UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 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 July 17, 2015, 94,528,982 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
 
 
 
 
 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 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 June 30, 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 were owned by third parties. 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)
 
June 30,
2015
 
December 31,
2014
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,896,809

 
$
2,751,488

Projects in development or held for future development
521,991

 
545,426

Total properties, net
3,418,800

 
3,296,914

Assets held for sale, net
77,013

 
14,339

Cash and cash equivalents
37,074

 
6,077

Restricted cash and marketable securities
10,121

 
9,069

Accounts receivable (net of allowance for doubtful accounts of $1,135 and $717, respectively)
16,181

 
26,901

Deferred rent receivable (net of allowance of $2,203 and $1,418, respectively)
101,488

 
95,910

Intangible assets on real estate acquisitions, net
81,728

 
43,854

Deferred leasing and financing costs, net
67,613

 
64,797

Investing receivables
45,766

 
52,147

Prepaid expenses and other assets, net
55,137

 
60,249

Total assets
$
3,910,921

 
$
3,670,257

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,130,170

 
$
1,920,057

Accounts payable and accrued expenses
155,989

 
123,035

Rents received in advance and security deposits
27,371

 
31,011

Dividends and distributions payable
30,178

 
29,862

Deferred revenue associated with operating leases
15,179

 
13,031

Interest rate derivatives
3,121

 
1,855

Other liabilities
11,866

 
12,105

Total liabilities
2,373,874

 
2,130,956

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
19,414

 
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 June 30, 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 94,529,618 at June 30, 2015 and 93,255,284 at December 31, 2014)
946

 
933

Additional paid-in capital
2,000,775

 
1,969,968

Cumulative distributions in excess of net income
(747,234
)
 
(717,264
)
Accumulated other comprehensive loss
(3,141
)
 
(1,297
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,450,429

 
1,451,423

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
48,707

 
51,534

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
9,697

 
9,127

Noncontrolling interests in subsidiaries
67,204

 
69,461

Total equity
1,517,633

 
1,520,884

Total liabilities, redeemable noncontrolling interest and equity
$
3,910,921

 
$
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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 

 
 

 
 
 
 
Rental revenue
$
105,508

 
$
94,332

 
$
203,746

 
$
192,367

Tenant recoveries and other real estate operations revenue
22,683

 
21,627

 
47,155

 
48,469

Construction contract and other service revenues
42,172

 
23,861

 
80,496

 
45,651

Total revenues
170,363

 
139,820

 
331,397

 
286,487

Expenses
 

 
 

 
 

 
 

Property operating expenses
46,418

 
43,772

 
97,099

 
93,544

Depreciation and amortization associated with real estate operations
33,786

 
30,895

 
65,385

 
74,491

Construction contract and other service expenses
41,293

 
23,136

 
78,791

 
41,760

Impairment losses
1,238

 
1,302

 
1,238

 
1,302

General, administrative and leasing expenses
7,534

 
7,528

 
15,425

 
15,671

Business development expenses and land carry costs
2,623

 
1,351

 
5,413

 
2,677

Total operating expenses
132,892

 
107,984

 
263,351

 
229,445

Operating income
37,471

 
31,836

 
68,046

 
57,042

Interest expense
(21,768
)
 
(23,478
)
 
(42,606
)
 
(44,305
)
Interest and other income
1,242

 
1,299

 
2,525

 
2,584

Loss on early extinguishment of debt
(65
)
 
(270
)
 
(68
)
 
(270
)
Income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes
16,880

 
9,387

 
27,897

 
15,051

Equity in income (loss) of unconsolidated entities
9

 
(47
)
 
34

 
13

Income tax expense
(50
)
 
(92
)
 
(105
)
 
(156
)
Income from continuing operations
16,839

 
9,248

 
27,826

 
14,908

Discontinued operations
394

 
(198
)
 
156

 
(187
)
Income before gain on sales of real estate
17,233

 
9,050

 
27,982

 
14,721

Gain on sales of real estate
(1
)
 
—

 
3,985

 
—

Net income
17,232

 
9,050

 
31,967

 
14,721

Net income attributable to noncontrolling interests:
 

 
 

 
 

 
 

Common units in COPLP
(476
)
 
(158
)
 
(874
)
 
(174
)
Preferred units in COPLP
(165
)
 
(165
)
 
(330
)
 
(330
)
Other consolidated entities
(810
)
 
