EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following table contains selected financial data for each of the years
ended December 31, 1995 through 1999. Our selected financial data for the years
reported is not comparable due to our growth resulting from property
acquisitions and other changes in our organization. Since this information is
only a summary, you should refer to our consolidated financial statements and
the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information.
CORPORATE OFFICE PROPERTIES TRUST
(DOLLAR AND SHARE INFORMATION IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues
Rental revenue ............................ $ 70,101 $ 35,676 $ 6,122 $ 2,477 $ 2,436
Tenant recoveries and other revenue ....... 11,011 4,538 496 32 48
-------- -------- -------- -------- --------
Total revenues ........................ 81,112 40,214 6,618 2,509 2,484
-------- -------- -------- -------- --------
Expenses
Property operating ........................ 22,325 9,632 728 31 42
General and administrative ................ 3,204 1,890 533 372 336
Interest .................................. 21,808 12,207 2,855 1,246 1,267
Amortization of deferred financing costs .. 975 423 64 13 13
Depreciation and other amortization ....... 12,075 6,285 1,267 554 554
Reformation costs (1) ..................... -- 637 -- -- --
Termination of advisory agreement (2) ..... -- -- 1,353 -- --
-------- -------- -------- -------- --------
Total expenses ........................ 60,387 31,074 6,800 2,216 2,212
-------- -------- -------- -------- --------
Income (loss) before equity in income of
Service Companies, gain on sales of
rental properties, minority interests
and extraordinary item .................... 20,725 9,140 (182) 293 272
Equity in income of Service Companies ........ 198 139 -- -- --
-------- -------- -------- -------- --------
Income (loss) before gain on sales of
rental properties, minority interests
and extraordinary item ..................... 20,923 9,279 (182) 293 272
Gain on sales of rental properties ........... 1,140 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before minority interests
and extraordinary item ..................... 22,063 9,279 (182) 293 272
Minority interests ........................... (6,077) (4,583) (785) -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary item ...... 15,986 4,696 (967) 293 272
Extraordinary item - loss on early
retirement of debt ..................... (903) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ............................ 15,083 4,696 (967) 293 272
Preferred Share dividends .................... (2,854) (327) -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to Common
Shareholders .............................. $ 12,229 $ 4,369 $ (967) $ 293 $ 272
======== ======== ======== ======== ========
Basic earnings (loss) per Common Share
Income (loss) before extraordinary item .... $ 0.77 $ 0.48 $ (0.60) $ 0.21 $ 0.19
======== ======== ======== ======== ========
Net income (loss) .......................... $ 0.72 $ 0.48 $ (0.60) $ 0.21 $ 0.19
======== ======== ======== ======== ========
Diluted earnings (loss) per Common Share
Income (loss) before extraordinary item .... $ 0.70 $ 0.47 $ (0.60) $ 0.21 $ 0.19
======== ======== ======== ======== ========
Net income (loss)............, ............. $ 0.66 $ 0.47 $ (0.60) $ 0.21 $ 0.19
======== ======== ======== ======== ========
Weighted average shares outstanding - basic .. 16,955 9,099 1,601 1,420 1,420
Weighted average shares outstanding - diluted 22,574 19,237 1,601 1,420 1,420
1
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA (AS OF PERIOD END):
Commercial real estate properties, net ........ $ 696,489 $ 546,887 $ 188,625 $ 23,070 $ 23,624
Total assets .................................. $ 721,034 $ 563,677 $ 193,534 $ 24,197 $ 24,779
Mortgage and other loans payable .............. $ 399,627 $ 306,824 $ 114,375 $ 14,658 $ 14,916
Total liabilities ............................. $ 416,298 $ 317,700 $ 117,008 $ 15,026 $ 15,191
Minority interests ............................ $ 112,635 $ 77,196 $ 64,862 $ -- $ --
Shareholders' equity .......................... $ 192,101 $ 168,781 $ 11,664 $ 9,171 $ 9,588
Debt to market capitalization ................. 57.6% 58.7% 53.1% 66.3% 68.9%
Debt to undepreciated real estate assets ...... 55.9% 55.1% 59.6% 58.6% 59.6%
OTHER FINANCIAL DATA (FOR THE YEAR ENDED):
Cash flows provided by (used in):
Operating activities ....................... $ 32,296 $ 12,863 $ 3,216 $ 840 $ 678
Investing activities ....................... $(125,836) $(183,650) $ 973 $ 127 $ (551)
Financing activities ....................... $ 93,567 $ 169,741 $ (1,052) $ (967) $ (1,001)
Funds from operations - basic (3) ............. $ 27,428 $ 12,415 $ 1,718 $ 847 $ 827
Funds from operations - diluted (3) ........... $ 31,401 $ 16,154 $ 2,438 $ 847 $ 827
Adjusted funds from operations - diluted (4) .. $ 26,056 $ 13,831 $ 2,143 $ 780 $ 760
Cash dividends declared per Common Share ...... $ 0.74 $ 0.66 $ 0.50 $ 0.50 $ 0.50
Payout ratio (5) .............................. 64.31% 74.63% 74.20% 83.83% 85.85%
Interest coverage (6) ......................... 2.56 2.36 1.88 1.69 1.66
Ratio of earnings to combined fixed charges and
Preferred Share dividends .................. 1.48 1.33 0.75 1.23 1.21
PROPERTY DATA (AS OF PERIOD END):
Number of properties owned .................... 79 57 17 7 7
Total rentable square feet owned (in thousands) 6,076 4,977 1,852 370 370
(1) Reflects a non-recurring expense of $637 associated with our reformation as
a Maryland REIT during the first quarter of 1998. We have eliminated this
transaction in determining funds from operations since it is not expected
to have a continuing impact.
(2) Reflects a non-recurring expense of $1,353 associated with the termination
of an advisory agreement during the fourth quarter of 1997. We have
eliminated this transaction in determining funds from operations since it
is not expected to have a continuing impact.
(3) We consider Funds from Operations ("FFO") to be meaningful to investors as
a measure of the financial performance of an equity REIT when considered
with the financial data presented under generally accepted accounting
principles ("GAAP"). Under the National Association of Real Estate
Investment Trusts' ("NAREIT") definition, FFO means net income (loss)
computed using generally accepted accounting principles, excluding gains
(or losses) from debt restructuring and sales of property, plus real
estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Further, if the conversion
of securities into Common Shares is dilutive, we exclude any GAAP income
allocated to these securities in computing FFO. The FFO we present may not
be comparable to the FFO of other REITs since they may interpret the
current NAREIT definition of FFO differently or they may not use the
current NAREIT definition of FFO. FFO is not the same as cash generated
from operating activities or net income determined in accordance with GAAP.
FFO is not necessarily an indication of our cash flow available to fund
cash needs. Additionally, it should not be used as an alternative to net
income when evaluating our financial performance or to cash flow from
operating, investing and financing when evaluating our liquidity or ability
to make cash distributions or pay debt service.
(4) We compute adjusted funds from operations-diluted by subtracting
straight-line rent adjustments and recurring capital improvements from
funds from operations-diluted.
(5) We compute payout ratio by dividing total Common and convertible Preferred
Share dividends and total distributions reported for the year by funds from
operations-diluted.
(6) We compute interest coverage by dividing earnings before interest,
depreciation and amortization by interest expense. We compute earnings
before interest, depreciation and amortization by subtracting property
operating and general and administrative expenses from the sum of total
revenues and equity in income of Service Companies
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Over the last three years, we completed a significant number of
acquisitions. Our portfolio consisted of seven retail properties as of December
31, 1996. At that time, we relied on an external advisory agreement for all of
our management and administrative needs. In October 1997, we acquired ten office
properties and certain management and staffing functions in connection with a
transaction which led to the termination of our external advisory agreement.
During 1998, we acquired 38 office and two retail properties. Also during 1998,
we added management and other staffing functions to support the growth of our
portfolio and enhance our organizational infrastructure to more efficiently meet
tenant needs and further grow the Company. During 1999, we acquired 29 office
properties, completed construction of two new office properties and sold seven
retail properties and two office properties. We financed these acquisitions and
construction activities by using debt, proceeds from sales of properties and
issuing Common Shares, Preferred Shares and ownership interests in Corporate
Office Properties, L.P., our Operating Partnership. As of December 31, 1999, our
portfolio included 77 office and two retail properties. Due to these significant
changes in our real estate portfolio and operating structure, our results of
operations changed dramatically.
We conduct almost all of our operations through our Operating Partnership,
for which we are the managing general partner. The Operating Partnership owns
real estate both directly and through subsidiary partnerships and limited
liability companies. The Operating Partnership also owns the principal economic
interest and, collectively with our Chief Executive Officer and Chief Operating
Officer, 49.5% of the voting stock of Corporate Office Management, Inc.
