UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q 
(Mark one)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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 October 21, 2016, 94,761,691 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
 
 
 
 
 

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 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 September 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)
 
September 30,
2016
 
December 31,
2015
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,632,069

 
$
2,920,529

Projects in development or held for future development
396,269

 
429,219

Total properties, net
3,028,338

 
3,349,748

Assets held for sale, net
161,454

 
96,782

Cash and cash equivalents
47,574

 
60,310

Restricted cash and marketable securities
7,583

 
7,716

Investment in unconsolidated real estate joint venture
25,721

 
—

Accounts receivable (net of allowance for doubtful accounts of $612 and $1,525, respectively)
25,790

 
29,167

Deferred rent receivable (net of allowance of $330 and $1,962, respectively)
87,526

 
105,484

Intangible assets on real estate acquisitions, net
84,081

 
98,338

Deferred leasing costs (net of accumulated amortization of $62,767 and $66,364, respectively)
41,470

 
53,868

Investing receivables
51,119

 
47,875

Prepaid expenses and other assets, net
73,538

 
60,024

Total assets
$
3,634,194

 
$
3,909,312

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,873,836

 
$
2,077,752

Accounts payable and accrued expenses
112,306

 
91,755

Rents received in advance and security deposits
28,740

 
37,148

Dividends and distributions payable
30,225

 
30,178

Deferred revenue associated with operating leases
9,898

 
19,758

Interest rate derivatives
17,272

 
3,160

Other liabilities
38,282

 
13,779

Total liabilities
2,110,559

 
2,273,530

Commitments and contingencies (Note 15)


 


Redeemable noncontrolling interests
22,848

 
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 September 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 94,764,786 at September 30, 2016 and 94,531,512 at December 31, 2015)
948

 
945

Additional paid-in capital
2,008,787

 
2,004,507

Cumulative distributions in excess of net income
(759,262
)
 
(657,172
)
Accumulated other comprehensive loss
(16,314
)
 
(2,838
)
Total Corporate Office Properties Trust’s shareholders’ equity
1,433,242

 
1,544,525

Noncontrolling interests in subsidiaries:
 

 
 

Common units in COPLP
46,757

 
52,359

Preferred units in COPLP
8,800

 
8,800

Other consolidated entities
11,988

 
10,880

Noncontrolling interests in subsidiaries
67,545

 
72,039

Total equity
1,500,787

 
1,616,564

Total liabilities, redeemable noncontrolling interest and equity
$
3,634,194

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 
 
 
Rental revenue
$
103,956

 
$
109,080

 
$
316,862

 
$
312,826

Tenant recoveries and other real estate operations revenue
26,998

 
24,606

 
81,103

 
71,761

Construction contract and other service revenues
11,149

 
17,058

 
34,372

 
97,554

Total revenues
142,103

 
150,744

 
432,337

 
482,141

Expenses
 

 
 

 
 

 
 

Property operating expenses
49,952

 
48,897

 
149,968

 
145,996

Depreciation and amortization associated with real estate operations
32,015

 
38,403

 
99,790

 
103,788

Construction contract and other service expenses
10,341

 
16,132

 
32,513

 
94,923

Impairment losses
27,699

 
2,307

 
99,837

 
3,545

General, administrative and leasing expenses
8,855

 
7,439

 
28,764

 
22,864

Business development expenses and land carry costs
1,716

 
5,573

 
6,497

 
10,986

Total operating expenses
130,578

 
118,751

 
417,369

 
382,102

Operating income
11,525

 
31,993

 
14,968

 
100,039

Interest expense
(18,301
)
 
(24,121
)
 
(64,499
)
 
(66,727
)
Interest and other income
1,391

 
692

 
3,877

 
3,217

(Loss) gain on early extinguishment of debt
(59
)
 
85,745

 
(37
)
 
85,677

(Loss) income from continuing operations before equity in income of unconsolidated entities and income taxes
(5,444
)
 
94,309

 
(45,691
)
 
122,206

Equity in income of unconsolidated entities
594

 
18

 
614

 
52

Income tax benefit (expense)
21

 
(48
)
 
28

 
(153
)
(Loss) income from continuing operations
(4,829
)
 
94,279

 
(45,049
)
 
122,105

Discontinued operations
—

 
—

 
—

 
156

(Loss) income before gain on sales of real estate
(4,829
)
 
94,279

 
(45,049
)
 
122,261

Gain on sales of real estate
34,101

 
15

 
34,101

 
4,000

Net income (loss)
29,272

 
94,294

 
(10,948
)
 