(837
)
 
(1,627
)
 
(1,586
)
Net income attributable to COPT
15,781

 
7,890

 
29,136

 
12,631

Preferred share dividends
(3,553
)
 
(4,344
)
 
(7,105
)
 
(8,834
)
Issuance costs associated with redeemed preferred shares
—

 
(1,769
)
 
—

 
(1,769
)
Net income attributable to COPT common shareholders
$
12,228

 
$
1,777

 
$
22,031

 
$
2,028

Net income attributable to COPT:
 

 
 

 
 

 
 

Income from continuing operations
$
15,402

 
$
8,077

 
$
28,983

 
$
12,805

Discontinued operations, net
379

 
(187
)
 
153

 
(174
)
Net income attributable to COPT
$
15,781

 
$
7,890

 
$
29,136

 
$
12,631

Basic earnings per common share (1)
 

 
 

 
 

 
 

Income from continuing operations
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income attributable to COPT common shareholders
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Diluted earnings per common share (1)
 

 
 

 
 
 
 
Income from continuing operations
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income attributable to COPT common shareholders
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Dividends declared per common share
$
0.275

 
$
0.275

 
$
0.550

 
$
0.550

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

4


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
17,232

 
$
9,050

 
$
31,967

 
$
14,721

Other comprehensive income (loss)
 

 
 

 
 

 
 

Unrealized gain (loss) on interest rate derivatives
392

 
(3,630
)
 
(3,082
)
 
(5,753
)
Losses on interest rate derivatives included in interest expense
769

 
719

 
1,542

 
1,414

Equity in other comprehensive loss of equity method investee
(264
)
 
—

 
(264
)
 
—

Other comprehensive income (loss)
897

 
(2,911
)
 
(1,804
)
 
(4,339
)
Comprehensive income
18,129

 
6,139

 
30,163

 
10,382

Comprehensive income attributable to noncontrolling interests
(1,542
)
 
(1,081
)
 
(2,871
)
 
(1,992
)
Comprehensive income attributable to COPT
$
16,587

 
$
5,058

 
$
27,292

 
$
8,390

 
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

Redemption of preferred shares (2,000,000 shares)
(50,000
)
 
—

 
1,769

 
(1,769
)
 
—

 
—

 
(50,000
)
Conversion of common units to common shares (78,498 shares)
—

 
—

 
1,047

 
—

 
—

 
(1,047
)
 
—

Costs associated with common shares issued to the public
—

 
—

 
(7
)
 
—

 
—

 
—

 
(7
)
Exercise of share options (51,289 shares)
—

 
—

 
1,185

 
—

 
—

 
—

 
1,185

Share-based compensation (144,009 shares issued, net of redemptions)
—

 
3

 
3,542

 
—

 
—

 
—

 
3,545

Redemption of vested equity awards
—

 
—

 
(1,326
)
 
—

 
—

 
—

 
(1,326
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(72
)
 
—

 
—

 
72

 
—

Comprehensive income
—

 
—

 
—

 
12,631

 
(4,241
)
 
976

 
9,366

Dividends
—

 
—

 
—

 
(57,027
)
 
—

 
—

 
(57,027
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(2,483
)
 
(2,483
)
Contributions from noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
3

 
3

Distributions to noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
(8
)
 
(8
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
(717
)
 
—

 
—

 
—

 
(717
)
Balance at June 30, 2014 (87,668,308 common shares outstanding)
$
199,083

 
$
877

 
$
1,819,436

 
$
(688,033
)
 
$
(761
)
 
$
69,178

 
$
1,399,780

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (76,474 shares)
—

 
—

 
2,008

 
—

 
—

 
—

 
2,008

Share-based compensation (149,619 shares issued, net of redemptions)
—

 
2

 
3,656

 
—

 
—

 
—

 
3,658

Redemption of vested equity awards
—

 
—

 
(2,245
)
 
—

 
—

 
—

 
(2,245
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(519
)
 
—

 
—

 
519

 
—

Comprehensive income
—

 
—

 
—

 
29,136

 
(1,844
)
 
1,728

 
29,020

Dividends
—

 
—

 
—

 
(59,106
)
 
—

 
—

 
(59,106
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(2,354
)
 
(2,354
)
Distributions to noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
(28
)
 
(28
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
(739
)
 
—

 
—

 
—

 
(739
)
Balance at June 30, 2015 (94,529,618 common shares outstanding)
$
199,083

 
$
946

 
$
2,000,775

 
$
(747,234
)
 
$
(3,141
)
 
$
67,204

 
$
1,517,633

See accompanying notes to consolidated financial statements.