("COMI"). We refer to COMI and its subsidiaries as the "Service Companies".
Interests in our Operating Partnership are in the form of Common and Preferred
Units. As of December 31, 1999, we owned approximately 60% of the outstanding
Common Units and approximately 70% of the outstanding Preferred Units. The
remaining Common and Preferred Units in our Operating Partnership were owned by
third parties, which included certain of our officers and Trustees.
In this section, we discuss our financial condition and results of
operations for 1999 and 1998. This section includes discussions on:
- - why various components of our Consolidated Statements of Operations changed
from 1998 to 1999 and from 1997 to 1998,
- - what our primary sources and uses of cash were in 1999,
- - how we raised cash for acquisitions and other capital expenditures during
1999,
- - how we intend to generate cash for future capital expenditures, and
- - the computation of our funds from operations for 1999, 1998 and 1997.
You should refer to our consolidated financial statements and selected
financial data table as you read this section.
This section contains "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995 that are based on our current
expectations, estimates and projections about future events and financial trends
affecting the financial condition of the business. Statements that are not
historical facts, including statements about our beliefs and expectations, are
forward-looking statements. These statements are not guarantees of future
performance, events or results and involve potential risks and uncertainties.
Accordingly, actual results may differ materially. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
Important facts that may affect these expectations, estimates or
projections include, but are not limited to: our ability to borrow on favorable
terms; general economic and business conditions, which will, among other things
affect office property demand and rents, tenant creditworthiness, interest rates
and financing availability; adverse changes in the real estate markets
including, among other things, competition with other companies; risks of real
estate acquisition and development; governmental actions and initiatives and
environmental requirements.
3
CORPORATE OFFICE PROPERTIES TRUST
OPERATING DATA VARIANCE ANALYSIS
(DOLLARS FOR THIS TABLE ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Years Ended December 31, For the Years Ended December 31,
--------------------------------------- --------------------------------------
1999 1998 Variance %Change 1998 1997 Variance %Change
-------- -------- -------- ------- -------- -------- -------- -------
Revenues
Rental revenue $ 70,101 $ 35,676 $ 34,425 96% $ 35,676 $ 6,122 $ 29,554 483%
Tenant recoveries and other revenue 11,011 4,538 6,473 143% 4,538 496 4,042 815%
-------- -------- -------- -------- -------- --------
Total revenues 81,112 40,214 40,898 102% 40,214 6,618 33,596 508%
-------- -------- -------- -------- -------- --------
Expenses
Property operating 22,325 9,632 12,693 132% 9,632 728 8,904 1,223%
General and administrative 3,204 1,890 1,314 70% 1,890 533 1,357 255%
Interest and amortization of deferred
financing costs 22,783 12,630 10,153 80% 12,630 2,919 9,711 333%
Depreciation and other amortization 12,075 6,285 5,790 92% 6,285 1,267 5,018 396%
Reformation costs -- 637 (637) (100%) 637 -- 637 N/A
Termination of advisory agreement -- -- -- -- -- 1,353 (1,353) (100%)
-------- -------- -------- -------- -------- --------
Total expenses 60,387 31,074 29,313 94% 31,074 6,800 24,274 357%
-------- -------- -------- -------- -------- --------
Income (loss) before equity in income of
Service Companies, gain on sales of
rental properties, minority interests
and extraordinary item 20,725 9,140 11,585 127% 9,140 (182) 9,322 N/A
Equity in income of Service Companies 198 139 59 42% 139 -- 139 N/A
Gain on sales of rental properties 1,140 -- 1,140 N/A -- -- -- N/A
-------- -------- -------- -------- -------- --------
Income (loss) before minority interests and
extraordinary item 22,063 9,279 12,784 138% 9,279 (182) 9,461 N/A
Minority interests (6,077) (4,583) (1,494) 33% (4,583) (785) (3,798) 484%
Extraordinary item - loss on early
retirement of debt (903) -- (903) N/A -- -- -- N/A
-------- -------- -------- -------- -------- --------
Net income (loss) 15,083 4,696 10,387 221% 4,696 (967) 5,663 N/A
Preferred Share dividends (2,854) (327) (2,527) 773% (327) -- (327) N/A
-------- -------- -------- -------- -------- --------
Net income (loss) available to
Common Shareholders $ 12,229 $ 4,369 $ 7,860 180% $ 4,369 $ (967) $ 5,336 N/A
======== ======== ======== ======== ======== ========
Basic earnings (loss) per Common Share
Income (loss) before extraordinary item $ 0.77 $ 0.48 $ 0.29 60% $ 0.48 $ (0.60) $ 1.08 N/A
Net income (loss) $ 0.72 $ 0.48 $ 0.24 50% $ 0.48 $ (0.60) $ 1.08 N/A
Diluted earnings (loss) per Common Share
Income (loss) before extraordinary item $ 0.70 $ 0.47 $ 0.23 49% $ 0.47 $ (0.60) $ 1.07 N/A
Net income (loss) $ 0.66 $ 0.47 $ 0.19 40% $ 0.47 $ (0.60) $ 1.07 N/A
4
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Our total revenues increased $40.9 million or 102%, of which $34.4 million
was generated by rental revenue and $6.5 million by tenant recoveries and other
revenue. Tenant recovery revenue includes payments from tenants as reimbursement
for property taxes, insurance and other property operating expenses. Our growth
in revenues was due primarily to our property acquisitions in 1998 and 1999,
although revenues increased $700,000 or 4% on the operations of office
properties owned since the beginning of 1998 and $2.0 million due to additional
interest and real estate service revenue earned in 1999, offset by a $1.6
million decrease due to the absence of revenues from Midwest region retail
properties sold during 1999.
Our total expenses increased $29.3 million or 94% due mostly to the effects
of the increases in property operating, interest expense and amortization of
deferred financing costs, depreciation and other amortization and general and
administrative expenses described below. However, our 1998 expenses also
included $637,000 in nonrecurring costs associated with our reformation into a
Maryland REIT in March 1998.
Our property operating expenses increased $12.7 million or 132% due mostly
to our property acquisitions, although property operating expenses increased
$268,000 or 7% on the operations of office properties owned since the beginning
of 1998. Our property operating expenses increased as a percentage of total
revenue from 24% to 28% due to more of our leases being written on a gross basis
(meaning we incur operating expenses) versus a net basis (meaning the tenant
incurs operating expenses directly). Our interest expense and amortization of
deferred financing costs increased $10.2 million or 80% due mostly to our
borrowings and assumptions of debt needed to finance property acquisitions which
amount includes a decrease of $724,000 attributable to our Midwest region retail
property sales. Our depreciation and other amortization expense increased $5.8
million or 92% due mostly to our property acquisitions which amount includes a
decrease of $359,000 attributable to our Midwest region retail property sales.
Our general and administrative expenses increased $1.3 million or 70%. Much
of this increase is due to the management and other staffing functions added
during 1998 that were in place for all of 1999. Approximately $255,000 of this
increase is due to additional professional fees for audit, legal and tax
preparation required to support the increased complexity of our organization
resulting from our growth and the creation of our Operating Partnership and the
Service Companies. This increase was partially offset by a $235,000 decrease in
costs expensed in exploring possible acquisitions that did not occur. Our
general and administrative expenses decreased as a percentage of total revenue
from 4.7% to 4.0%.
Our income before minority interests and extraordinary item also includes
the gain we realized on the sale of six of our retail properties in 1999 and a
$59,000 increase in our equity in the income of the Service Companies. These
Service Companies are not included as consolidated subsidiaries in our financial
statements.
As a result of the above factors, our income before minority interests and
extraordinary item increased by $12.8 million or 138%. The amounts reported for
minority interests on our Consolidated Statements of Operations represent
primarily the portion of the Operating Partnership's net income not allocated to
us. Our income allocation to minority interests increased $1.5 million or 33%
due to the increase in the Operating Partnership's net income. However, the
percentage of income allocated to minority interests decreased due to a higher
weighted average ownership of the Operating Partnership by us during the year.
