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
March 31, 2015
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 April 17, 2015, 94,537,019 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
 
 
 
 
 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2015 of Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP and their subsidiaries.

COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of March 31, 2015, COPT owned approximately 96.3% of the outstanding common units and approximately 95.5% of the outstanding preferred units in COPLP. The remaining common and preferred units in COPLP are owned by various non-affiliated investors, as well as a trustee of COPT. 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements


Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
March 31,
2015
 
December 31,
2014
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,888,534

 
$
2,751,488

Projects in development or held for future development
489,618

 
545,426

Total properties, net
3,378,152

 
3,296,914

Assets held for sale, net

 
14,339

Cash and cash equivalents
4,429

 
6,077

Restricted cash and marketable securities
11,445

 
9,069

Accounts receivable (net of allowance for doubtful accounts of $784 and $717, respectively)
33,753

 
26,901

Deferred rent receivable (net of allowance of $1,695 and $1,418, respectively)
98,340

 
95,910

Intangible assets on real estate acquisitions, net
61,477

 
43,854

Deferred leasing and financing costs, net
65,245

 
64,797

Investing receivables
52,814

 
52,147

Prepaid expenses and other assets
71,500

 
60,249

Total assets
$
3,777,155

 
$
3,670,257

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,999,622

 
$
1,920,057

Accounts payable and accrued expenses
138,214

 
123,035

Rents received in advance and security deposits
31,551

 
31,011

Dividends and distributions payable
30,174

 
29,862

Deferred revenue associated with operating leases
14,697

 
13,031

Interest rate derivatives
4,282

 
1,855

Other liabilities
9,990

 
12,105

Total liabilities
2,228,530

 
2,130,956

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
18,895

 
18,417

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 March 31, 2015 and December 31, 2014)
199,083

 
199,083

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 94,536,269 at March 31, 2015 and 93,255,284 at December 31, 2014)
945

 
933

Additional paid-in capital
1,999,708

 
1,969,968

Cumulative distributions in excess of net income
(733,459
)
 
(717,264
)
Accumulated other comprehensive loss
(3,947
)
 
(1,297
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,462,330

 
1,451,423

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
49,168

 
51,534

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
9,432

 
9,127

Noncontrolling interests in subsidiaries
67,400

 
69,461

Total equity
1,529,730

 
1,520,884

Total liabilities, redeemable noncontrolling interest and equity
$
3,777,155

 
$
3,670,257


See accompanying notes to consolidated financial statements.

3




Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Revenues
 
 
 
Rental revenue
$
98,238

 
$
98,035

Tenant recoveries and other real estate operations revenue
24,472

 
26,842

Construction contract and other service revenues
38,324

 
21,790

Total revenues
161,034

 
146,667

Expenses
 

 
 

Property operating expenses
50,681

 
49,772

Depreciation and amortization associated with real estate operations
31,599

 
43,596

Construction contract and other service expenses
37,498

 
18,624

General, administrative and leasing expenses
7,891

 
8,143

Business development expenses and land carry costs
2,790

 
1,326

Total operating expenses
130,459

 
121,461

Operating income
30,575

 
25,206

Interest expense
(20,838
)
 
(20,827
)
Interest and other income
1,283

 
1,285

Loss on early extinguishment of debt
(3
)
 

Income from continuing operations before equity in income of unconsolidated entities and income taxes
11,017

 
5,664

Equity in income of unconsolidated entities
25

 
60

Income tax expense
(55
)
 
(64
)
Income from continuing operations
10,987

 
5,660

Discontinued operations
(238
)
 
11

Income before gain on sales of real estate
10,749

 
5,671

Gain on sales of real estate
3,986

 

Net income
14,735

 
5,671

Net income attributable to noncontrolling interests:
 

 
 

Common units in COPLP
(398
)
 
(16
)
Preferred units in COPLP
(165
)
 
(165
)
Other consolidated entities
(817
)
 
(749
)
Net income attributable to COPT
13,355

 
4,741

Preferred share dividends
(3,552
)
 
(4,490
)
Net income attributable to COPT common shareholders
$
9,803

 
$
251

Net income attributable to COPT:
 

 
 

Income from continuing operations
$
13,581

 
$
4,728

Discontinued operations, net
(226
)
 
