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, 2016
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 22, 2016, 94,759,023 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, 2016 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, 2016, 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 14, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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,
2016
 
December 31,
2015
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,782,330

 
$
2,920,529

Projects in development or held for future development
387,397

 
429,219

Total properties, net
3,169,727

 
3,349,748

Assets held for sale, net
300,584

 
96,782

Cash and cash equivalents
13,317

 
60,310

Restricted cash and marketable securities
8,302

 
7,716

Accounts receivable (net of allowance for doubtful accounts of $745 and $1,525, respectively)
32,505

 
29,167

Deferred rent receivable (net of allowance of $422 and $1,962, respectively)
92,316

 
105,484

Intangible assets on real estate acquisitions, net
88,788

 
98,338

Deferred leasing costs (net of accumulated amortization of $63,768 and $66,364, respectively)
42,632

 
53,868

Investing receivables
50,162

 
47,875

Prepaid expenses and other assets, net
43,359

 
60,024

Total assets
$
3,841,692

 
$
3,909,312

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,094,486

 
$
2,077,752

Accounts payable and accrued expenses
92,848

 
91,755

Rents received in advance and security deposits
32,035

 
37,148

Dividends and distributions payable
30,219

 
30,178

Deferred revenue associated with operating leases
17,560

 
19,758

Interest rate derivatives
20,245

 
3,160

Other liabilities
31,123

 
13,779

Total liabilities
2,318,516

 
2,273,530

Commitments and contingencies (Note 15)


 


Redeemable noncontrolling interests
22,473

 
19,218

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, shares issued and outstanding of 7,431,667 at June 30, 2016 and December 31, 2015)
199,083

 
199,083

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 94,699,359 at June 30, 2016 and 94,531,512 at December 31, 2015)
947

 
945

Additional paid-in capital
2,007,328

 
2,004,507

Cumulative distributions in excess of net income
(756,940
)
 
(657,172
)
Accumulated other comprehensive loss
(17,712
)
 
(2,838
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,432,706

 
1,544,525

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
47,550

 
52,359

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
11,647

 
10,880

Noncontrolling interests in subsidiaries
67,997

 
72,039

Total equity
1,500,703

 
1,616,564

Total liabilities, redeemable noncontrolling interest and equity
$
3,841,692

 
$
3,909,312


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,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 
 
 
Rental revenue
$
107,524

 
$
105,508

 
$
212,906

 
$
203,746

Tenant recoveries and other real estate operations revenue
26,400

 
22,683

 
54,105

 
47,155

Construction contract and other service revenues
12,003

 
42,172

 
23,223

 
80,496

Total revenues
145,927

 
170,363

 
290,234

 
331,397

Expenses
 

 
 

 
 

 
 

Property operating expenses
48,141

 
46,418

 
100,016

 
97,099

Depreciation and amortization associated with real estate operations
33,248

 
33,786

 
67,775

 
65,385

Construction contract and other service expenses
11,478

 
41,293

 
22,172

 
78,791

Impairment losses
69,692

 
1,238

 
72,138

 
1,238

General, administrative and leasing expenses
8,026

 
7,534

 
19,909

 
15,425

Business development expenses and land carry costs
2,363

 
2,623

 
4,781

 
5,413

Total operating expenses
172,948

 
132,892

 
286,791

 
263,351

Operating (loss) income
(27,021
)
 
37,471

 
3,443

 
68,046

Interest expense
(22,639
)
 
(21,768
)
 
(46,198
)
 
(42,606
)
Interest and other income
1,330

 
1,242

 
2,486

 
2,525

Gain (loss) on early extinguishment of debt
5

 
(65
)
 
22

 
(68
)
(Loss) income from continuing operations before equity in income of unconsolidated entities and income taxes
(48,325
)
 
16,880

 
(40,247
)
 
27,897

Equity in income of unconsolidated entities
10

 
9

 
20

 
34

Income tax (expense) benefit
(1
)
 
