisition of property and noncontrolling interest in other consolidated entity for COPLP common units	—			—		(1,296		)	—			—			2,665			1,369
Exercise of share options (32,756 shares)	—			—		642			—			—			—			642
Share-based compensation	—			2		5,700			—			—			—			5,702
Restricted common share redemptions (71,523 shares)	—			—		(1,848		)	—			—			—			(1,848		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—			—		(773		)	—			—			773			—
Comprehensive income	—			—		—			6,691			8,360			1,834			16,885
Dividends	—			—		—			(86,700		)	—			—			(86,700		)
Distributions to owners of common and preferred units in COPLP	—			—		—			—			—			(3,681		)	(3,681		)
Contributions from noncontrolling interests in other consolidated entities	—			—		—			—			—			85			85
Distributions to noncontrolling interest in other consolidated entities	—			—		—			—			—			(8		)	(8		)
Adjustment to arrive at fair value of redeemable noncontrolling interest	—			—		(6,414		)	—			—			—			(6,414		)
Tax loss from share-based compensation	—			—		(122		)	—			—			—			(122		)
Balance at September 30, 2013 (87,381,395 common shares outstanding)	$	249,083		$	874	$	1,812,801		$	(700,368	)	$	2,925		$	68,752		$	1,434,067

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 (117,149 shares)	—			1		1,544			—			—			(1,545		)	—
Costs associated with common shares issued to the public	—			—		(7		)	—			—			—			(7		)
Exercise of share options (57,888 shares)	—			—		1,359			—			—			—			1,359
Share-based compensation	—			2		5,247			—			—			—			5,249
Restricted common share redemptions (51,681 shares)	—			—		(1,389		)	—			—			—			(1,389		)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—			—		(248		)	—			—			248			—
Comprehensive income	—			—		—			35,351			(2,609		)	2,313			35,055
Dividends	—			—		—			(84,692		)	—			—			(84,692		)
Distributions to owners of common and preferred units in COPLP	—			—		—			—			—			(3,710		)	(3,710		)
Contributions from noncontrolling interests in other consolidated entities	—			—		—			—			—			3			3
Distributions to noncontrolling interests in other consolidated entities	—			—		—			—			—			(1,606		)	(1,606		)
Adjustment to arrive at fair value of redeemable noncontrolling interest	—			—		(7		)	—			—			—			(7		)
Balance at September 30, 2014 (87,711,731 common shares outstanding)	$	199,083		$	877	$	1,822,283		$	(692,978	)	$	871		$	67,368		$	1,397,504

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities
Revenues from real estate operations received	$	358,212		$	359,431
Construction contract and other service revenues received	62,170			48,877
Property operating expenses paid	(141,489		)	(133,799		)
Construction contract and other service expenses paid	(58,218		)	(53,191		)
General, administrative, leasing, business development and land carry costs paid	(22,288		)	(20,681		)
Interest expense paid	(54,683		)	(59,052		)
Previously accreted interest expense paid	—			(11,116		)
Proceeds from sale of trading marketable securities	—			298
Exit costs on property dispositions	—			(186		)
Payments in connection with early extinguishment of debt	(104		)	(23,969		)
Interest and other income received	448			391
Income taxes refunded	200			6
Net cash provided by operating activities	144,248			107,009
Cash flows from investing activities
Construction, development and redevelopment	(150,862		)	(156,820		)
Tenant improvements on operating properties	(17,754		)	(15,868		)
Other capital improvements on operating properties	(21,179		)	(17,528		)
Proceeds from dispositions of properties	57,973			12,447
Mortgage and other loan receivables funded	(3,610		)	(4,111		)
Mortgage and other loan receivables payments received	10,278			144
Leasing costs paid	(10,549		)	(9,366		)
Other	(1,343		)	4,257
Net cash used in investing activities	(137,046		)	(186,845		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	115,000			457,000
Unsecured senior notes	297,342			592,413
Other debt proceeds	11,569			82,886
Repayments of debt
Revolving Credit Facility	(115,000		)	(457,000		)
Scheduled principal amortization	(4,914		)	(7,229		)
Other debt repayments	(183,059		)	(542,532		)
Deferred financing costs paid	(694		)	(9,001		)
Net proceeds from issuance of common shares	1,352			157,307
Redemption of preferred shares	(50,000		)	(84,750		)
Common share dividends paid	(72,217		)	(69,451		)
Preferred share dividends paid	(13,179		)	(16,845		)
Distributions paid to noncontrolling interests in COPLP	(3,786		)	(3,705		)
Restricted share redemptions	(1,389		)	(1,848		)
Other	(2,582		)	(685		)
Net cash (used in) provided by financing activities	(21,557		)	96,560
Net (decrease) increase in cash and cash equivalents	(14,355		)	16,724
Cash and cash equivalents
Beginning of period	54,373			10,594
End of period	$	40,018		$	27,318