13

Net income attributable to COPT
$
13,355

 
$
4,741

Basic earnings per common share (1)
 

 
 

Income from continuing operations
$
0.10

 
$
0.00

Discontinued operations
0.00

 
0.00

Net income attributable to COPT common shareholders
$
0.10

 
$
0.00

Diluted earnings per common share (1)
 
 
 
Income from continuing operations
$
0.10

 
$
0.00

Discontinued operations
0.00

 
0.00

Net income attributable to COPT common shareholders
$
0.10

 
$
0.00

Dividends declared per common share
$
0.275

 
$
0.275

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

4



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
 
For the Three Months Ended March 31,
 
 
2015
 
2014
Net income
 
$
14,735

 
$
5,671

Other comprehensive loss
 
 

 
 

Unrealized losses on interest rate derivatives
 
(3,474
)
 
(2,123
)
Losses on interest rate derivatives included in interest expense
 
773

 
695

Other comprehensive loss
 
(2,701
)
 
(1,428
)
Comprehensive income
 
12,034

 
4,243

Comprehensive income attributable to noncontrolling interests
 
(1,329
)
 
(911
)
Comprehensive income attributable to COPT
 
$
10,705

 
$
3,332

 
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, 2013 (87,394,512 common shares outstanding)
$
249,083

 
$
874

 
$
1,814,015

 
$
(641,868
)
 
$
3,480

 
$
71,665

 
$
1,497,249

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

 

 
651

 

 

 
(651
)
 

Exercise of share options (26,614 shares)

 

 
568

 

 

 

 
568

Share-based compensation (125,307 shares issued, net of redemptions)

 
2

 
1,854

 

 

 

 
1,856

Redemption of vested equity awards

 

 
(1,092
)
 

 

 

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

 

 
(69
)
 

 

 
69

 

Comprehensive income

 

 

 
4,741

 
(1,408
)
 
408

 
3,741

Dividends

 

 

 
(28,581
)
 

 

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

 

 

 

 

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

 

 
540

 

 

 

 
540

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

 
$
876

 
$
1,816,467

 
$
(665,708
)
 
$
2,072

 
$
70,245

 
$
1,473,035

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014 (93,255,284 common shares outstanding)
$
199,083

 
$
933

 
$
1,969,968

 
$
(717,264
)
 
$
(1,297
)
 
$
69,461

 
$
1,520,884

Conversion of common units to common shares (158,000 shares)

 
2

 
2,120

 

 

 
(2,122
)
 

Common shares issued under at-the-market program (890,241 shares)

 
9

 
26,526

 

 

 

 
26,535

Exercise of share options (70,374 shares)

 

 
1,845

 

 

 

 
1,845

Share-based compensation (162,370 shares issued, net of redemptions)

 
1

 
1,828

 

 

 

 
1,829

Redemption of vested equity awards

 

 
(2,031
)
 

 

 

 
(2,031
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP

 

 
(475
)
 

 

 
475

 

Comprehensive income

 

 

 
13,355

 
(2,650
)
 
767

 
11,472

Dividends

 

 

 
(29,550
)
 

 

 
(29,550
)
Distributions to owners of common and preferred units in COPLP

 

 

 

 

 
(1,177
)
 
(1,177
)
Distributions to noncontrolling interests in other consolidated entities

 

 

 

 

 
(4
)
 
(4
)
Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 
(73
)
 

 

 

 
(73
)
Balance at March 31, 2015 (94,536,269 common shares outstanding)
$
199,083

 
$
945

 
$
1,999,708

 
$
(733,459
)
 
$
(3,947
)
 
$
67,400

 
$
1,529,730

See accompanying notes to consolidated financial statements.