(50
)
 
7

 
(105
)
(Loss) income from continuing operations
(48,316
)
 
16,839

 
(40,220
)
 
27,826

Discontinued operations
—

 
394

 
—

 
156

(Loss) income before gain on sales of real estate
(48,316
)
 
17,233

 
(40,220
)
 
27,982

Gain on sales of real estate
—

 
(1
)
 
—

 
3,985

Net (loss) income
(48,316
)
 
17,232

 
(40,220
)
 
31,967

Net loss (income) attributable to noncontrolling interests:
 

 
 

 
 

 
 

Common units in COPLP
1,976

 
(476
)
 
1,849

 
(874
)
Preferred units in COPLP
(165
)
 
(165
)
 
(330
)
 
(330
)
Other consolidated entities
(914
)
 
(810
)
 
(1,892
)
 
(1,627
)
Net (loss) income attributable to COPT
(47,419
)
 
15,781

 
(40,593
)
 
29,136

Preferred share dividends
(3,553
)
 
(3,553
)
 
(7,105
)
 
(7,105
)
Net (loss) income attributable to COPT common shareholders
$
(50,972
)
 
$
12,228

 
$
(47,698
)
 
$
22,031

Net (loss) income attributable to COPT:
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(47,419
)
 
$
15,402

 
$
(40,593
)
 
$
28,983

Discontinued operations, net
—

 
379

 
—

 
153

Net (loss) income attributable to COPT
$
(47,419
)
 
$
15,781

 
$
(40,593
)
 
$
29,136

Basic earnings per common share (1)
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net (loss) income attributable to COPT common shareholders
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Diluted earnings per common share (1)
 

 
 

 
 
 
 
(Loss) income from continuing operations
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net (loss) income attributable to COPT common shareholders
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

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,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(48,316
)
 
$
17,232

 
$
(40,220
)
 
$
31,967

Other comprehensive (loss) income
 

 
 

 
 

 
 

Unrealized (loss) gain on interest rate derivatives
(5,704
)
 
392

 
(16,988
)
 
(3,082
)
Losses on interest rate derivatives included in interest expense
850

 
769

 
1,720

 
1,542

Equity in other comprehensive loss of equity method investee
(184
)
 
(264
)
 
(184
)
 
(264
)
Other comprehensive (loss) income
(5,038
)
 
897

 
(15,452
)
 
(1,804
)
Comprehensive (loss) income
(53,354
)
 
18,129

 
(55,672
)
 
30,163

Comprehensive loss (income) attributable to noncontrolling interests
1,085

 
(1,542
)
 
205

 
(2,871
)
Comprehensive (loss) income attributable to COPT
$
(52,269
)
 
$
16,587

 
$
(55,467
)
 
$
27,292

 
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 Loss
 
Noncontrolling
Interests
 
Total
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015 (94,531,512 common shares outstanding)
$
199,083

 
$
945

 
$
2,004,507

 
$
(657,172
)
 
$
(2,838
)
 
$
72,039

 
$
1,616,564

Conversion of common units to common shares (26,758 shares)
—

 
—

 
371

 
—

 
—

 
(371
)
 
—

Costs associated with common shares issued to the public
—

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Share-based compensation (141,089 shares issued, net of redemptions)
—

 
2

 
4,301

 
—

 
—

 
—

 
4,303

Redemption of vested equity awards
—

 
—

 
(1,492
)
 
—

 
—

 
—

 
(1,492
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(5
)
 
—

 
—

 
5

 
—

Comprehensive loss
—

 
—

 
—

 
(40,593
)
 
(14,874
)
 
(1,322
)
 
(56,789
)
Dividends
—

 
—

 
—

 
(59,175
)
 
—

 
—

 
(59,175
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(2,346
)
 
(2,346
)
Distributions to noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

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

 
—

 
(349
)
 