126,261

Net (income) loss attributable to noncontrolling interests:
 

 
 

 
 

 
 

Common units in COPLP
(901
)
 
(3,357
)
 
948

 
(4,231
)
Preferred units in COPLP
(165
)
 
(165
)
 
(495
)
 
(495
)
Other consolidated entities
(907
)
 
(972
)
 
(2,799
)
 
(2,599
)
Net income (loss) attributable to COPT
27,299

 
89,800

 
(13,294
)
 
118,936

Preferred share dividends
(3,552
)
 
(3,552
)
 
(10,657
)
 
(10,657
)
Net income (loss) attributable to COPT common shareholders
$
23,747

 
$
86,248

 
$
(23,951
)
 
$
108,279

Net income (loss) attributable to COPT:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
27,299

 
$
89,800

 
$
(13,294
)
 
$
118,783

Discontinued operations, net
—

 
—

 
—

 
153

Net income (loss) attributable to COPT
$
27,299

 
$
89,800

 
$
(13,294
)
 
$
118,936

Basic earnings per common share (1)
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to COPT common shareholders
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Diluted earnings per common share (1)
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to COPT common shareholders
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Dividends declared per common share
$
0.275

 
$
0.275

 
$
0.825

 
$
0.825

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

4


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
29,272

 
$
94,294

 
$
(10,948
)
 
$
126,261

Other comprehensive income (loss)
 

 
 

 
 

 
 

Unrealized gain (loss) on interest rate derivatives
407

 
(3,638
)
 
(16,581
)
 
(6,720
)
Losses on interest rate derivatives included in interest expense
1,043

 
915

 
2,763

 
2,457

Equity in other comprehensive loss of equity method investee
—

 
—

 
(184
)
 
(264
)
Other comprehensive income (loss)
1,450

 
(2,723
)
 
(14,002
)
 
(4,527
)
Comprehensive income (loss)
30,722

 
91,571

 
(24,950
)
 
121,734

Comprehensive income attributable to noncontrolling interests
(2,025
)
 
(4,453
)
 
(1,820
)
 
(7,324
)
Comprehensive income (loss) attributable to COPT
$
28,697

 
$
87,118

 
$
(26,770
)
 
$
114,410

 
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 (160,160 shares)
—

 
2

 
2,149

 
—

 
—

 
(2,151
)
 
—

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 (151,511 shares issued, net of redemptions)
—

 
1

 
5,599

 
—

 
—

 
—

 
5,600

Redemption of vested equity awards
—

 
—

 
(2,330
)
 
—

 
—

 
—

 
(2,330
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(591
)
 
—

 
—

 
591

 
—

Comprehensive income
—

 
—

 
—

 
118,936

 
(4,526
)
 
5,634

 
120,044

Dividends
—

 
—

 
—

 
(88,658
)
 
—

 
—

 
(88,658
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(3,530
)
 
(3,530
)
Distributions to noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
(47
)
 
(47
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
(599
)
 
—

 
—

 
—

 
(599
)
Balance at September 30, 2015 (94,533,670 common shares outstanding)
$
199,083

 
$
945

 
$
2,002,730

 
$
(686,986
)
 
$
(5,823
)
 
$
69,958

 
$
1,579,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (87,000 shares)
—

 
1

 
1,166

 
—

 
—

 
(1,167
)
 
—

Costs associated with common shares issued to the public
—

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Share-based compensation (146,274 shares issued, net of redemptions)
—

 
2

 
6,175

 
—

 
—

 
—

 
6,177

Redemption of vested equity awards
—

 
—

 
(2,179
)
 
—

 
—

 
—

 
(2,179
)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
—

 
—

 
(42
)
 
—

 
—

 
42

 
—

Comprehensive loss
—

 
—

 
—

 
(13,294
)
 
(13,476
)
 
141

 
(26,629
)
Dividends
—

 
—

 
—

 
(88,796
)
 
—

 
—

 
(88,796
)
Distributions to owners of common and preferred units in COPLP
—

 
—

 
—

 
—

 
—

 
(3,498
)
 
(3,498
)
Distributions to noncontrolling interests in other consolidated entities
—

 
—

 
—

 
—

 
—

 
(12
)
 
(12
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
(516
)
 
—

 
—

 
—

 
(516
)
Tax loss from share-based compensation
—

 
—

 
(319
)
 
—

 
—

 
—

 
(319
)
Balance at September 30, 2016 (94,764,786 common shares outstanding)
$
199,083

 
$
948

 
$
2,008,787

 
$
(759,262
)
 
$
(16,314
)
 
$
67,545

 
$
1,500,787

See accompanying notes to consolidated financial statements.