6



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
117,521

 
$
116,386

Construction contract and other service revenues received
19,968

 
17,289

Property operating expenses paid
(42,768
)
 
(42,739
)
Construction contract and other service expenses paid
(27,853
)
 
(11,397
)
General, administrative, leasing, business development and land carry costs paid
(12,728
)
 
(9,906
)
Interest expense paid
(12,795
)
 
(18,403
)
Payments in connection with early extinguishment of debt
(3
)
 
(101
)
Interest and other income received
556

 
217

Income taxes (paid) refunded
(8
)
 
192

Net cash provided by operating activities
41,890

 
51,538

Cash flows from investing activities
 

 
 

Acquisitions of operating properties
(56,622
)
 

Construction, development and redevelopment
(62,057
)
 
(42,625
)
Tenant improvements on operating properties
(5,520
)
 
(4,357
)
Other capital improvements on operating properties
(3,720
)
 
(9,115
)
Proceeds from dispositions of properties
17,424

 
220

Leasing costs paid
(1,935
)
 
(4,422
)
Increase in prepaid expenses and other assets associated with investing activities
(5,782
)
 
(450
)
Other
(174
)
 
(106
)
Net cash used in investing activities
(118,386
)
 
(60,855
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
150,000

 

Other debt proceeds

 
5,700

Repayments of debt
 
 
 
Revolving Credit Facility
(69,000
)
 

Scheduled principal amortization
(1,649
)
 
(1,855
)
Other debt repayments
(50
)
 
(50
)
Net proceeds from issuance of common shares
28,404

 
568

Common share dividends paid
(25,646
)
 
(24,036
)
Preferred share dividends paid
(3,552
)
 
(4,490
)
Distributions paid to noncontrolling interests in COPLP
(1,217
)
 
(1,253
)
Redemption of vested equity awards
(2,031
)
 
(1,092
)
Other
(411
)
 
(174
)
Net cash provided by (used in) financing activities
74,848

 
(26,682
)
Net decrease in cash and cash equivalents
(1,648
)
 
(35,999
)
Cash and cash equivalents
 

 
 

Beginning of period
6,077

 
54,373

End of period
$
4,429

 
$
18,374

See accompanying notes to consolidated financial statements.
 


7



Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
14,735

 
$
5,671

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

 
 

Depreciation and other amortization
32,091

 
44,101

Impairment losses
233

 
1

Amortization of deferred financing costs
990

 
1,167

(Increase) decrease in deferred rent receivable
(1,746
)
 
398

Amortization of net debt discounts
264

 
171

(Gain) loss on sales of real estate
(3,986
)
 
4

Share-based compensation
1,552

 
1,555

Loss on early extinguishment of debt

 
(78
)
Other
(640
)
 
(1,032
)
Operating changes in assets and liabilities:
 

 
 
Increase in accounts receivable
(6,918
)
 
(1,769
)
(Increase) decrease in restricted cash and marketable securities
(1,577
)
 
283

Increase in prepaid expenses and other assets
(6,352
)
 
(494
)
Increase in accounts payable, accrued expenses and other liabilities
12,704

 
4,785

Increase (decrease) in rents received in advance and security deposits
540

 
(3,225
)
Net cash provided by operating activities
$
41,890

 
$
51,538

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Decrease in accrued capital improvements, leasing and other investing activity costs
$
(3,897
)
 
$
(7,985
)
Liabilities assumed on acquisition of operating properties
$
5,265

 
$

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(2,701
)
 
$
(1,443
)
Dividends/distribution payable
$
30,174

 
$
29,122

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
2,122

 
$
651

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
475

 
$
69

Increase (decrease) in redeemable noncontrolling interest and decrease (increase) in equity to carry redeemable noncontrolling interest at fair value
$
73

 
$
(540
)
 
See accompanying notes to consolidated financial statements.


8





Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
March 31,
2015
 
December 31,
2014
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,888,534

 
$
2,751,488

Projects in development or held for future development
489,618

 
545,426

Total properties, net
3,378,152

 
3,296,914

Assets held for sale, net

 
14,339

Cash and cash equivalents
4,429

 
6,077

Restricted cash and marketable securities
5,509

 
3,187

Accounts receivable (net of allowance for doubtful accounts of $784 and $717, respectively)
33,753

 
26,901

Deferred rent receivable (net of allowance of $1,695 and $1,418, respectively)
98,340

 
95,910

Intangible assets on real estate acquisitions, net
61,477

 
43,854

Deferred leasing and financing costs, net
65,245

 
64,797

Investing receivables
52,814

 
52,147

Prepaid expenses and other assets
71,500

 
60,249

Total assets
$
3,771,219

 
$
3,664,375

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,999,622

 
$
1,920,057

Accounts payable and accrued expenses
138,214

 
123,035

Rents received in advance and security deposits
31,551

 
31,011

Distributions payable
30,174

 
29,862

Deferred revenue associated with operating leases
14,697

 
13,031

Interest rate derivatives
4,282

 
1,855

Other liabilities
4,054

 
6,223

Total liabilities
2,222,594

 
2,125,074

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
18,895

 
18,417

Equity:
 