—

 
—

 
—

 
(349
)
Balance at June 30, 2016 (94,699,359 common shares outstanding)
$
199,083

 
$
947

 
$
2,007,328

 
$
(756,940
)
 
$
(17,712
)
 
$
67,997

 
$
1,500,703

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,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
260,984

 
$
240,538

Construction contract and other service revenues received
34,992

 
86,790

Property operating expenses paid
(87,005
)
 
(79,667
)
Construction contract and other service expenses paid
(24,303
)
 
(76,355
)
General, administrative, leasing, business development and land carry costs paid
(19,212
)
 
(20,121
)
Interest expense paid
(41,179
)
 
(32,375
)
Interest and other income received
128

 
4,055

Other
(5
)
 
(26
)
Net cash provided by operating activities
124,400

 
122,839

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(75,339
)
 
(117,498
)
Acquisitions of operating properties and related intangible assets
—

 
(137,125
)
Tenant improvements on operating properties
(14,862
)
 
(10,314
)
Other capital improvements on operating properties
(16,007
)
 
(8,372
)
Proceeds from dispositions of properties
5,448

 
17,424

Investing receivables payments received
—

 
5,114

Leasing costs paid
(3,434
)
 
(6,732
)
Other
(13
)
 
(3,538
)
Net cash used in investing activities
(104,207
)
 
(261,041
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
133,500

 
294,000

Unsecured senior notes
—

 
296,580

Other debt proceeds
45,000

 
50,000

Repayments of debt
 
 
 
Revolving Credit Facility
(119,000
)
 
(377,000
)
Scheduled principal amortization
(3,532
)
 
(3,319
)
Other debt repayments
(40,498
)
 
(50,630
)
Deferred financing costs paid
(528
)
 
(4,693
)
Net proceeds from issuance of common shares
(5
)
 
28,567

Common share dividends paid
(52,021
)
 
(51,642
)
Preferred share dividends paid
(7,105
)
 
(7,105
)
Distributions paid to noncontrolling interests in COPLP
(2,362
)
 
(2,461
)
Distributions paid to redeemable noncontrolling interests
(14,306
)
 
—

Redemption of vested equity awards
(1,492
)
 
(2,245
)
Other
(4,837
)
 
(853
)
Net cash (used in) provided by financing activities
(67,186
)
 
169,199

Net (decrease) increase in cash and cash equivalents
(46,993
)
 
30,997

Cash and cash equivalents
 

 
 

Beginning of period
60,310

 
6,077

End of period
$
13,317

 
$
37,074

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,
 
2016
 
2015
Reconciliation of net (loss) income to net cash provided by operating activities:
 

 
 

Net (loss) income
$
(40,220
)
 
$
31,967

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Depreciation and other amortization
68,901

 
66,404

Impairment losses
72,138

 
1,472

Losses on interest rate derivatives
1,870

 
—

Amortization of deferred financing costs and net debt discounts
2,998

 
2,618

Increase in deferred rent receivable
(1,276
)
 
(5,956
)
Gain on sales of real estate
—

 
(3,985
)
Share-based compensation
3,839

 
3,210

Other
(1,725
)
 
1,754

Operating changes in assets and liabilities:
 

 
 
(Increase) decrease in accounts receivable
(3,320
)
 
10,655

Increase in restricted cash and marketable securities
(389
)
 
(735
)
Decrease in prepaid expenses and other assets, net
11,303

 
6,518

Increase in accounts payable, accrued expenses and other liabilities
15,394

 
12,557

Decrease in rents received in advance and security deposits
(5,113
)
 
(3,640
)
Net cash provided by operating activities
$
124,400

 
$
122,839

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase in accrued capital improvements, leasing and other investing activity costs
$
1,604

 
$
15,927

Increase in property and redeemable noncontrolling interests in connection with property contributed in a joint venture
$
22,600