6


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
240,538

 
$
232,877

Construction contract and other service revenues received
86,790

 
35,105

Property operating expenses paid
(79,667
)
 
(78,621
)
Construction contract and other service expenses paid
(76,355
)
 
(34,588
)
General, administrative, leasing, business development and land carry costs paid
(20,121
)
 
(16,904
)
Interest expense paid
(32,375
)
 
(35,365
)
Payments in connection with early extinguishment of debt
(18
)
 
(104
)
Interest and other income received
4,055

 
346

Income taxes (paid) refunded
(8
)
 
204

Net cash provided by operating activities
122,839

 
102,950

Cash flows from investing activities
 

 
 

Acquisitions of operating properties and related intangible assets
(137,125
)
 
—

Construction, development and redevelopment
(117,498
)
 
(105,459
)
Tenant improvements on operating properties
(10,314
)
 
(10,842
)
Other capital improvements on operating properties
(8,372
)
 
(16,482
)
Proceeds from dispositions of properties
17,424

 
1,971

Investing receivables payments received
5,114

 
151

Leasing costs paid
(6,732
)
 
(7,772
)
Increase in prepaid expenses and other assets associated with investing activities
(3,249
)
 
(1,158
)
Other
(289
)
 
(450
)
Net cash used in investing activities
(261,041
)
 
(140,041
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
294,000

 
115,000

Unsecured senior notes
296,580

 
297,342

Other debt proceeds
50,000

 
9,931

Repayments of debt
 
 
 
Revolving Credit Facility
(377,000
)
 
(115,000
)
Scheduled principal amortization
(3,319
)
 
(3,437
)
Other debt repayments
(50,630
)
 
(133,010
)
Deferred financing costs paid
(4,693
)
 
(653
)
Net proceeds from issuance of common shares
28,567

 
1,178

Redemption of preferred shares
—

 
(50,000
)
Common share dividends paid
(51,642
)
 
(48,118
)
Preferred share dividends paid
(7,105
)
 
(9,626
)
Distributions paid to noncontrolling interests in COPLP
(2,461
)
 
(2,641
)
Redemption of vested equity awards
(2,245
)
 
(1,326
)
Other
(853
)
 
(706
)
Net cash provided by financing activities
169,199

 
58,934

Net increase in cash and cash equivalents
30,997

 
21,843

Cash and cash equivalents
 

 
 

Beginning of period
6,077

 
54,373

End of period
$
37,074

 
$
76,216

See accompanying notes to consolidated financial statements.
 


7


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
For the Six Months Ended June 30,
 
2015
 
2014
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
31,967

 
$
14,721

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

 
 

Depreciation and other amortization
66,404

 
75,839

Impairment losses
1,472

 
1,329

Amortization of deferred financing costs
2,136

 
2,289

Increase in deferred rent receivable
(5,956
)
 
(1,754
)
Amortization of net debt discounts
482

 
400

(Gain) loss on sales of real estate
(3,985
)
 
4

Share-based compensation
3,210

 
3,056

(Gain) loss on early extinguishment of debt
(330
)
 
282

Other
2,084

 
(1,664
)
Operating changes in assets and liabilities:
 

 
 
Decrease (increase) in accounts receivable
10,655

 
(3,916
)
Increase in restricted cash and marketable securities
(735
)
 
(113
)
Decrease in prepaid expenses and other assets, net
6,518

 
3,213

Increase in accounts payable, accrued expenses and other liabilities
12,557

 
13,236

Decrease in rents received in advance and security deposits
(3,640
)
 
(3,972
)
Net cash provided by operating activities
$
122,839

 
$
102,950

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase (decrease) in accrued capital improvements, leasing and other investing activity costs
$
15,927

 
$
(7,153
)
Liabilities assumed on acquisition of operating properties
$
5,265

 
$
—

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(1,540
)
 
$
(4,369
)
Equity in other comprehensive loss of an equity method investee
$
(264
)
 
$
—

Dividends/distribution payable
$
30,178

 
$
28,342

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

 
$
1,047

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
519

 
$
72

Increase in redeemable noncontrolling interest and decrease in equity to carry redeemable noncontrolling interest at fair value
$
739

 
$
717

 
See accompanying notes to consolidated financial statements.