 
 

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

 
 

Preferred units
 
 
 
General partner, preferred units outstanding of 7,431,667 at March 31, 2015 and December 31, 2014
199,083

 
199,083

Limited partner, 352,000 preferred units outstanding at March 31, 2015 and December 31, 2014
8,800

 
8,800

Common units, 94,536,269 and 93,255,284 held by the general partner and 3,679,551 and 3,837,551 held by limited partners at March 31, 2015 and December 31, 2014, respectively
1,316,514

 
1,305,219

Accumulated other comprehensive loss
(4,137
)
 
(1,381
)
Total Corporate Office Properties, L.P.’s equity
1,520,260

 
1,511,721

Noncontrolling interests in subsidiaries
9,470

 
9,163

Total equity
1,529,730

 
1,520,884

Total liabilities, redeemable noncontrolling interest and equity
$
3,771,219

 
$
3,664,375

See accompanying notes to consolidated financial statements.


9



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit data)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Revenues
 
 
 
Rental revenue
$
98,238

 
$
98,035

Tenant recoveries and other real estate operations revenue
24,472

 
26,842

Construction contract and other service revenues
38,324

 
21,790

Total revenues
161,034

 
146,667

Expenses
 

 
 

Property operating expenses
50,681

 
49,772

Depreciation and amortization associated with real estate operations
31,599

 
43,596

Construction contract and other service expenses
37,498

 
18,624

General, administrative and leasing expenses
7,891

 
8,143

Business development expenses and land carry costs
2,790

 
1,326

Total operating expenses
130,459

 
121,461

Operating income
30,575

 
25,206

Interest expense
(20,838
)
 
(20,827
)
Interest and other income
1,283

 
1,285

Loss on early extinguishment of debt
(3
)
 

Income from continuing operations before equity in income of unconsolidated entities and income taxes
11,017

 
5,664

Equity in income of unconsolidated entities
25

 
60

Income tax expense
(55
)
 
(64
)
Income from continuing operations
10,987

 
5,660

Discontinued operations
(238
)
 
11

Income before gain on sales of real estate
10,749

 
5,671

Gain on sales of real estate
3,986

 

Net income
14,735

 
5,671

Net income attributable to noncontrolling interests in consolidated entities
(818
)
 
(737
)
Net income attributable to COPLP
13,917

 
4,934

Preferred unit distributions
(3,717
)
 
(4,655
)
Net income attributable to COPLP common unitholders
$
10,200

 
$
279

Net income attributable to COPLP:
 

 
 

Income from continuing operations
$
14,152

 
$
4,921

Discontinued operations, net
(235
)
 
13

Net income attributable to COPLP
$
13,917

 
$
4,934

Basic earnings per common unit (1)
 

 
 

Income from continuing operations
$
0.10

 
$
0.00

Discontinued operations
0.00

 
0.00

Net income attributable to COPLP common unitholders
$
0.10

 
$
0.00

Diluted earnings per common unit (1)
 
 
 
Income from continuing operations
$
0.10

 
$
0.00

Discontinued operations
0.00

 
0.00

Net income attributable to COPLP common unitholders
$
0.10

 
$
0.00

Distributions declared per common unit
$
0.275

 
$
0.275

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

10



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 
 
For the Three Months Ended March 31,
 
 
2015
 
2014
Net income
 
$
14,735

 
$
5,671

Other comprehensive loss
 
 
 
 
Unrealized losses on interest rate derivatives
 
(3,474
)
 
(2,123
)
Losses on interest rate derivatives included in interest expense
 
773

 
695

Other comprehensive loss
 
(2,701
)
 
(1,428
)
Comprehensive income
 
12,034

 
4,243

Comprehensive income attributable to noncontrolling interests
 
(873
)
 
(782
)
Comprehensive income attributable to COPLP
 
$
11,161

 
$
3,461

 
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
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling Interests in Subsidiaries
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Total Equity
Balance at December 31, 2013
352,000