 
$
—

Decrease in redeemable noncontrolling interests and increase in other liabilities in connection with distribution payable to redeemable noncontrolling interest
$
6,675

 
$
—

Other liabilities assumed on acquisition of operating properties
$
—

 
$
5,265

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(15,268
)
 
$
(1,540
)
Equity in other comprehensive loss of an equity method investee
$
(184
)
 
$
(264
)
Dividends/distribution payable
$
30,219

 
$
30,178

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
371

 
$
2,122

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
5

 
$
519

Increase in redeemable noncontrolling interest and decrease in equity to carry redeemable noncontrolling interest at fair value
$
349

 
$
739

 
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,
2016
 
December 31,
2015
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,782,330

 
$
2,920,529

Projects in development or held for future development
387,397

 
429,219

Total properties, net
3,169,727

 
3,349,748

Assets held for sale, net
300,584

 
96,782

Cash and cash equivalents
13,317

 
60,310

Restricted cash and marketable securities
3,256

 
1,953

Accounts receivable (net of allowance for doubtful accounts of $745 and $1,525, respectively)
32,505

 
29,167

Deferred rent receivable (net of allowance of $422 and $1,962, respectively)
92,316

 
105,484

Intangible assets on real estate acquisitions, net
88,788

 
98,338

Deferred leasing costs (net of accumulated amortization of $63,768 and $66,364, respectively)
42,632

 
53,868

Investing receivables
50,162

 
47,875

Prepaid expenses and other assets, net
43,359

 
60,024

Total assets
$
3,836,646

 
$
3,903,549

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
2,094,486

 
$
2,077,752

Accounts payable and accrued expenses
92,848

 
91,755

Rents received in advance and security deposits
32,035

 
37,148

Distributions payable
30,219

 
30,178

Deferred revenue associated with operating leases
17,560

 
19,758

Interest rate derivatives
20,245

 
3,160

Other liabilities
26,077

 
8,016

Total liabilities
2,313,470

 
2,267,767

Commitments and contingencies (Note 15)


 


Redeemable noncontrolling interests
22,473

 
19,218

Equity:
 

 
 

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

 
 

Preferred units
 
 
 
General partner, preferred units outstanding of 7,431,667 at June 30, 2016 and December 31, 2015
199,083

 
199,083

Limited partner, 352,000 preferred units outstanding at June 30, 2016 and December 31, 2015
8,800

 
8,800

Common units, 94,699,359 and 94,531,512 held by the general partner and 3,650,633 and 3,677,391 held by limited partners at June 30, 2016 and December 31, 2015, respectively
1,299,571

 
1,400,745

Accumulated other comprehensive loss
(18,437
)
 
(2,985
)
Total Corporate Office Properties, L.P.’s equity
1,489,017

 
1,605,643

Noncontrolling interests in subsidiaries
11,686

 
10,921

Total equity
1,500,703

 
1,616,564

Total liabilities, redeemable noncontrolling interest and equity
$
3,836,646

 
$
3,903,549

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,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 
 
 
Rental revenue
$
107,524

 
$
105,508

 
$
212,906

 
$
203,746

Tenant recoveries and other real estate operations revenue
26,400

 
22,683

 
54,105

 
47,155

Construction contract and other service revenues
12,003

 
42,172

 
23,223

 
80,496

Total revenues
145,927

 
170,363

 
290,234

 
331,397

Expenses
 

 
 

 
 

 
 

Property operating expenses
48,141

 
46,418

 
100,016

 
97,099

Depreciation and amortization associated with real estate operations
33,248

 
33,786

 
67,775

 
65,385

Construction contract and other service expenses
11,478

 
41,293

 
22,172

 
78,791

Impairment losses
69,692

 
1,238

 
72,138

 
1,238

General, administrative and leasing expenses
8,026

 
7,534

 
19,909

 
15,425

Business development expenses and land carry costs
2,363

 
2,623

 
4,781

 
5,413

Total operating expenses
172,948

 
132,892

 
286,791

 
263,351

Operating (loss) income
(27,021
)
 