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2014			2013
Reconciliation of net income to net cash provided by operating activities:
Net income	$	39,269		$	8,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	106,619			87,956
Impairment losses	1,371			30,940
Settlement of previously accreted interest expense	—			(11,116		)
Amortization of deferred financing costs	3,646			4,292
Increase in deferred rent receivable	(2,738		)	(7,995		)
Amortization of net debt discounts	659			1,207
Gain on sales of real estate	(10,654		)	(2,683		)
Share-based compensation	4,563			4,869
Loss on early extinguishment of debt	458			3,059
Other	(2,446		)	(2,284		)
Changes in operating assets and liabilities:
Decrease in accounts receivable	6,815			1,523
(Increase) decrease in restricted cash and marketable securities	(2,591		)	418
Increase in prepaid expenses and other assets	(26,553		)	(12,974		)
Increase in accounts payable, accrued expenses and other liabilities	24,247			18
Increase in rents received in advance and security deposits	1,583			907
Net cash provided by operating activities	$	144,248		$	107,009
Supplemental schedule of non-cash investing and financing activities:
Decrease in accrued capital improvements, leasing and other investing activity costs	$	(174	)	$	(13,094	)
(Decrease) increase in fair value of derivatives applied to accumulated other comprehensive income (loss) and noncontrolling interests	$	(2,613	)	$	7,785
Equity in other comprehensive income of an equity method investee	$	—		$	1,070
Dividends/distribution payable	$	28,344		$	29,077
COPLP common units issued to acquire property and noncontrolling interest in other consolidated entity	$	—		$	5,194
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	1,545		$	3,991
Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	248		$	773
Increase in redeemable noncontrolling interest and decrease in shareholders’ equity to carry redeemable noncontrolling interest at fair value	$	7		$	6,414

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except unit data)

(unaudited)



	September 30, 2014		December 31, 2013
Assets
Properties, net:
Operating properties, net	$	2,757,207	$	2,702,693
Projects in development or held for future development	513,949		511,608
Total properties, net	3,271,156		3,214,301
Cash and cash equivalents	40,018		54,373
Restricted cash and marketable securities	6,871		3,981
Accounts receivable (net of allowance for doubtful accounts of $750 and $2,976, respectively)	20,180		27,000
Deferred rent receivable (net of allowance of $1,426 and $2,126, respectively)	95,405		89,456
Intangible assets on real estate acquisitions, net	48,300		59,258
Deferred leasing and financing costs, net	65,009		66,267
Mortgage and other investing receivables	50,886		53,663
Prepaid expenses and other assets	74,863		54,186
Total assets	$	3,672,688	$	3,622,485
Liabilities and equity
Liabilities:
Debt, net	$	2,049,992	$	1,927,703
Accounts payable and accrued expenses	123,893		98,785
Rents received in advance and security deposits	33,075		31,492
Distributions payable	28,344		29,080
Deferred revenue associated with operating leases	13,420		10,369
Interest rate derivatives	2,236		3,309
Other liabilities	5,788		6,740
Total liabilities	2,256,748		2,107,478
Commitments and contingencies (Note 17)
Redeemable noncontrolling interest	18,436		17,758
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, preferred units outstanding of 7,431,667 at September 30, 2014 and 9,431,667 at December 31, 2013	199,083		249,083
Limited partner, 352,000 preferred units outstanding at September 30, 2014 and December 31, 2013	8,800		8,800
Common units, 87,711,731 and 87,394,512 held by the general partner and 3,860,551 and 3,977,700 held by limited partners at September 30, 2014 and December 31, 2013, respectively	1,179,919		1,226,318
Accumulated other comprehensive income	879		3,605
Total Corporate Office Properties, L.P.’s equity	1,388,681		1,487,806
Noncontrolling interests in subsidiaries	8,823		9,443
Total equity	1,397,504		1,497,249
Total liabilities, redeemable noncontrolling interest and equity	$	3,672,688	$	3,622,485