 
$
8,800

 
9,431,667

 
$
249,083

 
91,372,212

 
$
1,226,318

 
$
3,605

 
$
9,443

 
$
1,497,249

Issuance of common units resulting from exercise of share options

 

 

 

 
26,614

 
568

 

 

 
568

Share-based compensation (units net of redemption)

 

 

 

 
125,307

 
1,856

 

 

 
1,856

Redemptions of vested equity awards

 

 

 

 

 
(1,092
)
 

 

 
(1,092
)
Comprehensive income

 
165

 

 
4,490

 

 
279

 
(1,472
)
 
279

 
3,741

Distributions to owners of common and preferred units

 
(165
)
 

 
(4,490
)
 

 
(25,172
)
 

 

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

 

 

 

 

 
540

 

 

 
540

Balance at March 31, 2014
352,000

 
$
8,800

 
9,431,667

 
$
249,083

 
91,524,133

 
$
1,203,297

 
$
2,133

 
$
9,722

 
$
1,473,035

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
97,092,835

 
$
1,305,219

 
$
(1,381
)
 
$
9,163

 
$
1,520,884

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

 

 

 

 
890,241

 
26,535

 

 

 
26,535

Issuance of common units resulting from exercise of share options

 

 

 

 
70,374

 
1,845

 

 

 
1,845

Share-based compensation (units net of redemption)

 

 

 

 
162,370

 
1,829

 

 

 
1,829

Redemptions of vested equity awards

 

 

 

 

 
(2,031
)
 

 

 
(2,031
)
Comprehensive income

 
165

 

 
3,552

 

 
10,200

 
(2,756
)
 
311

 
11,472

Distributions to owners of common and preferred units

 
(165
)
 

 
(3,552
)
 

 
(27,010
)
 

 

 
(30,727
)
Distributions to noncontrolling interests in subsidiaries

 

 

 

 

 

 

 
(4
)
 
(4
)
Adjustment to arrive at fair value of redeemable noncontrolling interest

 

 

 

 

 
(73
)
 

 

 
(73
)
Balance at March 31, 2015
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,215,820

 
$
1,316,514

 
$
(4,137
)
 
$
9,470

 
$
1,529,730

See accompanying notes to consolidated financial statements.

12



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
117,521

 
$
116,386

Construction contract and other service revenues received
19,968

 
17,289

Property operating expenses paid
(42,768
)
 
(42,739
)
Construction contract and other service expenses paid
(27,853
)
 
(11,397
)
General, administrative, leasing, business development and land carry costs paid
(12,728
)
 
(9,906
)
Interest expense paid
(12,795
)
 
(18,403
)
Payments in connection with early extinguishment of debt
(3
)
 
(101
)
Interest and other income received
556

 
217

Income taxes (paid) refunded
(8
)
 
192

Net cash provided by operating activities
41,890

 
51,538

Cash flows from investing activities
 

 
 

Acquisitions of operating properties
(56,622
)
 

Construction, development and redevelopment
(62,057
)
 
(42,625
)
Tenant improvements on operating properties
(5,520
)
 
(4,357
)
Other capital improvements on operating properties
(3,720
)
 
(9,115
)
Proceeds from dispositions of properties
17,424

 
220

Leasing costs paid
(1,935
)
 
(4,422
)
Increase in prepaid expenses and other assets associated with investing activities
(5,782
)
 
(450
)
Other
(174
)
 
(106
)
Net cash used in investing activities
(118,386
)
 
(60,855
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
150,000

 

Other debt proceeds

 
5,700

Repayments of debt
 
 
 
Revolving Credit Facility
(69,000
)
 

Scheduled principal amortization
(1,649
)
 
(1,855
)
Other debt repayments
(50
)
 
(50
)
Net proceeds from issuance of common units
28,404

 
568

Common unit distributions paid
(26,698
)
 
(25,124
)
Preferred unit distributions paid
(3,717
)
 
(4,655
)
Redemption of vested equity awards
(2,031
)
 
(1,092
)
Other
(411
)
 
(174
)
Net cash provided by (used in) financing activities
74,848

 
(26,682
)
Net decrease in cash and cash equivalents
(1,648
)
 
(35,999
)
Cash and cash equivalents
 

 
 

Beginning of period
6,077

 
54,373

End of period
$
4,429

 
$
18,374

See accompanying notes to consolidated financial statements.

13



Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)

 
For the Three Months Ended March 31,
 
2015
 
2014
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
14,735

 
$
5,671

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

 
 

Depreciation and other amortization
32,091

 
44,101

Impairment losses
233

 
1

Amortization of deferred financing costs
990

 
1,167

(Increase) decrease in deferred rent receivable
(1,746
)
 
398

Amortization of net debt discounts
264

 
171

(Gain) loss on sales of real estate
(3,986
)
 
4

Share-based compensation
1,552

 
1,555

Loss on early extinguishment of debt

 
(78
)
Other
(640
)
 
(1,032
)
Operating changes in assets and liabilities:
 

 
 
Increase in accounts receivable
(6,918
)
 
(1,769
)
(Increase) decrease in restricted cash and marketable securities
(1,523
)
 
381

Increase in prepaid expenses and other assets
(6,352
)
 
(494
)
Increase in accounts payable, accrued expenses and other liabilities
12,650

 
4,687

Increase (decrease) in rents received in advance and security deposits
540

 
(3,225
)
Net cash provided by operating activities
$
41,890

 
$
51,538

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Decrease in accrued capital improvements, leasing and other investing activity costs
$
(3,897
)
 
$
(7,985
)
Liabilities assumed on acquisition of operating properties
$
5,265

 
$

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(2,701
)
 
$
(1,443
)
Distributions payable
$
30,174

 
$
29,122

Increase (decrease) in redeemable noncontrolling interest and decrease (increase) in equity to carry redeemable noncontrolling interest at fair value
$
73

 
$
(540
)
 
See accompanying notes to consolidated financial statements.



14



Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We focus primarily on serving the specialized requirements of United States Government agencies and their contractors, most of whom are engaged in national security and information technology related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of March 31, 2015, our properties included the following:

178 operating office properties totaling 17.7 million square feet (excluding two properties serving as collateral for a nonrecourse mortgage loan in default, as discussed further in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Quarterly Report on Form 10-Q);
12 office properties under, or contractually committed for, construction or redevelopment that we estimate will total approximately 1.4 million square feet upon completion, including one partially operational property included above;
1,402 acres of land we control that we believe are potentially developable into approximately 17.6 million square feet; and
a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 19.25 megawatts.
 
COPLP owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”).  In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Equity interests in COPLP are in the form of common and preferred units. As of March 31, 2015, COPT owned 96.3% of the outstanding COPLP common units (“common units”) and 95.5% of the outstanding COPLP preferred units (“preferred units”); the remaining common and preferred units in COPLP were owned by third parties. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation is substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

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

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

15



advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
 
These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2014 included in our 2014 Annual Report on Form 10-K.  The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations.  All adjustments are of a normal recurring nature.  The consolidated financial statements have been prepared using the accounting policies described in our 2014 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We are required to adopt this guidance for our annual and interim periods beginning January 1, 2017, using one of two methods: retrospective restatement for each reporting period presented at the time of adoption, or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

In January 2015, the FASB issued guidance regarding the presentation of extraordinary and unusual items in statements of operations. This guidance eliminates the concept of extraordinary items. However, the presentation and disclosure requirements for items that are either unusual in nature or infrequent in occurrence remain and will be expanded to include items that are both unusual in nature and infrequent in occurrence. This guidance is effective for periods beginning after December 15, 2015. We expect that the application of this guidance will have no effect on our reported consolidated financial statements.

In February 2015, the FASB issued guidance regarding amendments to the consolidation analysis. This guidance amends the criteria for determining which entities are considered variable interest entities (“VIE”), amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. This guidance is effective for annual periods, and interim periods therein, beginning after December 15, 2015. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

In April 2015, the FASB issued guidance that changes the presentation of debt issuance costs in financial statements. This guidance requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. This guidance will be applied retrospectively to each prior period presented. We are currently in the process of evaluating the impact of this guidance on our consolidated financial statements.

3.     Fair Value Measurements

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2014 Annual Report on Form 10-K.
 