37,471

 
3,443

 
68,046

Interest expense
(22,639
)
 
(21,768
)
 
(46,198
)
 
(42,606
)
Interest and other income
1,330

 
1,242

 
2,486

 
2,525

Gain (loss) on early extinguishment of debt
5

 
(65
)
 
22

 
(68
)
(Loss) income from continuing operations before equity in income of unconsolidated entities and income taxes
(48,325
)
 
16,880

 
(40,247
)
 
27,897

Equity in income of unconsolidated entities
10

 
9

 
20

 
34

Income tax (expense) benefit
(1
)
 
(50
)
 
7

 
(105
)
(Loss) income from continuing operations
(48,316
)
 
16,839

 
(40,220
)
 
27,826

Discontinued operations
—

 
394

 
—

 
156

(Loss) income before gain on sales of real estate
(48,316
)
 
17,233

 
(40,220
)
 
27,982

Gain on sales of real estate
—

 
(1
)
 
—

 
3,985

Net (loss) income
(48,316
)
 
17,232

 
(40,220
)
 
31,967

Net income attributable to noncontrolling interests in consolidated entities
(911
)
 
(812
)
 
(1,890
)
 
(1,630
)
Net (loss) income attributable to COPLP
(49,227
)
 
16,420

 
(42,110
)
 
30,337

Preferred unit distributions
(3,718
)
 
(3,718
)
 
(7,435
)
 
(7,435
)
Net (loss) income attributable to COPLP common unitholders
$
(52,945
)
 
$
12,702

 
$
(49,545
)
 
$
22,902

Net (loss) income attributable to COPLP:
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(49,227
)
 
$
16,026

 
$
(42,110
)
 
$
30,178

Discontinued operations, net
—

 
394

 
—

 
159

Net (loss) income attributable to COPLP
$
(49,227
)
 
$
16,420

 
$
(42,110
)
 
$
30,337

Basic earnings per common unit (1)
 

 
 

 
 

 
 

(Loss) income from continuing operations
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net (loss) income attributable to COPLP common unitholders
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Diluted earnings per common unit (1)
 

 
 

 
 
 
 
(Loss) income from continuing operations
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net (loss) income attributable to COPLP common unitholders
$
(0.54
)
 
$
0.13

 
$
(0.51
)
 
$
0.23

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,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(48,316
)
 
$
17,232

 
$
(40,220
)
 
$
31,967

Other comprehensive (loss) income
 

 
 

 
 
 
 
Unrealized (loss) gain on interest rate derivatives
(5,704
)
 
392

 
(16,988
)
 
(3,082
)
Losses on interest rate derivatives included in interest expense
850

 
769

 
1,720

 
1,542

Equity in other comprehensive loss of equity method investee
(184
)
 
(264
)
 
(184
)
 
(264
)
Other comprehensive (loss) income
(5,038
)
 
897

 
(15,452
)
 
(1,804
)
Comprehensive (loss) income
(53,354
)
 
18,129

 
(55,672
)
 
30,163

Comprehensive income attributable to noncontrolling interests
(911
)
 
(872
)
 
(1,890
)
 
(1,745
)
Comprehensive (loss) income attributable to COPLP
$
(54,265
)
 
$
17,257

 
$
(57,562
)
 
$
28,418

 
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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,208,903

 
$
1,400,745

 
$
(2,985
)
 
$
10,921

 
$
1,616,564

Costs associated with common shares issued to the public
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
(5
)
Share-based compensation (units net of redemption)
—

 
—

 
—

 
—

 
141,089

 
4,303

 
—

 
—

 
4,303

Redemptions of vested equity awards
—

 
—

 
—

 
—

 
—

 
(1,492
)
 
—

 
—

 
(1,492
)
Comprehensive loss
—

 
330

 
—

 
7,105

 
—

 
(49,545
)
 