8




Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
June 30,
2015
 
December 31,
2014
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,896,809

 
$
2,751,488

Projects in development or held for future development
521,991

 
545,426

Total properties, net
3,418,800

 
3,296,914

Assets held for sale, net
77,013

 
14,339

Cash and cash equivalents
37,074

 
6,077

Restricted cash and marketable securities
4,248

 
3,187

Accounts receivable (net of allowance for doubtful accounts of $1,135 and $717, respectively)
16,181

 
26,901

Deferred rent receivable (net of allowance of $2,203 and $1,418, respectively)
101,488

 
95,910

Intangible assets on real estate acquisitions, net
81,728

 
43,854

Deferred leasing and financing costs, net
67,613

 
64,797

Investing receivables
45,766

 
52,147

Prepaid expenses and other assets, net
55,137

 
60,249

Total assets
$
3,905,048

 
$
3,664,375

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,130,170

 
$
1,920,057

Accounts payable and accrued expenses
155,989

 
123,035

Rents received in advance and security deposits
27,371

 
31,011

Distributions payable
30,178

 
29,862

Deferred revenue associated with operating leases
15,179

 
13,031

Interest rate derivatives
3,121

 
1,855

Other liabilities
5,993

 
6,223

Total liabilities
2,368,001

 
2,125,074

Commitments and contingencies (Note 17)


 


Redeemable noncontrolling interest
19,414

 
18,417

Equity:
 

 
 

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

 
 

Preferred units
 
 
 
General partner, preferred units outstanding of 7,431,667 at June 30, 2015 and December 31, 2014
199,083

 
199,083

Limited partner, 352,000 preferred units outstanding at June 30, 2015 and December 31, 2014
8,800

 
8,800

Common units, 94,529,618 and 93,255,284 held by the general partner and 3,679,551 and 3,837,551 held by limited partners at June 30, 2015 and December 31, 2014, respectively
1,303,313

 
1,305,219

Accumulated other comprehensive loss
(3,300
)
 
(1,381
)
Total Corporate Office Properties, L.P.’s equity
1,507,896

 
1,511,721

Noncontrolling interests in subsidiaries
9,737

 
9,163

Total equity
1,517,633

 
1,520,884

Total liabilities, redeemable noncontrolling interest and equity
$
3,905,048

 
$
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 June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 

 
 

 
 
 
 
Rental revenue
$
105,508

 
$
94,332

 
$
203,746

 
$
192,367

Tenant recoveries and other real estate operations revenue
22,683

 
21,627

 
47,155

 
48,469

Construction contract and other service revenues
42,172

 
23,861

 
80,496

 
45,651

Total revenues
170,363

 
139,820

 
331,397

 
286,487

Expenses
 

 
 

 
 

 
 

Property operating expenses
46,418

 
43,772

 
97,099

 
93,544

Depreciation and amortization associated with real estate operations
33,786

 
30,895

 
65,385

 
74,491

Construction contract and other service expenses
41,293

 
23,136

 
78,791

 
41,760

Impairment losses
1,238

 
1,302

 
1,238

 
1,302

General, administrative and leasing expenses
7,534

 
7,528

 
15,425

 
15,671

Business development expenses and land carry costs
2,623

 
1,351

 
5,413

 
2,677

Total operating expenses
132,892

 
107,984

 
263,351

 
229,445

Operating income
37,471

 
31,836

 
68,046

 
57,042

Interest expense
(21,768
)
 
(23,478
)
 
(42,606
)
 
(44,305
)
Interest and other income
1,242

 
1,299

 
2,525

 
2,584

Loss on early extinguishment of debt
(65
)
 
(270
)
 
(68
)
 
(270
)
Income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes
16,880

 
9,387

 
27,897

 
15,051

Equity in income (loss) of unconsolidated entities
9

 
(47
)
 
34

 
13

Income tax expense
(50
)
 
(92
)
 
(105
)
 
(156
)
Income from continuing operations
16,839

 
9,248

 
27,826

 
14,908

Discontinued operations
394

 
(198
)
 
156

 
(187
)
Income before gain on sales of real estate
17,233

 
9,050

 
27,982

 
14,721

Gain on sales of real estate
(1
)
 
—

 
3,985

 
—

Net income
17,232

 
9,050

 
31,967

 
14,721

Net income attributable to noncontrolling interests in consolidated entities
(812
)
 
(837
)
 
(1,630
)
 
(1,574
)
Net income attributable to COPLP
16,420

 
8,213

 
30,337

 
13,147

Preferred unit distributions
(3,718
)
 
(4,509
)
 
(7,435
)
 
(9,164
)
Issuance costs associated with redeemed preferred units
—

 
(1,769
)
 
—

 
(1,769
)
Net income attributable to COPLP common unitholders
$
12,702

 
$
1,935

 
$
22,902

 
$
2,214

Net income attributable to COPLP:
 

 
 

 
 

 
 

Income from continuing operations
$
16,026

 
$
8,408

 
$
30,178

 
$
13,329

Discontinued operations, net
394

 
(195
)
 
159

 
(182
)
Net income attributable to COPLP
$
16,420

 
$
8,213

 
$
30,337

 
$
13,147

Basic earnings per common unit (1)
 

 
 

 
 

 
 

Income from continuing operations
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income attributable to COPLP common unitholders
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Diluted earnings per common unit (1)
 

 
 

 
 
 
 
Income from continuing operations
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income attributable to COPLP common unitholders
$
0.13

 
$
0.02

 
$
0.23

 
$
0.02

Distributions declared per common unit
$
0.275

 
$
0.275

 
$
0.550

 
$
0.550

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

10


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
17,232

 
$
9,050

 
$
31,967

 
$
14,721

Other comprehensive income (loss)
 

 
 

 
 
 
 
Unrealized gain (loss) on interest rate derivatives
392

 
(3,630
)
 
(3,082
)
 
(5,753
)
Losses on interest rate derivatives included in interest expense
769

 
719

 
1,542

 
1,414

Equity in other comprehensive loss of equity method investee
(264
)
 
—

 
(264
)
 
—

Other comprehensive income (loss)
897

 
(2,911
)
 
(1,804
)
 
(4,339
)
Comprehensive income
18,129

 
6,139

 
30,163

 
10,382

Comprehensive income attributable to noncontrolling interests
(872
)
 
(884
)
 
(1,745
)
 
(1,666
)
Comprehensive income attributable to COPLP
$
17,257

 
$
5,255

 
$
28,418

 
$
8,716

 
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

Redemption of preferred units resulting from redemption of preferred shares
—

 
—

 
(2,000,000
)
 
(50,000
)
 
—

 
—

 
—

 
—

 
(50,000
)
Costs associated with common shares issued to the public
—

 
—

 
—

 
—

 
—

 
(7
)
 
—

 
—

 
(7
)
Issuance of common units resulting from exercise of share options
—

 
—

 
—

 
—

 
51,289

 
1,185

 
—

 
—

 
1,185

Share-based compensation (units net of redemption)
—

 
—

 
—

 
—

 
144,009

 
3,545

 
—

 
—

 
3,545

Redemptions of vested equity awards
—

 
—

 
—

 
—

 
—

 
(1,326
)
 
—

 
—

 
(1,326
)
Comprehensive income
—

 
330

 
—

 
8,834

 
—

 
3,983

 
(4,430
)
 
649

 
9,366

Distributions to owners of common and preferred units
—

 
(330
)
 
—

 
(8,834
)
 
—

 
(50,346
)
 
—

 
—

 
(59,510
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8
)
 
(8
)
Contributions from noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3

 
3

Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(717
)
 
—

 
—

 
(717
)
Balance at June 30, 2014
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
91,567,510

 
$
1,182,635

 
$
(825
)
 
$
10,087

 
$
1,399,780

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
—

 
—

 
76,474

 
2,008

 
—

 
—

 
2,008

Share-based compensation (units net of redemption)
—

 
—

 
—

 
—

 
149,619

 
3,658

 
—

 
—

 
3,658

Redemptions of vested equity awards
—

 
—

 
—

 
—

 
—

 
(2,245
)
 
—

 
—

 
(2,245
)
Comprehensive income
—

 
330

 
—

 
7,105

 
—

 
22,902

 
(1,919
)
 
602

 
29,020

Distributions to owners of common and preferred units
—

 
(330
)
 
—

 
(7,105
)
 
—

 
(54,025
)
 
—

 
—

 
(61,460
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(28
)
 
(28
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(739
)
 
—

 
—

 
(739
)
Balance at June 30, 2015
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,209,169

 
$
1,303,313

 
$
(3,300
)
 
$
9,737

 
$
1,517,633

See accompanying notes to consolidated financial statements.

12


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
240,538

 
$
232,877

Construction contract and other service revenues received
86,790

 
35,105

Property operating expenses paid
(79,667
)
 
(78,621
)
Construction contract and other service expenses paid
(76,355
)
 
(34,588
)
General, administrative, leasing, business development and land carry costs paid
(20,121
)
 
(16,904
)
Interest expense paid
(32,375
)
 
(35,365
)
Payments in connection with early extinguishment of debt
(18
)
 
(104
)
Interest and other income received
4,055

 
346

Income taxes (paid) refunded
(8
)
 
204

Net cash provided by operating activities
122,839

 
102,950

Cash flows from investing activities
 

 
 

Acquisitions of operating properties and related intangible assets
(137,125
)
 
—

Construction, development and redevelopment
(117,498
)
 
(105,459
)
Tenant improvements on operating properties
(10,314
)
 
(10,842
)
Other capital improvements on operating properties
(8,372
)
 
(16,482
)
Proceeds from dispositions of properties
17,424

 
1,971

Investing receivables payments received
5,114

 
151

Leasing costs paid
(6,732
)
 
(7,772
)
Increase in prepaid expenses and other assets associated with investing activities
(3,249
)
 
(1,158
)
Other
(289
)
 
(450
)
Net cash used in investing activities
(261,041
)
 
(140,041
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
294,000

 
115,000

Unsecured senior notes
296,580

 
297,342

Other debt proceeds
50,000

 
9,931

Repayments of debt
 
 
 
Revolving Credit Facility
(377,000
)
 
(115,000
)
Scheduled principal amortization
(3,319
)
 
(3,437
)
Other debt repayments
(50,630
)
 
(133,010
)
Deferred financing costs paid
(4,693
)
 
(653
)
Net proceeds from issuance of common units
28,567

 
1,178

Redemption of preferred units
—

 
(50,000
)
Common unit distributions paid
(53,773
)
 
(50,429
)
Preferred unit distributions paid
(7,435
)
 
(9,956
)
Redemption of vested equity awards
(2,245
)
 
(1,326
)
Other
(853
)
 
(706
)
Net cash provided by financing activities
169,199

 
58,934

Net increase in cash and cash equivalents
30,997

 
21,843

Cash and cash equivalents
 

 
 

Beginning of period
6,077

 
54,373

End of period
$
37,074

 
$
76,216

See accompanying notes to consolidated financial statements.

13


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

 
For the Six Months Ended June 30,
 
2015
 
2014
Reconciliation of net income to net cash provided by operating activities:
 

 
 

Net income
$
31,967

 
$
14,721

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

 
 

Depreciation and other amortization
66,404

 
75,839

Impairment losses
1,472

 
1,329

Amortization of deferred financing costs
2,136

 
2,289

Increase in deferred rent receivable
(5,956
)
 
(1,754
)
Amortization of net debt discounts
482

 
400

(Gain) loss on sales of real estate
(3,985
)
 
4

Share-based compensation
3,210

 
3,056

(Gain) loss on early extinguishment of debt
(330
)
 
282

Other
2,084

 
(1,664
)
Operating changes in assets and liabilities:
 

 
 
Decrease (increase) in accounts receivable
10,655

 
(3,916
)
(Increase) decrease in restricted cash and marketable securities
(744
)
 
40

Decrease in prepaid expenses and other assets, net
6,518

 
3,213

Increase in accounts payable, accrued expenses and other liabilities
12,566

 
13,083

Decrease in rents received in advance and security deposits
(3,640
)
 
(3,972
)
Net cash provided by operating activities
$
122,839

 
$
102,950

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase (decrease) in accrued capital improvements, leasing and other investing activity costs
$
15,927

 
$
(7,153
)
Liabilities assumed on acquisition of operating properties
$
5,265

 
$
—

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(1,540
)
 
$
(4,369
)
Equity in other comprehensive loss of an equity method investee
$
(264
)
 
$
—

Distributions payable
$
30,178

 
$
28,342

Increase in redeemable noncontrolling interest and decrease in equity to carry redeemable noncontrolling interest at fair value
$
739