Recurring Fair Value Measurements
 
Our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest as of March 31, 2015, we used a discount rate of 15.5% which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture. A significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short

16



maturities of these instruments.  As discussed in Note 7, we estimated the fair values of our investing receivables based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 9, we estimated the fair value of our unsecured senior notes and exchangeable senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
 
For additional fair value information, please refer to Note 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives. 

COPT and Subsidiaries

The table below sets forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2015 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Marketable securities in deferred compensation plan (1)
 
 

 
 

 
 

 
 

Mutual funds
 
$
5,826

 
$

 
$

 
$
5,826

Other
 
110

 

 

 
110

Warrants to purchase common stock (2)
 

 
89

 

 
89

Total assets
 
$
5,936

 
$
89

 
$

 
$
6,025

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$

 
$
5,936

 
$

 
$
5,936

Interest rate derivatives
 

 
4,282

 

 
4,282

Total liabilities
 
$

 
$
10,218

 
$

 
$
10,218

Redeemable noncontrolling interest
 
$

 
$

 
$
18,895

 
$
18,895


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

COPLP and Subsidiaries

The table below sets forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2015 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
Description
 
Quoted Prices in
Active Markets for
Identical Assets(Level 1)
 
Significant Other
Observable Inputs(Level 2)
 
Significant
Unobservable Inputs(Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Warrants to purchase common stock (1)
 
$

 
$
89

 
$

 
$
89

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$

 
$
4,282

 
$

 
$
4,282

Redeemable noncontrolling interest
 
$

 
$

 
$
18,895

 
$
18,895


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


17



4.    Properties, Net
 
Operating properties, net consisted of the following (in thousands): 
 
March 31,
2015
 
December 31,
2014
Land
$
455,639

 
$
439,355

Buildings and improvements
3,157,434

 
3,015,216

Less: Accumulated depreciation
(724,539
)
 
(703,083
)
Operating properties, net
$
2,888,534

 
$
2,751,488


During the three months ended March 31, 2014, we recognized $12.9 million in additional depreciation expense resulting from our revision of the useful life of a property in Greater Philadelphia, Pennsylvania (“Greater Philadelphia”) that was removed from service for redevelopment.
 
Projects in development or held for future development consisted of the following (in thousands):
 
March 31,
2015
 
December 31,
2014
Land
$
219,852

 
$
214,977

Construction in progress, excluding land
269,766

 
330,449

Projects in development or held for future development
$
489,618

 
$
545,426


As of December 31, 2014, we had two land parcels in the Greater Baltimore region classified as held for sale with a cost basis of $14.3 million that were sold during the three months ended March 31, 2015.

2015 Acquisition

On March 19, 2015, we acquired 250 W. Pratt Street, a 367,000 square foot office property in Baltimore, Maryland that was 96.2% leased, for $61.9 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands):

Land, operating properties
 
$
8,057

Building and improvements
 
34,740

Intangible assets on real estate acquisitions
 
20,183

Total assets
 
62,980

Below-market leases
 
(1,093
)
Total acquisition cost
 
$
61,887


Intangible assets recorded in connection with the above acquisition included the following (dollars in thousands):
 
 
 
 Weighted Average Amortization Period (in Years)
Tenant relationship value
$
7,252

 
11
In-place lease value
10,218

 
7
Above-market leases
2,713

 
4
 
$
20,183

 
8

We expensed $1.0 million in operating property acquisition costs during the three months ended March 31, 2015 that are included in business development expenses and land carry costs on our consolidated statements of operations.

2015 Dispositions

We sold land in the three months ended March 31, 2015 for $18.1 million and recognized gains of $4.0 million on the sales.


18



2015 Construction Activities

During the three months ended March 31, 2015, we placed into service an aggregate of 440,000 square feet in three newly constructed office properties located in Northern Virginia and San Antonio, Texas (“San Antonio”), and 111,000 square feet of a property undergoing redevelopment in Greater Philadelphia. As of March 31, 2015, we had seven office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion, including four in Northern Virginia, two in the Baltimore/Washington Corridor and one in Huntsville, Alabama (“Huntsville”). We also had five office properties under redevelopment (including one partially operational property) that we estimate will total 344,000 square feet upon completion, including three in the Baltimore/Washington Corridor, one in Greater Philadelphia and one in St. Mary’s County, Maryland.