(15,452
)
 
773

 
(56,789
)
Distributions to owners of common and preferred units
—

 
(330
)
 
—

 
(7,105
)
 
—

 
(54,086
)
 
—

 
—

 
(61,521
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
(349
)
 
—

 
—

 
(349
)
Balance at June 30, 2016
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,349,992

 
$
1,299,571

 
$
(18,437
)
 
$
11,686

 
$
1,500,703

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,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
260,984

 
$
240,538

Construction contract and other service revenues received
34,992

 
86,790

Property operating expenses paid
(87,005
)
 
(79,667
)
Construction contract and other service expenses paid
(24,303
)
 
(76,355
)
General, administrative, leasing, business development and land carry costs paid
(19,212
)
 
(20,121
)
Interest expense paid
(41,179
)
 
(32,375
)
Interest and other income received
128

 
4,055

Other
(5
)
 
(26
)
Net cash provided by operating activities
124,400

 
122,839

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(75,339
)
 
(117,498
)
Acquisitions of operating properties and related intangible assets
—

 
(137,125
)
Tenant improvements on operating properties
(14,862
)
 
(10,314
)
Other capital improvements on operating properties
(16,007
)
 
(8,372
)
Proceeds from dispositions of properties
5,448

 
17,424

Investing receivables payments received
—

 
5,114

Leasing costs paid
(3,434
)
 
(6,732
)
Other
(13
)
 
(3,538
)
Net cash used in investing activities
(104,207
)
 
(261,041
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
133,500

 
294,000

Unsecured senior notes
—

 
296,580

Other debt proceeds
45,000

 
50,000

Repayments of debt
 
 
 
Revolving Credit Facility
(119,000
)
 
(377,000
)
Scheduled principal amortization
(3,532
)
 
(3,319
)
Other debt repayments
(40,498
)
 
(50,630
)
Deferred financing costs paid
(528
)
 
(4,693
)
Net proceeds from issuance of common units
(5
)
 
28,567

Common unit distributions paid
(54,053
)
 
(53,773
)
Preferred unit distributions paid
(7,435
)
 
(7,435
)
Redemption of vested equity awards
(1,492
)
 
(2,245
)
Distributions paid to redeemable noncontrolling interests
(14,306
)
 
—

Other
(4,837
)
 
(853
)
Net cash (used in) provided by financing activities
(67,186
)
 
169,199

Net (decrease) increase in cash and cash equivalents
(46,993
)
 
30,997

Cash and cash equivalents
 

 
 

Beginning of period
60,310

 
6,077

End of period
$
13,317

 
$
37,074

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,
 
2016
 
2015
Reconciliation of net (loss) income to net cash provided by operating activities:
 

 
 

Net (loss) income
$
(40,220
)
 
$
31,967

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Depreciation and other amortization
68,901

 
66,404

Impairment losses
72,138

 
1,472

Losses on interest rate derivatives
1,870

 
—

Amortization of deferred financing costs and net debt discounts
2,998

 
2,618

Increase in deferred rent receivable
(1,276
)
 
(5,956
)
Gain on sales of real estate
—

 
(3,985
)
Share-based compensation
3,839

 
3,210

Other
(1,725
)
 
1,754

Operating changes in assets and liabilities:
 

 
 
(Increase) decrease in accounts receivable
(3,320
)
 
10,655

Increase in restricted cash and marketable securities
(1,106
)
 
(744
)
Decrease in prepaid expenses and other assets, net
11,303

 
6,518

Increase in accounts payable, accrued expenses and other liabilities
16,111

 
12,566

Decrease in rents received in advance and security deposits
(5,113
)
 
(3,640
)
Net cash provided by operating activities
$
124,400

 
$
122,839

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase in accrued capital improvements, leasing and other investing activity costs
$
1,604