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per unit data)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues
Rental revenue	$	96,207		$	94,641		$	288,574		$	280,911
Tenant recoveries and other real estate operations revenue	22,069			20,180			70,538			61,599
Construction contract and other service revenues	34,739			16,991			80,390			52,048
Total revenues	153,015			131,812			439,502			394,558
Expenses
Property operating expenses	43,056			41,361			136,600			123,082
Depreciation and amortization associated with real estate operations	30,237			28,205			104,728			82,888
Construction contract and other service expenses	33,593			16,306			75,353			49,165
Impairment losses	66			5,857			1,368			5,857
General, administrative and leasing expenses	7,211			8,027			22,882			22,430
Business development expenses and land carry costs	1,430			1,383			4,107			4,069
Total operating expenses	115,593			101,139			345,038			287,491
Operating income	37,422			30,673			94,464			107,067
Interest expense	(24,802		)	(19,342		)	(69,107		)	(60,734		)
Interest and other income (loss)	1,191			(3		)	3,775			2,949
Loss on early extinguishment of debt	(176		)	(374		)	(446		)	(27,028		)
Income from continuing operations before equity in income of unconsolidated entities and income taxes	13,635			10,954			28,686			22,254
Equity in income of unconsolidated entities	193			44			206			211
Income tax expense	(101		)	(24		)	(257		)	(61		)
Income from continuing operations	13,727			10,974			28,635			22,404
Discontinued operations	191			(12,974		)	4			(16,215		)
Income (loss) before gain on sales of real estate	13,918			(2,000		)	28,639			6,189
Gain on sales of real estate	10,630			—			10,630			2,683
Net income (loss)	24,548			(2,000		)	39,269			8,872
Net income attributable to noncontrolling interests in consolidated entities	(897		)	(1,035		)	(2,471		)	(2,172		)
Net income (loss) attributable to COPLP	23,651			(3,035		)	36,798			6,700
Preferred unit distributions	(3,718		)	(4,655		)	(12,882		)	(15,976		)
Issuance costs associated with redeemed preferred units	—			—			(1,769		)	(2,904		)
Net income (loss) attributable to COPLP common unitholders	$	19,933		$	(7,690	)	$	22,147		$	(12,180	)
Net income (loss) attributable to COPLP:
Income from continuing operations	$	23,460		$	9,988		$	36,789		$	23,062
Discontinued operations, net	191			(13,023		)	9			(16,362		)
Net income (loss) attributable to COPLP	$	23,651		$	(3,035	)	$	36,798		$	6,700
Basic earnings per common unit (1)
Income from continuing operations	$	0.22		$	0.06		$	0.24		$	0.04
Discontinued operations	0.00			(0.15		)	0.00			(0.18		)
Net income (loss) attributable to COPLP common unitholders	$	0.22		$	(0.09	)	$	0.24		$	(0.14	)
Diluted earnings per common unit (1)
Income from continuing operations	$	0.22		$	0.06		$	0.24		$	0.04
Discontinued operations	0.00			(0.15		)	0.00			(0.18		)
Net income (loss) attributable to COPLP common unitholders	$	0.22		$	(0.09	)	$	0.24		$	(0.14	)
Distributions declared per common unit	$	0.275		$	0.275		$	0.825		$	0.825

(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.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	24,548		$	(2,000	)	$	39,269		$	8,872
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives	1,015			(2,482		)	(4,738		)	5,810
Losses on interest rate derivatives included in interest expense	756			689			2,170			2,021
Equity in other comprehensive income of equity method investee	—			1,070			—			1,070
Other comprehensive income (loss)	1,771			(723		)	(2,568		)	8,901
Comprehensive income (loss)	26,319			(2,723		)	36,701			17,773
Comprehensive income attributable to noncontrolling interests	(964		)	(1,050		)	(2,630		)	(2,339		)
Comprehensive income (loss) attributable to COPLP	$	25,355		$	(3,773	)	$	34,071		$	15,434

See accompanying notes to consolidated financial statements.

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		117,961			—			—			117,961
Issuance of common units resulting from common shares issued under at-the-market program	—	—			—		—			1,500,000		38,447			—			—			38,447
Acquisition of property and noncontrolling interest in subsidiary for COPLP common units	—	—			—		—			221,501		3,899			—			(2,530		)	1,369
Issuance of common units resulting from exercise of share options	—	—			—		—			32,756		642			—			—			642
Share-based compensation	—	—			—		—			171,287		5,702			—			—			5,702
Restricted common unit redemptions	—	—			—		—			(71,523	)	(1,848		)	—			—			(1,848		)
Comprehensive loss	—	495			—		15,481			—		(9,276		)	8,734			1,451			16,885
Distributions to owners of common and preferred units	—	(495		)	—		(15,481		)	—		(74,405		)	—			—			(90,381		)
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—		—			—			(8		)	(8		)
Contributions from noncontrolling interests in subsidiaries	—	—			—		—			—		—			—			85			85
Adjustment to arrive at fair value of redeemable noncontrolling interest	—	—			—		—			—		(6,414		)	—			—			(6,414		)
Tax loss from share-based compensation	—	—			—		—			—		(122		)	—			—			(122		)
Balance at September 30, 2013	352,000	$	8,800		9,431,667		$	249,083		91,359,549		$	1,163,977		$	3,026		$	9,181		$	1,434,067

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	—	—			—		—			57,888		1,359			—			—			1,359
Share-based compensation	—	—			—		—			193,863		5,249			—			—			5,249
Restricted common unit redemptions	—	—			—		—			(51,681	)	(1,389		)	—			—			(1,389		)
Comprehensive income	—	495			—		12,387			—		23,916			(2,726		)	983			35,055
Distributions to owners of common and preferred units	—	(495		)	—		(12,387		)	—		(75,520		)	—			—			(88,402		)
Distributions to noncontrolling interests in subsidiaries	—	—			—		—			—		—			—			(1,606		)	(1,606		)
Contributions from noncontrolling interests in subsidiaries	—	—			—		—			—		—			—			3			3
Adjustment to arrive at fair value of redeemable noncontrolling interest	—	—			—		—			—		(7		)	—			—			(7		)
Balance at September 30, 2014	352,000	$	8,800		7,431,667		$	199,083		91,572,282		$	1,179,919		$	879		$	8,823		$	1,397,504

See accompanying notes to consolidated financial statements.

Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities
Revenues from real estate operations received	$	358,212		$	359,431
Construction contract and other service revenues received	62,170			48,877
Property operating expenses paid	(141,489		)	(133,799		)
Construction contract and other service expenses paid	(58,218		)	(53,191		)
General, administrative, leasing, business development and land carry costs paid	(22,288		)	(20,681		)
Interest expense paid	(54,683		)	(59,052		)
Previously accreted interest expense paid	—			(11,116		)
Proceeds from sale of trading marketable securities	—			298
Exit costs on property dispositions	—			(186		)
Payments in connection with early extinguishment of debt	(104		)	(23,969		)
Interest and other income received	448			391
Income taxes refunded	200			6
Net cash provided by operating activities	144,248			107,009
Cash flows from investing activities
Construction, development and redevelopment	(150,862		)	(156,820		)
Tenant improvements on operating properties	(17,754		)	(15,868		)
Other capital improvements on operating properties	(21,179		)	(17,528		)
Proceeds from dispositions of properties	57,973			12,447
Mortgage and other loan receivables funded	(3,610		)	(4,111		)
Mortgage and other loan receivables payments received	10,278			144
Leasing costs paid	(10,549		)	(9,366		)
Other	(1,343		)	4,257
Net cash used in investing activities	(137,046		)	(186,845		)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	115,000			457,000
Unsecured senior notes	297,342			592,413
Other debt proceeds	11,569			82,886
Repayments of debt
Revolving Credit Facility	(115,000		)	(457,000		)
Scheduled principal amortization	(4,914		)	(7,229		)
Other debt repayments	(183,059		)	(542,532		)
Deferred financing costs paid	(694		)	(9,001		)
Net proceeds from issuance of common units