6


Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited) 
 
For the Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
391,511

 
$
373,607

Construction contract and other service revenues received
54,399

 
104,817

Property operating expenses paid
(154,203
)
 
(146,274
)
Construction contract and other service expenses paid
(33,169
)
 
(112,614
)
General, administrative, leasing, business development and land carry costs paid
(27,879
)
 
(29,620
)
Interest expense paid
(61,662
)
 
(46,278
)
Interest and other income received
472

 
4,130

Other
504

 
(26
)
Net cash provided by operating activities
169,973

 
147,742

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(121,297
)
 
(174,434
)
Acquisitions of operating properties and related intangible assets
—

 
(202,866
)
Tenant improvements on operating properties
(26,055
)
 
(18,129
)
Other capital improvements on operating properties
(22,063
)
 
(12,610
)
Proceeds from dispositions of properties
210,661

 
45,066

Proceeds from partial sale of properties, net of related debt
43,686

 
—

Investing receivables payments received
—

 
5,114

Leasing costs paid
(6,024
)
 
(8,603
)
Other
(991
)
 
(4,827
)
Net cash provided by (used in) investing activities
77,917

 
(371,289
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
362,500

 
422,000

Unsecured senior notes
—

 
296,580

Other debt proceeds
105,000

 
50,000

Repayments of debt
 
 
 
Revolving Credit Facility
(406,000
)
 
(418,000
)
Scheduled principal amortization
(4,454
)
 
(5,011
)
Other debt repayments
(203,056
)
 
(50,681
)
Deferred financing costs paid
(825
)
 
(5,377
)
Net proceeds from issuance of common shares
(46
)
 
28,567

Common share dividends paid
(78,072
)
 
(77,641
)
Preferred share dividends paid
(10,657
)
 
(10,657
)
Distributions paid to noncontrolling interests in COPLP
(3,476
)
 
(3,581
)
Distributions paid to redeemable noncontrolling interests
(14,329
)
 
—

Redemption of vested equity awards
(2,179
)
 
(2,330
)
Other
(5,032
)
 
(2,559
)
Net cash (used in) provided by financing activities
(260,626
)
 
221,310

Net decrease in cash and cash equivalents
(12,736
)
 
(2,237
)
Cash and cash equivalents
 

 
 

Beginning of period
60,310

 
6,077

End of period
$
47,574

 
$
3,840

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 Nine Months Ended September 30,
 
2016
 
2015
Reconciliation of net (loss) income to net cash provided by operating activities:
 

 
 

Net (loss) income
$
(10,948
)
 
$
126,261

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

 
 

Depreciation and other amortization
101,429

 
105,397

Impairment losses
99,797

 
3,779

Losses on interest rate derivatives
347

 
—

Amortization of deferred financing costs and net debt discounts
4,456

 
4,144

Increase in deferred rent receivable
(930
)
 
(11,939
)
Gain on sales of real estate
(34,101
)
 
(4,000
)
Share-based compensation
5,637

 
4,949

Loss (gain) on early extinguishment of debt
34

 
(86,075
)
Other
(2,761
)
 
1,922

Operating changes in assets and liabilities:
 

 
 
Decrease in accounts receivable
3,658

 
6,526

Decrease (increase) in restricted cash and marketable securities
18

 
(1,102
)
Increase in prepaid expenses and other assets, net
(19,778
)
 
(5,228
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
31,523

 
(655
)
(Decrease) increase in rents received in advance and security deposits
(8,408
)
 
3,763

Net cash provided by operating activities
$
169,973

 
$
147,742

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase (decrease) in accrued capital improvements, leasing and other investing activity costs
$
9,963

 
$
(11,722
)
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
$
6,683

 
$
—

Non-cash changes from partial sale of properties, net of debt:
 
 
 
Decrease in properties, net
$
(114,597
)
 
$
—

Increase in investment in unconsolidated real estate joint venture
$
25,680

 
$
—

Decrease in debt
$
59,534

 
$
—

Other net decreases in assets and liabilities
$
3,619

 
$
—

Debt assumed on acquisition of operating property
$
—

 
$
55,490

Other liabilities assumed on acquisition of operating properties
$
—

 
$
5,265

Decrease in property in connection with surrender of property in settlement of debt
$
—

 
$
(82,738
)
Decrease in debt in connection with surrender of property in settlement of debt
$
—

 
$
(150,000
)
Decrease in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests
$
(13,817
)
 
$
(4,263
)
Equity in other comprehensive loss of an equity method investee
$
(184
)
 
$
(264
)
Dividends/distribution payable
$
30,225

 
$
30,182

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
$
1,167

 
$
2,151

Adjustments to noncontrolling interests resulting from changes in COPLP ownership
$
42

 
$
591

Increase in redeemable noncontrolling interest and decrease in equity to carry redeemable noncontrolling interest at fair value
$
516

 
$
599

 
See accompanying notes to consolidated financial statements.


8




Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit data)
(unaudited)
 
September 30,
2016
 
December 31,
2015
Assets
 

 
 

Properties, net:
 

 
 

Operating properties, net
$
2,632,069

 
$
2,920,529

Projects in development or held for future development
396,269

 
429,219

Total properties, net
3,028,338

 
3,349,748

Assets held for sale, net
161,454

 
96,782

Cash and cash equivalents
47,574

 
60,310

Restricted cash and marketable securities
2,333

 
1,953

Investment in unconsolidated real estate joint venture
25,721

 
—

Accounts receivable (net of allowance for doubtful accounts of $612 and $1,525, respectively)
25,790

 
29,167

Deferred rent receivable (net of allowance of $330 and $1,962, respectively)
87,526

 
105,484

Intangible assets on real estate acquisitions, net
84,081

 
98,338

Deferred leasing costs (net of accumulated amortization of $62,767 and $66,364, respectively)
41,470

 
53,868

Investing receivables
51,119

 
47,875

Prepaid expenses and other assets, net
73,538

 
60,024

Total assets
$
3,628,944

 
$
3,903,549

Liabilities and equity
 

 
 

Liabilities:
 

 
 

Debt, net
$
1,873,836

 
$
2,077,752

Accounts payable and accrued expenses
112,306

 
91,755

Rents received in advance and security deposits
28,740

 
37,148

Distributions payable
30,225

 
30,178

Deferred revenue associated with operating leases
9,898

 
19,758

Interest rate derivatives
17,272

 
3,160

Other liabilities
33,032

 
8,016

Total liabilities
2,105,309

 
2,267,767

Commitments and contingencies (Note 15)


 


Redeemable noncontrolling interests
22,848

 
19,218

Equity:
 

 
 

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

 
 

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

 
199,083

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

 
8,800

Common units, 94,764,786 and 94,531,512 held by the general partner and 3,590,391 and 3,677,391 held by limited partners at September 30, 2016 and December 31, 2015, respectively
1,297,858

 
1,400,745

Accumulated other comprehensive loss
(16,987
)
 
(2,985
)
Total Corporate Office Properties, L.P.’s equity
1,488,754

 
1,605,643

Noncontrolling interests in subsidiaries
12,033

 
10,921

Total equity
1,500,787

 
1,616,564

Total liabilities, redeemable noncontrolling interest and equity
$
3,628,944

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 

 
 

 
 
 
 
Rental revenue
$
103,956

 
$
109,080

 
$
316,862

 
$
312,826

Tenant recoveries and other real estate operations revenue
26,998

 
24,606

 
81,103

 
71,761

Construction contract and other service revenues
11,149

 
17,058

 
34,372

 
97,554

Total revenues
142,103

 
150,744

 
432,337

 
482,141

Expenses
 

 
 

 
 

 
 

Property operating expenses
49,952

 
48,897

 
149,968

 
145,996

Depreciation and amortization associated with real estate operations
32,015

 
38,403

 
99,790

 
103,788

Construction contract and other service expenses
10,341

 
16,132

 
32,513

 
94,923

Impairment losses
27,699

 
2,307

 
99,837

 
3,545

General, administrative and leasing expenses
8,855

 
7,439

 
28,764

 
22,864

Business development expenses and land carry costs
1,716

 
5,573

 
6,497

 
10,986

Total operating expenses
130,578

 
118,751

 
417,369

 
382,102

Operating income
11,525

 
31,993

 
14,968

 
100,039

Interest expense
(18,301
)
 
(24,121
)
 
(64,499
)
 
(66,727
)
Interest and other income
1,391

 
692

 
3,877

 
3,217

(Loss) gain on early extinguishment of debt
(59
)
 
85,745

 
(37
)
 
85,677

(Loss) income from continuing operations before equity in income of unconsolidated entities and income taxes
(5,444
)
 
94,309

 
(45,691
)
 
122,206

Equity in income of unconsolidated entities
594

 
18

 
614

 
52

Income tax benefit (expense)
21

 
(48
)
 
28

 
(153
)
(Loss) income from continuing operations
(4,829
)
 
94,279

 
(45,049
)
 
122,105

Discontinued operations
—

 
—

 
—

 
156

(Loss) income before gain on sales of real estate
(4,829
)
 
94,279

 
(45,049
)
 
122,261

Gain on sales of real estate
34,101

 
15

 
34,101

 
4,000

Net income
29,272

 
94,294

 
(10,948
)
 
126,261

Net income attributable to noncontrolling interests in consolidated entities
(913
)
 
(972
)
 
(2,803
)
 
(2,602
)
Net income (loss) attributable to COPLP
28,359

 
93,322

 
(13,751
)
 
123,659

Preferred unit distributions
(3,717
)
 
(3,717
)
 
(11,152
)
 
(11,152
)
Net income (loss) attributable to COPLP common unitholders
$
24,642

 
$
89,605

 
$
(24,903
)
 
$
112,507

Net income (loss) attributable to COPLP:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
28,359

 
$
93,322

 
$
(13,751
)
 
$
123,500

Discontinued operations, net
—

 
—

 
—

 
159

Net income (loss) attributable to COPLP
$
28,359

 
$
93,322

 
$
(13,751
)
 
$
123,659

Basic earnings per common unit (1)
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to COPLP common unitholders
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Diluted earnings per common unit (1)
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Discontinued operations
0.00

 
0.00

 
0.00

 
0.00

Net income (loss) attributable to COPLP common unitholders
$
0.25

 
$
0.91

 
$
(0.26
)
 
$
1.15

Distributions declared per common unit
$
0.275

 
$
0.275

 
$
0.825

 
$
0.825

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

10


Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
29,272

 
$
94,294

 
$
(10,948
)
 
$
126,261

Other comprehensive income (loss)
 

 
 

 
 
 
 
Unrealized gain (loss) on interest rate derivatives
407

 
(3,638
)
 
(16,581
)
 
(6,720
)
Losses on interest rate derivatives included in interest expense
1,043

 
915

 
2,763

 
2,457

Equity in other comprehensive loss of equity method investee
—

 
—

 
(184
)
 
(264
)
Other comprehensive income (loss)
1,450

 
(2,723
)
 
(14,002
)
 
(4,527
)
Comprehensive income (loss)
30,722

 
91,571

 
(24,950
)
 
121,734

Comprehensive income attributable to noncontrolling interests
(913
)
 
(1,035
)
 
(2,803
)
 
(2,780
)
Comprehensive income (loss) attributable to COPLP
$
29,809

 
$
90,536

 
$
(27,753
)
 
$
118,954

 
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)
—

 
—

 
—

 
—

 
151,511

 
5,600

 
—

 
—

 
5,600

Redemptions of vested equity awards
—

 
—

 
—

 
—

 
—

 
(2,330
)
 
—

 
—

 
(2,330
)
Comprehensive income
—

 
495

 
—

 
10,657

 
—

 
112,507

 
(4,705
)
 
1,090

 
120,044

Distributions to owners of common and preferred units
—

 
(495
)
 
—

 
(10,657
)
 
—

 
(81,036
)
 
—

 
—

 
(92,188
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(47
)
 
(47
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(599
)
 
—

 
—

 
(599
)
Balance at September 30, 2015
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,211,061

 
$
1,367,904

 
$
(6,086
)
 
$
10,206

 
$
1,579,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
—

 
—

 
—

 
—

 
146,274

 
6,177

 
—

 
—

 
6,177

Redemptions of vested equity awards
—

 
—

 
—

 
—

 
—

 
(2,179
)
 
—

 
—

 
(2,179
)
Comprehensive loss
—

 
495

 
—

 
10,657

 
—

 
(24,903
)
 
(14,002
)
 
1,124

 
(26,629
)
Distributions to owners of common and preferred units
—

 
(495
)
 
—

 
(10,657
)
 
—

 
(81,142
)
 
—

 
—

 
(92,294
)
Distributions to noncontrolling interests in subsidiaries
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12
)
 
(12
)
Adjustment to arrive at fair value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(516
)
 
—

 
—

 
(516
)
Tax loss from share-based compensation
—

 
—

 
—

 
—

 
—

 
(319
)
 
—

 
—

 
(319
)
Balance at September 30, 2016
352,000

 
$
8,800

 
7,431,667

 
$
199,083

 
98,355,177

 
$
1,297,858

 
$
(16,987
)
 