 
$
15,927

Increase in property and redeemable noncontrolling interests in connection with property contributed in a joint venture
$
22,600

 
$
—

Decrease in redeemable noncontrolling interests and increase in other liabilities in connection with distribution payable to redeemable noncontrolling interest
$
6,675

 
$
—

Other liabilities assumed on acquisition of operating properties
$
—

 
$
5,265

Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(15,268
)
 
$
(1,540
)
Equity in other comprehensive loss of an equity method investee
$
(184
)
 
$
(264
)
Distributions payable
$
30,219

 
$
30,178

Increase in redeemable noncontrolling interest and decrease in equity to carry redeemable noncontrolling interest at fair value
$
349

 
$
739

 
See accompanying notes to consolidated financial statements.



14


Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.    Organization
 
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support United States Government agencies and their contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable priority missions (“Defense/IT Locations”). We also own a complementary portfolio of traditional office properties located in select urban/urban-like submarkets within our regional footprint with durable Class-A office fundamentals and characteristics, as well as other properties supporting general commercial office tenants (“Regional Office”). As of June 30, 2016, our properties included the following:

•
181 operating office properties totaling 18.4 million square feet, including 11 triple-net leased, single-tenant data center properties;
•
12 office properties under, or contractually committed for, construction or redevelopment that we estimate will total approximately 1.5 million square feet upon completion, including two partially operational properties
included above and two properties completed but held for future lease to the United States Government;
•
1,379 acres of land we control that we believe could be developed into approximately 16.7 million square feet; and
•
a wholesale data center with 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 June 30, 2016, 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 intercompany balances and transactions in consolidation.

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

15


advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
 
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.

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, 2015 included in our 2015 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 2015 Annual Report on Form 10-K.

Recent Accounting Pronouncements

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2016 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. Our adoption of this guidance did not affect on our reported consolidated financial statements.

We adopted guidance issued by the FASB effective January 1, 2016 modifying the analysis that must be performed by us in determining whether we should consolidate certain types of legal entities. The guidance did not amend the existing disclosure requirements for VIEs or voting interest model entities.  The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, COPLP is considered a variable interest entity of COPT. As COPLP was already consolidated in the balance sheets of COPT, the identification of COPLP as a variable interest entity had no impact on the consolidated financial statements.  There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption.  In addition, there were no voting interest entities under prior existing guidance determined to be variable interest entities under the revised guidance.  

We adopted effective January 1, 2016 guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination.  The guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be either presented separately on the face of the statement of operations or disclosed in the notes. Our adoption of this guidance did not affect our reported consolidated financial statements.

In May 2014, the 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, 2018 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 February 2016, the FASB issued guidance that sets forth principles for the recognition, measurement, presentation and disclosure of leases.  This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. The resulting classification determines whether the lease expense is recognized based on an effective interest method or straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

In March 2016, the FASB issued guidance intended to simplify certain aspects of the accounting for employee based share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the consolidated statement of cash flows. This guidance is effective for annual periods beginning after

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December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are currently assessing the financial impact of this guidance on our consolidated financial statements.

3.     Fair Value Measurements

Recurring Fair Value Measurements

COPT has a non-qualified elective deferred compensation plan for certain members of our management team that permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on COPT’s consolidated balance sheet using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $5.0 million as of June 30, 2016, and is included in the accompanying COPT consolidated balance sheets in the line entitled restricted cash and marketable securities. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in other liabilities on COPT’s consolidated balance sheets. The assets of the plan and other marketable securities that we hold are classified in Level 1 of the fair value hierarchy. The liability associated with the plan is classified in Level 2 of the fair value hierarchy.

The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of June 30, 2016, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 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 maturities of these instruments.  As discussed in Note 6, 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 8, we estimated the fair value of our unsecured 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 as of 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 6 for investing receivables, Note 8 for debt and Note 9 for interest rate derivatives. 


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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 June 30, 2016 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: