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

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

Corporate Office Properties Trust

Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Corporate Office Properties, L.P.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Corporate Office Properties Trust o Yes   ý No

Corporate Office Properties, L.P. o Yes   ý No

As of 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

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

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

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

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

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

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

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

•	consolidated financial statements;

•	the following notes to the consolidated financial statements:

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

•	Note 16, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries;

•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPT”; and

•	“Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of COPLP.”

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

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TABLE OF CONTENTS

 

FORM 10-Q

 

		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements:
Consolidated Financial Statements of Corporate Office Properties Trust
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)	7
Consolidated Financial Statements of Corporate Office Properties, L.P.
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (unaudited)	9
	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)	10
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	11
	Consolidated Statements of Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)	12
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)	13
Notes to Consolidated Financial Statements (unaudited)		15
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4:	Controls and Procedures	45
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	46
Item 1A:	Risk Factors	46
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3:	Defaults Upon Senior Securities	46
Item 4:	Mine Safety Disclosures	46
Item 5:	Other Information	46
Item 6:	Exhibits	46
SIGNATURES		48

2

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PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

	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

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended 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

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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

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

	Preferred Shares				Common Shares				Additional Paid-in Capital				Cumulative Distributions in Excess of Net Income				Accumulated Other Comprehensive Income (Loss)				Noncontrolling Interests				Total
Balance at December 31, 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

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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

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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

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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

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per unit data)

(unaudited)

	For the Three Months Ended 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.

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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.

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Corporate Office Properties, L.P. and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

	Limited Partner Preferred Units							General Partner  Preferred Units							Common Units							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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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9.    Debt

 

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