$
12,033

 
$
1,500,787

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 Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Revenues from real estate operations received
$
391,511

 
$
373,607

Construction contract and other service revenues received
54,399

 
104,817

Property operating expenses paid
(154,203
)
 
(146,274
)
Construction contract and other service expenses paid
(33,169
)
 
(112,614
)
General, administrative, leasing, business development and land carry costs paid
(27,879
)
 
(29,620
)
Interest expense paid
(61,662
)
 
(46,278
)
Interest and other income received
472

 
4,130

Other
504

 
(26
)
Net cash provided by operating activities
169,973

 
147,742

Cash flows from investing activities
 

 
 

Construction, development and redevelopment
(121,297
)
 
(174,434
)
Acquisitions of operating properties and related intangible assets
—

 
(202,866
)
Tenant improvements on operating properties
(26,055
)
 
(18,129
)
Other capital improvements on operating properties
(22,063
)
 
(12,610
)
Proceeds from dispositions of properties
210,661

 
45,066

Proceeds from partial sale of properties, net of related debt
43,686

 
—

Investing receivables payments received
—

 
5,114

Leasing costs paid
(6,024
)
 
(8,603
)
Other
(991
)
 
(4,827
)
Net cash provided by (used in) investing activities
77,917

 
(371,289
)
Cash flows from financing activities
 

 
 

Proceeds from debt
 
 
 
Revolving Credit Facility
362,500

 
422,000

Unsecured senior notes
—

 
296,580

Other debt proceeds
105,000

 
50,000

Repayments of debt
 
 
 
Revolving Credit Facility
(406,000
)
 
(418,000
)
Scheduled principal amortization
(4,454
)
 
(5,011
)
Other debt repayments
(203,056
)
 
(50,681
)
Deferred financing costs paid
(825
)
 
(5,377
)
Net proceeds from issuance of common units
(46
)
 
28,567

Common unit distributions paid
(81,053
)
 
(80,727
)
Preferred unit distributions paid
(11,152
)
 
(11,152
)
Redemption of vested equity awards
(2,179
)
 
(2,330
)
Distributions paid to redeemable noncontrolling interests
(14,329
)
 
—

Other
(5,032
)
 
(2,559
)
Net cash (used in) provided by financing activities
(260,626
)
 
221,310

Net decrease in cash and cash equivalents
(12,736
)
 
(2,237
)
Cash and cash equivalents
 

 
 

Beginning of period
60,310

 
6,077

End of period
$
47,574

 
$
3,840

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 Nine Months Ended September 30,
 
2016
 
2015
Reconciliation of net (loss) income to net cash provided by operating activities:
 

 
 

Net (loss) income
$
(10,948
)
 
$
126,261

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

 
 

Depreciation and other amortization
101,429

 
105,397

Impairment losses
99,797

 
3,779

Losses on interest rate derivatives
347

 
—

Amortization of deferred financing costs and net debt discounts
4,456

 
4,144

Increase in deferred rent receivable
(930
)
 
(11,939
)
Gain on sales of real estate
(34,101
)
 
(4,000
)
Share-based compensation
5,637

 
4,949

Loss (gain) on early extinguishment of debt
34

 
(86,075
)
Other
(2,761
)
 
1,922

Operating changes in assets and liabilities:
 

 
 
Decrease in accounts receivable
3,658

 
6,526

Increase in restricted cash and marketable securities
(495
)
 
(1,485
)
Increase in prepaid expenses and other assets, net
(19,778
)
 
(5,228
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
32,036

 
(272
)
(Decrease) increase in rents received in advance and security deposits
(8,408
)
 
3,763

Net cash provided by operating activities
$
169,973

 
$
147,742

Supplemental schedule of non-cash investing and financing activities:
 

 
 

Increase (decrease) in accrued capital improvements, leasing and other investing activity costs
$
9,963

 
$
(11,722
)
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
$
6,683

 
$
—

Non-cash changes from partial sale of properties, net of debt:
 
 
 
Decrease in properties, net
$
(114,597
)
 
$
—

Increase in investment in unconsolidated real estate joint venture
$
25,680

 
$
—

Decrease in debt
$
59,534

 
$
—

Other net decreases in assets and liabilities
$
3,619

 
$
—

Debt assumed on acquisition of operating property
$
—

 
$
55,490

Other liabilities assumed on acquisition of operating properties
$
—

 
$
5,265

Decrease in property in connection with surrender of property in settlement of debt