5.    Real Estate Joint Ventures

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of March 31, 2015 (dollars in thousands):
 
 
 
 
Nominal
 
 
 
 
 
 
 
 
 
 
 
 
Ownership
 
 
 
March 31, 2015
(1)
 
 
Date
 
% as of
 
 
 
Total
 
Encumbered
 
Total
 
 
Acquired
 
3/31/2015
 
Nature of Activity
 
Assets
 
Assets
 
Liabilities
LW Redstone Company, LLC
 
3/23/2010
 
85%
 
Operates four buildings and developing others (2)
 
$
149,098

 
$
65,934

 
$
43,314

M Square Associates, LLC
 
6/26/2007
 
50%
 
Operates two buildings and developing others (3)
 
59,671

 
48,480

 
38,700

 
 
 
 
 
 
 
 
$
208,769

 
$
114,414

 
$
82,014

(1)
Excludes amounts eliminated in consolidation.
(2)
This joint venture’s properties are in Huntsville, Alabama.
(3)
This joint venture’s properties are in College Park, Maryland (in the Baltimore/Washington Corridor).

6.    Intangible Assets on Real Estate Acquisitions, Net

Intangible assets on real estate acquisitions consisted of the following (in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Carrying Amount
In-place lease value
 
$
133,395

 
$
102,019

 
$
31,376

 
$
123,759

 
$
101,040

 
$
22,719

Tenant relationship value
 
49,552

 
29,265

 
20,287

 
42,301

 
28,492

 
13,809

Below-market cost arrangements
 
12,415

 
6,154

 
6,261

 
12,415

 
5,984

 
6,431

Above-market leases
 
11,372

 
8,211

 
3,161

 
8,659

 
8,159

 
500

Market concentration premium
 
1,333

 
941

 
392

 
1,333

 
938

 
395

 
 
$
208,067

 
$
146,590

 
$
61,477

 
$
188,467

 
$
144,613

 
$
43,854

Amortization of the intangible asset categories set forth above totaled $2.6 million in the three months ended March 31, 2015 and $3.6 million in the three months ended March 31, 2014. The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: six years; tenant relationship value: eight years; below-market cost arrangements: 31 years; above-market leases: four years; and market concentration premium: 27 years. The approximate weighted average amortization period for all of the categories combined is ten years. Estimated amortization expense associated with the intangible asset categories set forth above through 2020 is: $9.4 million for the nine months ending December 31, 2015; $11.6 million for 2016; $9.4 million for 2017; $6.3 million for 2018; $5.1 million for 2019; and $3.8 million for 2020.

7.     Investing Receivables
 
Investing receivables, including accrued interest thereon, consisted of the following (in thousands):
 
 
March 31,
2015
 
December 31,
2014
Notes receivable from the City of Huntsville
$
49,814

 
$
49,147

Other investing loans receivable
3,000

 
3,000

 
$
52,814

 
$
52,147


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Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5) and carry an interest rate of 9.95%.

We did not have an allowance for credit losses in connection with our investing receivables as of March 31, 2015 or December 31, 2014.  The fair value of these receivables approximated their carrying amounts as of March 31, 2015 and December 31, 2014.

8.    Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets consisted of the following (in thousands):
 
 
March 31,
2015
 
December 31,
2014
Construction contract costs incurred in excess of billings
$
19,136

 
$
6,656

Prepaid expenses
14,862

 
20,570

Lease incentives, net
13,183

 
13,344

Furniture, fixtures and equipment, net
6,349

 
6,637

Deposit on acquisitions
5,066

 
516

Deferred tax asset, net (1)
3,946

 
4,002

Operating notes receivable
3,629

 
3,797

Equity method investments
2,390

 
2,368

Other assets
2,939

 
2,359

Prepaid expenses and other assets
$
71,500

 
$
60,249


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

Operating notes receivable reported above includes amounts due from tenants with remaining terms exceeding one year totaling $3.6 million as of March 31, 2015 and December 31, 2014; we carried allowances for estimated losses for $281,000 of the March 31, 2015 balance and $252,000 of the December 31, 2014 balance.


20



9.    Debt
 
Our debt consisted of the following (dollars in thousands):