Our net income available to Common Shareholders increased $7.9 million or
180% due to the factors discussed above, partially offset by a $903,000 loss on
the early retirement of debt and a $2.5 million increase in Preferred Share
dividends due to the Series A Cumulative Convertible Preferred Shares of
beneficial interest ("Series A Preferred Shares") issued in 1998 that were in
place for the entire year and the Series B Cumulative Redeemable Preferred
Shares of beneficial interest ("Series B Preferred Shares") issued in 1999. Our
diluted
5
earnings per Common Share on net income increased $0.19 per share or 40% due to
the effect of the increase in net income being proportionately greater than the
dilutive effects of issuing additional Common Shares and securities that are
convertible into our Common Shares.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997:
Our total revenues increased $33.6 million or 508%, of which $29.6 million
was generated by rental revenue and $4.0 million by tenant recoveries and other
revenue. Our growth in revenues was due primarily to our property acquisitions
in 1998 and the impact of a full year of operations for the properties we
acquired in October 1997.
Our total expenses increased $24.3 million or 357% due mostly to the
effects of the increases in property operating expenses and depreciation and
amortization, interest expense and amortization of deferred financing costs and
general and administrative expenses described below. In addition to these items,
our 1998 expenses included $637,000 in costs associated with our reformation
into a Maryland REIT in March 1998. Our 1997 expenses included $1.4 million in
costs to terminate the external advisory agreement.
Our property operating expenses increased $8.9 million or 1,223% and our
depreciation and other amortization increased $5.0 million or 396% due primarily
to our property acquisitions. Our interest expense and amortization of deferred
financing costs increased $9.7 million or 333% because of our borrowings and
assumptions of debt needed to finance property acquisitions.
Our general and administrative expenses increased $1.4 million or 255%. Of
this increase, $282,000 are costs we expensed in exploring possible property
acquisitions that did not occur. The remaining increase is due mostly to the
management and staffing functions added during 1997 being in place for the
entire year and the addition of new management and staffing functions during
1998.
Our 1998 income before minority interests also includes our equity in
income from the Service Companies, which were established in 1998.
As a result of the above factors, our income before minority interests
increased by $9.5 million. Our income allocation to minority interests increased
$3.8 million or 484%. Minority interests resulted from our creation of the
Operating Partnership in October 1997. The percentage of income allocated to
minority interests decreased during 1998 as our percentage ownership of the
Operating Partnership increased. The increase in income allocated to minority
interests is due to the effects of the minority interests that were outstanding
for all of 1998, offset by the decreased percentage of income allocated to
minority interests later in the year.
Our net income available to Common Shareholders increased $5.3 million due
to the factors discussed above partially offset by $327,000 in dividends
declared on our Series A Preferred Shares issued in 1998. Our diluted earnings
per Common Share increased $1.07 per share due to the effect of the increase in
net income being proportionately greater than the dilutive effects of the
issuance of our Common Shares and securities that are convertible into our
Common Shares.
LIQUIDITY AND CAPITAL RESOURCES
CAPITALIZATION
Cash provided from operations represented our primary source of liquidity
to fund distributions, pay debt service and fund working capital requirements.
We expect to continue to meet our short-term capital needs from property cash
flow, including all property expenses, general and administrative expenses,
interest expense, dividend and distribution requirements and recurring capital
improvements and leasing commissions. We do not anticipate borrowing to meet
these requirements.
6
We have financed our property acquisitions using a combination of borrowings
secured by our properties, proceeds from sales of properties and the equity
issuances of Common and Preferred Units in our Operating Partnership and Common
and Preferred Shares. We use our secured revolving credit facility with Deutsche
Banc Alex. Brown (the "Revolving Credit Facility") to finance much of our
investing and financing activities. We pay down our Revolving Credit Facility
using proceeds from long-term borrowings collateralized by our properties as
attractive financing conditions arise and equity issuances as attractive equity
market conditions arise. On December 28, 1999, we obtained a $50.0 million line
of credit with Prudential Securities Credit Corporation (the "Prudential Line of
Credit"). Amounts available under the Revolving Credit Facility and the
Prudential Line of Credit are computed based on 65% of the appraised value of
properties pledged as collateral. As of February 10, 2000, the maximum amount
available under our Revolving Credit Facility was $99.4 million, of which $37.9
million was unused. As of February 10, 2000, none of our properties were pledged
as collateral for the Prudential Line of Credit and therefore no borrowings were
available.
Our debt strategy favors long-term, fixed rate, secured debt over
variable-rate debt to minimize the risk of short-term increases in interest
rates. As of December 31, 1999, 70% of our mortgage and other loans payable
balance carried fixed interest rates.
As of December 31, 1999, we had $180.2 million in mortgage and other loans
payable maturing in 2000. On February 8, 2000 we extended the maturity of $57.5
million of these 2000 loan maturities to May 2001. Also included in the 2000
loan maturities is a $100.0 million loan that may be extended for two one-year
periods, subject to certain conditions; we expect to extend this loan for a
one-year period during 2000 and as of December 31, 1999 are in compliance with
the necessary conditions. We expect to repay the remaining balance of the 2000
loan maturities through a combination of borrowings from existing credit
facilities and new loans and cash from operations.
We are under contract to purchase two parcels of land contiguous to certain
of our existing operating properties. The purchase price will be determined
based upon the square footage of the area contained in the buildings to be
constructed on the land parcels. We have no other contractual obligations as of
December 31, 1999 for property acquisitions or material capital costs other than
the completion of the five construction projects and one redevelopment project
discussed below and tenant improvements and leasing costs in the ordinary course
of business.
We expect to meet our long-term capital needs through a combination of cash
from operations, additional borrowings from existing credit facilities and new
loans and additional equity issuances of Common Shares, Preferred Shares, Common
Units and/or Preferred Units. We have an effective Form S-3 shelf registration
statement on file with the Securities and Exchange Commission under which we may
sell up to $218.8 million in debt or equity securities depending upon our needs
and market conditions.
INVESTING AND FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 1999
During 1999, we acquired 29 operating properties, seven parcels of land and
a warehouse facility to undergo redevelopment for an aggregate acquisition cost
of $171.3 million. Of the 29 operating properties acquired, 16 are located in
the Baltimore/Washington Corridor, 12 in Pennsylvania and one in New Jersey. Of
the seven land parcels acquired, six are located in the Baltimore/Washington
Corridor and one in Pennsylvania. The warehouse facility is located in New
Jersey. The operating property acquisitions increased our rentable square
footage by 1.5 million. These acquisitions were financed by:
- - using $103.7 million in borrowings under our Revolving Credit Facility,
- - assuming $26.6 million in mortgage and other loans,
- - using $6.8 million in borrowings from other loans,
- - issuing 377,251 Common Units in our Operating Partnership,
- - issuing 974,662 Series C Preferred Units in our Operating Partnership,
- - applying a $1.6 million outstanding receivable balance towards a purchase,
and
7
- - using cash reserves for the balance.
During 1999, we completed construction on two office buildings totaling
202,000 square feet. These office buildings are located in Annapolis Junction,
Maryland and Columbia, Maryland. Costs incurred on these buildings through
December 31, 1999 totaled $23.2 million. We entered into $20.7 million in
construction loan facilities for these projects of which $16.8 million was
borrowed through December 31, 1999. We also completed an expansion project that
increased the rentable square footage of one of our properties by 6,350 square
feet.
As of December 31, 1999, we had construction underway on five new buildings
totaling approximately 407,000 square feet that were 49% pre-leased and
redevelopment underway on a 57,000 square foot existing building that was 100%
pre-leased. We entered into $19.8 million in construction loan facilities during
1999 to finance the construction of two of these projects. Borrowings under
these facilities totaled $7.9 million at December 31, 1999.
During 1999, we sold nine properties for $53.5 million, of which $20.9
million was used to pay off mortgage loans payable on the properties. We
realized a gain of $1.1 million on the sales of these properties, including the
value of the transaction involving Glacier (discussed below). Net proceeds from
these sales after property level debt repayments, transaction costs and
operating revenue and cost pro-rations totaled $31.2 million, $24.3 million of
which was used to repay a portion of our Revolving Credit Facility and the
remainder applied to working capital.
During 1999, we received $165.2 million in proceeds from new borrowing
arrangements. We pledged certain of our real estate assets as collateral to the
financial institutions for all of these borrowings. Proceeds from these loans
were used as follows:
- - $98.4 million to pay down our Revolving Credit Facility,
- - $33.5 million tofinance acquisitions,
- - $24.7 million to finance construction activities,
- - $3.6 million to repay other loans, and
- - the balance applied to cash reserves.
On December 28, 1999, we obtained a $50.0 million line of credit with
Prudential Securities Credit Corporation. No borrowings were made under this
loan during 1999.
On January 5, 1999, we entered into an interest rate swap agreement with
Deutsche Banc Alex. Brown. This swap agreement fixed our one-month LIBOR base to
5.085% per annum on a notional amount of $30.0 million. On October 20, 1999, we
received $492,000 from Deutsche Banc Alex. Brown in exchange for the termination
of this agreement that was recognized as a gain.
On December 21, 1999, our Operating Partnership issued 974,662 Series C
Preferred Units in connection with a property acquisition. Owners of these units
are entitled to a priority annual return equal to 9% of their liquidation
preference for the first ten years following issuance, 10.5% for the five
following years and 12% thereafter. These units are convertible, subject to
certain restrictions, commencing December 21, 2000 into Common Units in the
Operating Partnership on the basis of 2.381 Common Units for each Series C
Preferred Unit, plus any accrued return. The Common Units would then be
exchangeable for Common Shares, subject to certain conditions. The Series C
Preferred Units also carry a liquidation preference of $25.00 per unit, plus any
accrued return, and may be redeemed for cash by the Operating Partnership at any
time after the tenth anniversary of their issuance.
In connection with an October 1997 acquisition, our Operating Partnership
issued 2.1 million preferred units (the "Initial Preferred Units"). These units
were converted into Common Units on the basis of 3.5714 Common Units for each
Initial Preferred Unit in October 1999. Prior to conversion, these units were
entitled to a priority annual return equal to 6.5% of their liquidation
preference.
8
We had a management agreement with Glacier Realty LLC ("Glacier"), a
company that was partially owned by one of our former Trustees. Under the
management agreement, Glacier was responsible for the management of our retail
properties for a base annual fee of $250,000 plus a percent of Average Invested
Assets (as defined in the management agreement). Glacier was also entitled to
fees upon our acquisition or sale of any net-leased retail real estate property,
a fee that increased in the event that all or substantially all of the
net-leased retail real estate properties were sold. The management agreement,
entered into on October 14, 1997, had a term of five years. A fee was also due
in the event that the management agreement was terminated or not renewed. On
March 19, 1999, our Operating Partnership issued 200,000 Common Units in
exchange for all of the ownership interests in Glacier. For accounting purposes,
we recorded the value of this transaction against the gain on the sale of our
retail properties in the Midwest region of the United States.
In July 1999, we completed the sale of 1,250,000 Series B Preferred Shares
to the public at a price of $25.00 per share. These shares are nonvoting (except
in limited circumstances) and are redeemable for cash at $25.00 per share plus
accrued and unpaid dividends at our option on or after July 15, 2004. Holders of
these shares are entitled to cumulative dividends, payable quarterly (as and if
declared by the Board of Trustees). Dividends accrue from the date of issue at
the annual rate of $2.50 per share, which is equal to 10% of the $25.00 per
share redemption price. We contributed the net proceeds to our Operating
Partnership in exchange for 1,250,000 Series B Preferred Units. Our Operating
Partnership used most of the proceeds to pay down our Revolving Credit Facility.
The Series B Preferred Units carry terms that are substantially the same as the
Series B Preferred Shares.
On August 4, 1999, 372,295 Common Units in our Operating Partnership were
converted into Common Shares.
On December 16, 1999, we issued 471,875 Common Shares subject to forfeiture
restrictions to certain officers. The forfeiture restrictions of specified
percentages of these shares lapse annually through 2004 upon the Company's
attainment of defined earnings or shareholder return growth targets. These
shares may not be sold, transferred or encumbered while the forfeiture
restrictions are in place. Forfeiture restrictions on 8,593 of these shares
lapsed during 1999.
INVESTING AND FINANCING ACTIVITIES SUBSEQUENT TO THE YEAR ENDED DECEMBER 31,
1999
On February 10, 2000, we entered into a $6.9 million construction loan
facility with Summit Bank to finance the redevelopment of a 57,000 square foot
warehouse facility into office space. This loan bears interest at LIBOR plus
1.75%. The loan matures on February 28, 2001 and may be extended for a two-year
period, subject to certain conditions.
STATEMENT OF CASH FLOWS
We generated net cash flow from operating activities of $32.3 million for
the year ended December 31, 1999, an increase of $19.4 million from the year
ended December 31, 1998. Our increase in cash flows from operating activities is
due mostly to income generated from our newly acquired properties. Our net cash
used in investing activities for the year ended December 31, 1999 decreased
$57.8 million from the year ended December 31, 1998 due mostly to $31.2 million
in proceeds generated from sales of rental properties and a $27.9 million
decrease in cash outlays associated with purchases of and improvements to real
estate properties. Our net cash provided by financing activities for the year
ended December 31, 1999 decreased $76.2 million from the year ended December 31,
1998 due primarily to $151.2 million in additional repayments of mortgage and
other loans payable, $72.2 million from the issuance of Common Shares in the
prior year and $11.4 million in additional dividend and distribution payments,
offset by $130.7 million in additional proceeds from mortgage and other loans
payable and $29.4 million from the issuance of our Series B Preferred Shares.
9
FUNDS FROM OPERATIONS
We consider Funds from Operations ("FFO") to be meaningful to investors as
a measure of the financial performance of an equity REIT when considered with
the financial data presented under generally accepted accounting principles
("GAAP"). Under the National Association of Real Estate Investment Trusts'
("NAREIT") definition, FFO means net income (loss) computed using generally
accepted accounting principles, excluding gains (or losses) from debt
restructuring and sales of property, plus real estate-related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Further, if the conversion of securities into common shares is
dilutive, we exclude any GAAP income allocated to these securities in computing
FFO. The FFO we present may not be comparable to the FFO of other REITs since
they may interpret the current NAREIT definition of FFO differently or they may
not use the current NAREIT definition of FFO. FFO is not the same as cash
generated from operating activities or net income determined in accordance with
GAAP. FFO is not necessarily an indication of our cash flow available to fund
cash needs. Additionally, it should not be used as an alternative to net income
when evaluating our financial performance or to cash flow from operating,
investing and financing when evaluating our liquidity or ability to make cash
distributions or pay debt service. Our FFO for 1999, 1998 and 1997 are
summarized in the following table.
10
For the years ended December 31,
--------------------------------
(Dollars and shares in thousands)
1999 1998 1997
---- ---- ----
Income (loss) before minority interests and
extraordinary item ................................ $ 22,063 $ 9,279 $ (182)
Add: Real estate related depreciation and
amortization ...................................... 11,987 6,238 1,267
Add: Nonrecurring charges
Reformation costs ................................. -- 637 --
Advisory Agreement termination cost ............... -- -- 1,353
Less: Preferred Unit distributions .................. (2,620) (3,412) (720)
Less: Preferred Share dividends ..................... (2,854) (327) --
Less: Minority interest in other consolidated
partnership ....................................... (8) -- --
Less: Gain on sales of rental properties ........... (1,140) -- --
-------- -------- --------
Funds from operations ............................... 27,428 12,415 1,718
Add: Preferred Unit distributions .................. 2,620 3,412 720
Add: Convertible Preferred Share dividends ......... 1,353 327 --
-------- -------- --------
Funds from operations assuming conversion of share
options, Preferred Units and Preferred Shares ..... 31,401 16,154 2,438
Less: Straight line rent adjustments ............... (2,766) (1,785) (295)
Less: Recurring capital improvements ............... (2,579) (538) --
-------- -------- --------
Adjusted funds from operations assuming conversion of
share options, Preferred Units and Preferred Shares $ 26,056 $ 13,831 $ 2,143
======== ======== ========
Weighted average Common Shares ...................... 16,955 9,099 1,601
Conversion of weighted average Common Units ......... 4,883 2,614 552
-------- -------- --------
Weighted average Common Shares/Units ................ 21,838 11,713 2,153
Assumed conversion of share options ................. 9 24 --
Conversion of weighted average Preferred Shares ..... 1,845 449 --
Conversion of weighted average Preferred Units ...... 5,680 7,500 1,602
-------- -------- --------
Weighted average Common Shares/Units assuming
conversion of share options, Preferred Units and
Preferred Shares .................................. 29,372 19,686 3,755
-------- -------- --------
INFLATION
We have not been significantly impacted by inflation during the periods
presented in this report. This is mostly because of the relatively low inflation
rates in our markets. Most of our tenants are contractually obligated to pay
their share of operating expenses, thereby reducing exposure to increases in
such costs resulting from inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, the most predominant of which is
changes in interest rates. Increases in interest rates can result in increased
interest expense under our Revolving Credit Facility and our other mortgage
loans payable carrying variable interest rate terms. Increases in interest rates
can also result in increased interest expense when our mortgage loans payable
carrying fixed interest rate terms mature and need to be refinanced.
11
The following table sets forth our long-term debt obligations, principal
cash flows by scheduled maturity, weighted average interest rates and estimated
fair market value ("FMV") at December 31, 1999 (dollars in thousands):
For the Years Ended December 31,
----------------------------------------------------------------------------------------
2000(1) 2001(2) 2002 2003 2004 Thereafter Total
------- ------- ---- ---- ---- ---------- -----
Long term debt:
Fixed rate $ 102,905 $ 3,127 $ 3,365 $ 3,621 $ 29,449 $ 138,785 $ 281,252
Average interest rate 7.37% 7.37% 7.37% 7.37% 8.06% 7.73% 7.32%
Variable rate $ 77,340 $ 25,053 $ 11,769 $ 44 $ 47 $ 4,122 $ 118,375
Average interest rate 8.01% 8.21% 8.05% 7.97% 7.97% 7.97% 8.09%
(1) Includes $100.0 million maturity in October that may be extended for two
one-year terms, subject to certain conditions. Also includes $57.5 million
maturity in May that was extended for a one-year period on February 8,
2000.
(2) Includes $24.7 million for four construction loans maturing that may be
extended for a one-year period, subject to certain conditions.
The fair market value of our mortgage and other loans payable was $387,539
at December 31, 1999 and $309,451 at December 31, 1998.
Based on our variable rate debt balances, our interest expense would have
increased $727,000 in 1999 and $246,000 in 1998 if interest rates were 1%
higher. Interest expense in 1999 would have been more sensitive to a change in
interest rates than 1998 due to our Revolving Credit Facility, which originated
in May 1998, being in place for all of 1999 and other variable rate debt
obtained in the later portion of 1998 and 1999.
IMPACT OF THE YEAR 2000 ISSUE
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, this could result in a system failure or
miscalculations causing disruption of operations, including a temporary
inability to process transactions, prepare financial statements, send invoices
or engage in similar normal business activity.
We implemented a plan to identify and address possible implications of the
Year 2000 Issue on our accounting and other network software, property operating
systems, third party suppliers and revenue and cash flow. We also developed
contingency plans to be implemented in the event that undetected problems from
the Year 2000 Issue were to occur. Our plan was completed during the fourth
quarter of 1999.
Based on information currently available from our internal assessment, we
experienced no system failures or computer errors from the Year 2000 Issue and
do not expect such system failures or computer errors to occur in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. It requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure those instruments at fair value
unless certain conditions are met that allow the entity to designate certain
derivatives as a hedge. We have not yet determined the impact of the adoption of
this standard on our financial position or results of operations. The
statement's effective date has been delayed and will become effective in 2001.
Accordingly, we plan to adopt this standard beginning January 1, 2001.
12
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
December 31,
--------------------------------
1999 1998
---------- ----------
ASSETS
Commercial real estate properties:
Operating properties, net $ 662,664 $ 536,228
Projects under construction 33,825 10,659
- ----------------------------------------------------------------------- --------------------- ---------------------
Total commercial real estate properties, net 696,489 546,887
Cash and cash equivalents 2,376 2,349
Restricted cash 2,041 293
Accounts receivable, net 1,928 2,986
Investment in and advances to Service Companies 3,661 2,351
Deferred rent receivable 4,634 2,263
Deferred charges, net 7,525 3,542
Prepaid and other assets 2,380 3,006
- ----------------------------------------------------------------------- --------------------- ---------------------
TOTAL ASSETS $ 721,034 $ 563,677
- ----------------------------------------------------------------------- --------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage and other loans payable $ 399,627 $ 306,824
Accounts payable and accrued expenses 6,597 3,395
Rents received in advance and security deposits 3,776 2,789
Dividends/distributions payable 6,298 4,692
- ----------------------------------------------------------------------- --------------------- ---------------------
Total liabilities 416,298 317,700
- ----------------------------------------------------------------------- --------------------- ---------------------
Minority interests:
Preferred Units in the Operating Partnership 24,367 52,500
Common Units in the Operating Partnership 88,170 24,696
Other consolidated partnership 98 --
- ----------------------------------------------------------------------- --------------------- ---------------------
Total minority interests 112,635 77,196
- ----------------------------------------------------------------------- --------------------- ---------------------
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred Shares ($0.01 par value; 5,000,000 authorized);
1,025,000 designated as Series A Convertible Preferred Shares
of beneficial interest (984,308 shares issued and outstanding
with an aggregate liquidation preference of $24,608) 10 10
1,725,000 designated as Series B Cumulative Redeemable
Preferred Shares of beneficial interest (1,250,000 issued and
outstanding at December 31, 1999 with an aggregate
liquidation preference of $31,250) 12 --
Common Shares of beneficial interest ($0.01 par value;
45,000,000 authorized, shares issued and outstanding of
17,646,046 at December 31, 1999 and 16,801,876 at December
31, 1998) 176 168
Additional paid-in capital 202,867 175,802
Accumulated deficit (7,547) (7,199)
Value of unearned restricted Common Share grants (3,417) --
- ----------------------------------------------------------------------- --------------------- ---------------------
Total shareholders' equity 192,101 168,781
- ----------------------------------------------------------------------- --------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 721,034 $ 563,677
- ----------------------------------------------------------------------- --------------------- ---------------------
See accompanying notes to financial statements.
13
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31,
----------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
REVENUES
Rental revenue $ 70,101 $ 35,676 $ 6,122
Tenant recoveries and other revenue 11,011 4,538 496
- -------------------------------------------------------------------- --------------- -------------- ---------------
Total revenues 81,112 40,214 6,618
- -------------------------------------------------------------------- --------------- -------------- ---------------
EXPENSES
Property operating 22,325 9,632 728
General and administrative 3,204 1,890 533
Interest 21,808 12,207 2,855
Amortization of deferred financing costs 975 423 64
Depreciation and other amortization 12,075 6,285 1,267
Reformation costs -- 637 --
Termination of advisory agreement -- -- 1,353
- -------------------------------------------------------------------- --------------- -------------- ---------------
Total expenses 60,387 31,074 6,800
- -------------------------------------------------------------------- --------------- -------------- ---------------
Income (loss) before equity in income of Service Companies,
gain on sales of rental properties, minority interests and
extraordinary item 20,725 9,140 (182)
Equity in income of Service Companies 198 139 --
- -------------------------------------------------------------------- --------------- -------------- ---------------
Income (loss) before gain on sales of rental properties, minority
interests and extraordinary item 20,923 9,279 (182)
Gain on sales of rental properties 1,140 -- --
- -------------------------------------------------------------------- --------------- -------------- ---------------
Income (loss) before minority interests and extraordinary item 22,063 9,279 (182)
Minority interests
Common Units in the Operating Partnership (3,449) (1,171) (65)
Preferred Units in the Operating Partnership (2,620) (3,412) (720)
Other consolidated partnership (8) -- --
- -------------------------------------------------------------------- --------------- -------------- ---------------
Income (loss) before extraordinary item 15,986 4,696 (967)
Extraordinary item - loss on early retirement of debt (903) -- --
- -------------------------------------------------------------------- --------------- -------------- ---------------
NET INCOME (LOSS) 15,083 4,696 (967)
Preferred Share dividends (2,854) (327) --
- -------------------------------------------------------------------- --------------- -------------- ---------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $12,229 $ 4,369 $ (967)
- -------------------------------------------------------------------- --------------- -------------- ---------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $ 0.77 $ 0.48 $ (0.60)
Extraordinary item (0.05) -- --
- -------------------------------------------------------------------- --------------- -------------- ---------------
Net income (loss) $ 0.72 $ 0.48 $ (0.60)
- -------------------------------------------------------------------- --------------- -------------- ---------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $ 0.70 $ 0.47 $ (0.60)
Extraordinary item (0.04) -- --
- -------------------------------------------------------------------- --------------- -------------- ---------------
Net income (loss) $ 0.66 $ 0.47 $ (0.60)
- -------------------------------------------------------------------- --------------- -------------- ---------------
See accompanying notes to financial statements.
14
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Value of
Unearned
Additional Restricted
Preferred Common Paid-in Accumulated Common
Shares Shares Capital Deficit Share Grants Total
---------- --------- ---------- ----------- ------------ -----------
Balance at December 31, 1996 $ -- $ 14 $ 12,353 $ (3,196) $ -- $ 9,171
Common Shares issued in connection with
property acquisitions and advisory
agreement termination
(846,083 Shares) -- 9 4,267 -- -- 4,276
Net loss -- -- -- (967) -- (967)
Dividends -- -- -- (816) -- (816)
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 -- 23 16,620 (4,979) -- 11,664
Common Shares issued to the public
(7,500,000 Shares) -- 75 72,640 -- -- 72,715
Common Shares issued in connection with
acquisitions (7,030,793 Shares) -- 70 73,248 -- -- 73,318
Series A Convertible Preferred Shares
issued in connection with acquisitions
(984,308 Shares) 10 -- 24,598 -- -- 24,608
Adjustments to minority interests
resulting from changes in ownership of
Operating Partnership by COPT -- -- (11,331) -- -- (11,331)
Exercise of share options (5,000
Common Shares) -- -- 27 -- -- 27
Net income -- -- -- 4,696 -- 4,696
Dividends -- -- -- (6,916) -- (6,916)
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 10 168 175,802 (7,199) -- 168,781
Conversion of Common Units to Common
Shares (372,295 Shares) -- 4 3,137 -- -- 3,141
Series B Cumulative Redeemable Preferred
Shares issued to the public (1,250,000
Shares) 12 -- 29,422 -- -- 29,434
Restricted Common Share grants issued
(471,875 Shares) -- 4 3,476 -- (3,480) --
Value of earned restricted share grants -- -- -- -- 63 63
Adjustments to minority interests
resulting from changes in ownership of
Operating Partnership by COPT -- -- (8,970) -- -- (8,970)
Net income -- -- -- 15,083 -- 15,083
Dividends -- -- -- (15,431) -- (15,431)
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 $ 22 $ 176 $ 202,867 $ (7,547) $ (3,417) $ 192,101
- ---------------------------------------------- --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements.
15
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the years ended December 31,
------------------------------------------
1999 1998 1997
----------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 15,083 $ 4,696 $ (967)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Minority interests 6,077 4,583 785
Depreciation and other amortization 12,075 6,285 1,267
Amortization of deferred financing costs 975 423 64
Equity in income of Service Companies (198) (139) --
Gain on sales of rental properties (1,140) -- --
Extraordinary item - loss on early retirement of debt 903 -- --
Termination of advisory agreement -- -- 1,353
Increase in deferred rent receivable (2,766) (1,784) (295)
Increase in accounts receivable, restricted cash and prepaid
and other assets (1,690) (4,286) (158)
Increase in accounts payable, accrued expenses, rents received
in advance and security deposits 2,977 3,085 1,167
- ---------------------------------------------------------------------- -------------- -------------- ------------
Net cash provided by operating activities 32,296 12,863 3,216
- ---------------------------------------------------------------------- -------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of and additions to commercial real estate properties (152,749) (180,649) (506)
Proceeds from sales of rental properties 31,163 -- --
Cash proceeds received from acquisition of properties -- -- 1,000
Purchase of marketable securities -- -- (1,375)
Proceeds from maturity of marketable securities -- -- 1,854
Investments in and advances (to) from Service Companies (1,112) 288 --
Leasing commissions paid (3,275) (1,468) --
Change in prepaid and other assets 137 (1,821) --
- ---------------------------------------------------------------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities (125,836) (183,650) 973
- ---------------------------------------------------------------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage and other loans payable 248,639 117,962 --
Repayments of mortgage and other loans payable (161,417) (10,192) (283)
Deferred financing costs paid (3,064) (1,627) --
Net proceeds from issuance of Preferred Shares 29,434 -- --
Net proceeds (costs) from issuance of Common Shares 63 72,237 (59)
Dividends paid (14,528) (3,848) (710)
Distributions paid (5,560) (4,791) --
- ---------------------------------------------------------------------- -------------- -------------- --------------
Net cash provided by (used in) financing activities 93,567 169,741 (1,052)
- ---------------------------------------------------------------------- -------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 27 (1,046) 3,137
CASH AND CASH EQUIVALENTS
Beginning of year 2,349 3,395 258
- ---------------------------------------------------------------------- -------------- -------------- --------------
End of year $ 2,376 $ 2,349 $ 3,395
- ---------------------------------------------------------------------- -------------- -------------- --------------
See accompanying notes to financial statements.
16
CORPORATE OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION
Corporate Office Properties Trust ("COPT") and subsidiaries (the "Company")
is a fully integrated and self managed real estate investment trust ("REIT"). We
focus principally on the ownership, management, leasing, acquisition and
development of suburban office buildings located in select submarkets in the
Mid-Atlantic region of the United States. COPT is qualified as a REIT as defined
in the Internal Revenue Code and is the successor to a corporation organized in
1988. As of December 31, 1999, our portfolio included 77 office and two retail
properties.
We conduct almost all of our operations through our operating partnership,
Corporate Office Properties, L.P. (the "Operating Partnership"), for which we
are the managing general partner. The Operating Partnership owns real estate
both directly and through subsidiary partnerships and limited liability
companies ("LLCs"). The Operating Partnership also owns the principal economic
interest and, collectively with our Chief Executive Officer and Chief Operating
Officer, 49.5% of the voting stock of Corporate Office Management, Inc. ("COMI")
(together with its subsidiaries defined as the "Service Companies"). See Note 5
for a description of the activities of the Service Companies. A summary of our
Operating Partnership's forms of ownership and the percentage of those ownership
forms owned by COPT follows:
December 31,
-------------------
1999 1998
-------- ------
Common Units (see Note 3) 60% 85%
Series A Preferred Units (see Note 8) 100% 100%
Series B Preferred Units (see Note 8) 100% N/A
Series C Preferred Units (see Note 3) 0% N/A
Initial Preferred Units (see Note 3) N/A 0%
2. BASIS OF PRESENTATION
We use two different accounting methods to report our investments in
entities: the consolidation method and the equity method.
CONSOLIDATION METHOD
We use the consolidation method when we own most of the outstanding voting
interests in an entity and can control its operations. This means the accounts
of the entity are combined with our accounts. We eliminate balances and
transactions between companies when we consolidate these accounts. Our
consolidated financial statements include the accounts of:
- - COPT,
- - the Operating Partnership and its subsidiary partnerships and LLCs, and
- - Corporate Office Properties Holdings, Inc. (we own 100%).
EQUITY METHOD
We use the equity method of accounting to report our investment in the
Service Companies. Under the equity method, we report:
17
- - our ownership interest in the Service Companies' capital as an
investment on our Consolidated Balance Sheets and
- - our percentage share of the earnings or losses from the Service
Companies in our Consolidated Statements of Operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
We make estimates and assumptions when preparing financial statements under
generally accepted accounting principles. These estimates and assumptions affect
various matters, including:
- - our reported amounts of assets and liabilities in our Consolidated
Balance Sheets at the dates of the financial statements,
- - our disclosure of contingent assets and liabilities at the dates of the
financial statements, and
- - our reported amounts of revenues and expenses in our Consolidated
Statements of Operations during the reporting periods.
These estimates involve judgements with respect to, among other things,
future economic factors that are difficult to predict and are often beyond
management's control. As a result, actual amounts could differ from these
estimates.
COMMERCIAL REAL ESTATE PROPERTIES
We report commercial real estate properties at our depreciated cost. The
amounts reported for our commercial real estate properties include our costs of:
- - acquisitions,
- - development and construction,
- - building and land improvements, and
- - tenant improvements paid by us.
We capitalize interest expense, real estate taxes and other costs
associated with real estate under construction to the cost of the real estate.
We start depreciating newly constructed properties when we place them in
service.
We depreciate our assets evenly over their estimated useful lives as
follows:
- - Building and building improvements..........40 years
- - Land improvements...........................20 years
- - Tenant improvements.........................Related lease terms
- - Equipment and personal property.............3-10 years
We also apply the valuation requirements of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," to our real
estate assets. Under these requirements, we recognize an impairment loss on a
real estate asset if its undiscounted expected future cash flows are less than
its depreciated cost. We have not recognized impairment losses on our real
estate assets to date.
We expense property maintenance and repair costs when incurred.
18
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and liquid investments that
mature three months or less from when they are purchased. Cash equivalents are
reported at cost, which almost equals their fair value. We maintain our cash in
bank accounts which may exceed federally insured limits at times. We have not
experienced any losses in these accounts in the past and believe we are not
exposed to significant credit risk.
ACCOUNTS RECEIVABLE
Our accounts receivable are reported net of an allowance for bad debts of
$10 at December 31, 1999 and $50 at December 31, 1998.
REVENUE RECOGNITION
We recognize rental revenue evenly over the term of tenant leases. Many of
our leases include contractual rent increases. For these leases, we average the
rents over the lease term to evenly recognize revenues. We report revenues
recognized in advance of payments received as deferred rent receivable on our
Consolidated Balance Sheets. We report prepaid tenant rents as rents received in
advance on our Consolidated Balance Sheets.
Some of our retail tenants' leases provide for additional rental payments
if the tenants meet certain sales targets. We do not recognize additional rental
revenue under these leases in interim periods until the tenants meet the sales
targets.
We recognize tenant recovery income as revenue in the same period we incur
the related expenses. Tenant recovery income includes payments from tenants as
reimbursement for property taxes, insurance and other property operating
expenses.
MAJOR TENANTS
During 1999, 39% of our total rental revenue was earned from four major
tenants, including 30% from our two largest tenants, the United States
Government and Unisys Corporation. During 1998, 50% of our total rental revenue
was earned from four major tenants, including 28% from our single largest
tenant, Unisys Corporation. During 1997, 64% of our total rental revenue was
earned from four major tenants, each contributing 10% or more.
GEOGRAPHICAL CONCENTRATION
Our operations are geographically concentrated in the Mid-Atlantic region
of the United States. Our rental revenue derived from the Mid-Atlantic region of
the United States increased as a percentage of total rental revenue from 59% in
1997 to 99% in 1999.
DEFERRED CHARGES
We capitalize costs that we incur to obtain new tenant leases or extend
existing tenant leases. We amortize these costs evenly over the lease terms.
When tenant leases are terminated early, we expense any unamortized deferred
leasing costs associated with those leases.
We also capitalize costs for long-term financing arrangements and amortize
these costs over the related loan terms. We expense any unamortized loan costs
as an extraordinary item when loans are retired early.
MINORITY INTERESTS
As discussed previously, we consolidate the accounts of our Operating
Partnership into our financial statements. However, we do not own 100% of the
Operating Partnership. Our Operating Partnership also does not own 11% of one of
its subsidiary partnerships. The amounts reported for minority interests on our
Consolidated Balance Sheets represent the portion of these consolidated
entities' equity that we do not own.
19
The amounts reported for minority interests on our Consolidated Statements of
Operations represent the portion of these consolidated entities' net income not
allocated to us.
Common Units of the Operating Partnership ("Common Units") are
substantially similar economically to our Common Shares of beneficial interest
("Common Shares"). Common Units are also exchangeable into our Common Shares,
subject to certain conditions. The Operating Partnership issued its Common Units
to minority interests during each of the last three years as consideration for
acquisitions. We have accrued distributions related to Common Units owned by
minority interests of $1,983 at December 31, 1999 and $488 at December 31, 1998.
Our Operating Partnership issued 974,662 Series C Preferred Units in
connection with a December 1999 property acquisition. Owners of these units are
entitled to a priority annual return equal to 9% of their liquidation preference
for the first ten years following issuance, 10.5% for the five following years
and 12% thereafter. These units are convertible, subject to certain
restrictions, commencing December 21, 2000 into Common Units in the Operating
Partnership on the basis of 2.381 Common Units for each Series C Preferred Unit,
plus any accrued return. The Common Units would then be exchangeable for Common
Shares, subject to certain conditions. The Series C Preferred Units also carry a
liquidation preference of $25.00 per unit, plus any accrued return, and may be
redeemed for cash by the Operating Partnership at any time after the tenth
anniversary of their issuance. We have accrued distributions related to Series C
Preferred Units owned by minority interests of $61 at December 31, 1999.
Our Operating Partnership issued 2,100,000 preferred units in connection
with an October 1997 property acquisition (the "Initial Preferred Units"). These
units were converted into Common Units on the basis of 3.5714 Common Units for
each Initial Preferred Unit in October 1999. Prior to converting these units,
owners were entitled to a priority annual return equal to 6.5% of their
liquidation preference. We accrued distributions related to Initial Preferred
Units owned by minority interests of $853 at December 31, 1998.
INTEREST RATE SWAP AGREEMENTS
We recognize the interest rate differential to be paid or received on
interest rate swap agreements as an adjustment to interest expense. We amortize
gains and losses on terminated interest rate swaps accounted for as hedges over
the remaining lives of the related swaps; we recognize any unamortized gain or
loss when the underlying debt is terminated.
INCOME TAXES
We have elected to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code. As a REIT, we generally will not be subject to
Federal income tax if we distribute at least 95% of our REIT taxable income to
our shareholders and satisfy certain other requirements. As a result, we do not
report income tax expense on our Consolidated Statements of Operations. If we
fail to qualify as a REIT in any tax year, we will be subject to Federal income
tax on our taxable income at regular corporate rates.
20
For Federal income tax purposes, dividends to shareholders may be
characterized as ordinary income, capital gains or return of capital (which is
generally non-taxable). The characterization of dividends declared during each
of the last three years was as follows (unaudited):
1999 1998 1997
------- ------ ------
Ordinary income 79.3% 77.4% 45.0%
Long term capital gain 20.7% -- --
Return of capital -- 22.6% 55.0%
We are subject to certain state and local income and franchise taxes. The
expense associated with these state and local taxes is included in general and
administrative expense on our Consolidated Statements of Operations. We did not
separately state these amounts on our Consolidated Statements of Operations
because they are insignificant.
EARNINGS PER SHARE ("EPS")
We present both basic and diluted EPS. We compute basic EPS by dividing
income available to common shareholders by the weighted average number of Common
Shares outstanding during the year. Our computation of diluted EPS is similar
except that:
- - the denominator is increased to include the weighted average number of
potential additional Common Shares that would have been outstanding if
securities that are convertible into our Common Shares were converted
and
- - the numerator is adjusted to add back any convertible preferred
dividends and any other changes in income or loss that would result
from the assumed conversion into Common Shares.
Our computation of diluted EPS does not assume conversion of securities
into our Common Shares if conversion of those securities would increase our
diluted EPS in a given year. A summary of the numerator and denominator for
purposes of basic and diluted EPS calculations is as follows (dollars and shares
in thousands):
Numerator: 1999 1998 1997
-------- --------- ---------
Net income (loss) available to Common Shareholders $12,229 $4,369 $ (967)
Add: Extraordinary loss 903 -- --
-------- --------- ---------
Numerator for basic earnings (loss) per share before
Extraordinary item 13,132 4,369 (967)
Add: Minority interests - Initial Preferred Units 2,559 3,412 --
Add: Minority interests - Common Units -- 1,171 --
-------- --------- ---------
Numerator for diluted earnings (loss) per share before
extraordinary item $15,691 $ 8,952 $ (967)
Less: Extraordinary loss (903) -- --
-------- --------- ---------
Numerator for diluted earnings (loss) per share $14,788 $ 8,952 $ (967)
======== ========= =========
Denominator:
Weighted average Common Shares - basic 16,955 9,099 1,601
Assumed conversion of share options 9 24 --
Conversion of weighted average Initial Preferred Units 5,610 7,500 --
Conversion of weighted average Common Units -- 2,614 --
-------- --------- ---------
Weighted average Common Shares - diluted 22,574 19,237 1,601
======== ========= =========
Our diluted EPS computation for 1999 only assumes conversion of Initial
Preferred Units because conversions of the Series A Preferred Shares, Series C
Preferred Units and Common Units would increase
21
diluted EPS for that year. Our diluted EPS computation for 1998 does not assume
conversion of the Series A Preferred Shares since such conversions would
increase diluted EPS for that year. Our diluted EPS computation for 1997 does
not assume conversion of Initial Preferred Units or Common Units since these
conversions would increase diluted EPS for that year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include primarily notes receivable and mortgage
and other loans payable. The fair values of notes receivable were not materially
different from their carrying or contract values at December 31, 1999 and 1998.
See Note 7 for fair value of mortgage and other loans payable information.
RECLASSIFICATION
We reclassified certain amounts from prior periods to conform to the
current year presentation of our consolidated financial statements. These
reclassifications did not affect consolidated net income or shareholders'
equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure those
instruments at fair value unless certain conditions are met that allow the
entity to designate certain derivatives as a hedge. We have not yet determined
the impact of the adoption of this standard on our financial position or results
of operations. The statement's effective date has been delayed and will now
become effective in 2001. Accordingly, we plan to adopt this standard beginning
January 1, 2001.
4. COMMERCIAL REAL ESTATE PROPERTIES
Operating properties consisted of the following:
December 31,
-------------------------
1999 1998
---------- ----------
Land $135,641 $108,433
Buildings and improvements 544,967 436,932
Furniture, fixtures and equipment 335 332
---------- ----------
680,943 545,697
Less: accumulated depreciation (18,279) (9,469)
---------- ----------
$662,664 $536,228
---------- ----------
Projects we had under construction at December 31, 1999 consisted of the
following:
December 31,
-------------------------
1999 1998
---------- ----------
Land $ 13,158 $ 8,941
Construction in progress 20,667 1,718
--------- ---------
$ 33,825 $ 10,659
========= =========
22
1999 ACQUISITIONS
We acquired the following office properties during the year ended December
31, 1999:
Number
Date of of Total Rentable Initial
Project Name Location Acquisition Buildings Square Feet Cost
- ----------------------------- ---------------------- ----------- ---------- -------------- --------
Airport Square XXI Linthicum, MD 2/23/99 1 67,913 $ 6,751
Parkway Crossing Properties Hanover, MD 4/16/99 2 99,026 9,524
Commons Corporate Center (1) Hanover, MD 4/28/99 8 250,413 25,442
Princeton Executive Center Monmouth Junction, NJ 6/24/99 1 61,300 6,020
Gateway Central (2) Harrisburg, PA 8/12/99 3 55,726 5,960
Gateway International (3) Linthicum, MD 11/18/99 2 198,438 24,316
Corporate Gateway Center (4) Harrisburg, PA 12/3/99 9 417,138 40,082
Timonium Business Park (5) Timonium, MD 12/21/99 2 233,623 30,001
Brown's Wharf (5) Baltimore, MD 12/21/99 1 103,670 10,607
(1) Does not include $400 allocated to projects under construction and $50
relating to land under a ground lease.
(2) Acquired 89% ownership interest from an officer and Trustee of ours.
(3) Does not include $1,973 allocated to projects under construction.
(4) Acquired 49% interest on September 15, 1999. Acquired remaining 51%
interest on December 3, 1999 (discussed below).
(5) See discussion below.
In June 1999, we sold Brown's Wharf and assigned our rights to purchase
the Timonium Business Park to an unrelated third party. Simultaneously with
these transactions, we entered into a contract with the third party under which
the third party had the right to transfer these three office buildings to us on
or before March 31, 2000. In December 1999, we acquired Brown's Wharf and the
Timonium Business Park from the third party for $40,608 which is reflected in
the table above. Due to the nature of this agreement, we did not recognize a
gain or loss on the sale of Brown's Wharf. We also continued to depreciate
Brown's Wharf throughout 1999.
On September 15, 1999, we acquired a 49% interest in Corporate Gateway
General Partnership ("Corporate Gateway"), a newly organized joint venture, for
$2,952. On the same day, the joint venture acquired nine office buildings
located in Greater Harrisburg, Pennsylvania from First Industrial Realty Trust,
Inc., a publicly held real estate investment company where Jay Shidler, the
Chairman of our Board of Trustees, serves as Chairman of the Board of Directors.
Corporate Gateway acquired these buildings for $39,925 using cash and proceeds
from a $34,247 loan payable to our Operating Partnership. The loan carried an
interest rate of 10%. We accounted for our investment in Corporate Gateway at
that time using the equity method of accounting. On December 3, 1999, we
acquired the remaining 51% interest in Corporate Gateway. The recorded cost of
the nine office buildings upon completion of these transactions totaled $40,082
which is reflected in the table above.
We issued 974,662 Series C Preferred Units and 377,251 Common Units in our
Operating Partnership in connection with 1999 office property acquisitions.
We also acquired the following properties during the year ended December
31, 1999:
- - a parcel of land located in Annapolis Junction, Maryland that is
contiguous to certain of our existing operating properties for $2,908
on May 28, 1999 from Constellation (defined later in this note), owner
of 40% of our Common Shares and 100% of our Series A Convertible
Preferred Shares of beneficial interest ("Series A Preferred Shares")
at December 31, 1999. Constellation also controlled two of our nine
positions on our Board of Trustees at December 31, 1999.
23
- - a 57,000 square foot warehouse facility for redevelopment into office
space located on 8.5 acres of land that is contiguous to properties we
own in South Brunswick, New Jersey for $2,172 on July 9, 1999,
- - a parcel of land located in Linthicum, Maryland that is contiguous to
certain of our existing operating properties for $1,970 on August 1,
1999 from CDS (see Note 5),
- - a parcel of land located in Annapolis Junction, Maryland that is
contiguous to certain of our existing operating properties for $2,945
on October 21, 1999 from Constellation, and
- - a parcel of land located in Harrisburg, Pennsylvania that is contiguous
to certain of our existing operating properties for $191 on November 4,
1999 from an officer and Trustee of ours.
1999 DISPOSITIONS
We sold the following properties during the year ended December 31, 1999:
Property Date of Total Rentable Sales
Project Name Location Type (1) Sale Square Feet Price
- --------------------- ------------------ --------- --------- -------------- ---------
Cranberry Square Westminster, MD R 1/22/99 139,988 $ 18,900
Delafield Retail Delafield, WI R 2/26/99 52,800 3,303
Indianapolis Retail Indianapolis, IN R 3/09/99 67,541 5,735
Plymouth Retail Plymouth, MN R 3/09/99 67,510 5,465
Glendale Retail Glendale, WI R 5/04/99 36,248 1,900
Peru Retail Peru, IL R 6/16/99 60,232 3,750
Browns Wharf (2) Baltimore, MD O 6/24/99 103,670 10,575
Oconomowoc Retail Oconomowoc, WI R 6/25/99 39,272 2,575
Brandon One Riviera Beach, MD O 12/30/99 38,513 1,260
(1) "R" indicates retail property; "O" indicates office property.
(2) See discussion in portion of this note entitled "1999 Acquisitions".
1999 CONSTRUCTION IN PROGRESS
During 1999, we completed the construction of two office properties
totaling 202,219 square feet. The office buildings are located in Annapolis
Junction, Maryland and Columbia, Maryland. Costs incurred on these properties
through December 31, 1999 totaled $23,227. We also completed an expansion
project that increased the rentable square footage of one of our properties by
6,350 square feet. As of December 31, 1999 we had development underway on five
new buildings and redevelopment underway on an existing building.
24
1998 ACQUISITIONS
We acquired the following properties during the year ended December 31, 1998:
Date of Number of Total Rentable Initial
Project Name Location Acquisition Buildings Square Feet Cost
- ------------------------------ -------------------- --------------- ----------- -------------- ----------
Airport Square Linthicum, MD 4/30/98 12 812,616 $ 72,618
Fairfield Properties Fairfield, NJ 5/28/98 2 262,417 29,405
Constellation Properties(1)(2) Various Maryland 9/28/98 - 14 1,466,722 177,039
Locations 12/30/98
Riverwood Columbia, MD 10/13/98 1 160,000 20,333
Centerpoint Middlesex County, NJ 10/30/98 8 269,222 31,656
Gateway Properties(3) Columbia, MD 12/31/98 3 148,804 17,837
(1) Does not include $7,186 allocated to projects under construction.
(2) Acquisition included 12 office and 2 retail buildings.
(3) Does not include $1,263 allocated to projects under construction.
The acquisition of the Constellation Properties was part of a series of
transactions (the "Constellation Transaction") with affiliates of Constellation
Real Estate Group, Inc. (collectively, "Constellation"). As part of this
transaction, Constellation also granted us certain options and rights of first
refusal to purchase undeveloped land in three locations adjacent to certain of
the Constellation Properties. In addition, a significant number of persons
previously employed by Constellation Real Estate, Inc. ("CRE") who were engaged
in the operation of the Constellation Properties became employees of COMI and
CDS (defined in Note 5).
We issued 7,030,793 Common Shares, 984,308 Series A Preferred Shares and
148,381 Common Units in our Operating Partnership in connection with the
Constellation Transaction and other 1998 property acquisitions.
5. INVESTMENT IN AND ADVANCES TO SERVICE COMPANIES
On September 28, 1998, we acquired a 75% interest in Corporate Realty
Management, LLC ("CRM"), a real estate management services entity, and certain
equipment, furniture and other assets related to CRE for $2,500. Upon completion
of this transaction, we contributed these assets into COMI, an entity that
provides us with asset management, managerial, financial and legal support. In
exchange for this contribution of assets, we received 95% of the capital stock
in COMI, including 1% of the voting common stock, and a $2,005 note receivable
carrying an interest rate of 10% for one year and Prime plus 2% thereafter
through its maturity on September 28, 2003. Also on September 28, 1998, our
Chief Executive Officer and Chief Operating Officer collectively acquired 48.5%
of the voting common stock in COMI.
On September 28, 1998, COMI contributed certain equipment, furniture and
other assets into Corporate Development Services, LLC ("CDS"), a limited
liability company that provides construction and development services
predominantly to us. In exchange for this contribution of assets, COMI received
100% of the membership interests in CDS. In November 1998, CDS acquired a parcel
of land located near the Airport Square Properties. CDS acquired this property
for $1,162, using cash and proceeds from a $1,200 loan payable to our Operating
Partnership. After incurring costs to improve the land parcel, CDS sold the land
to us on August 1, 1999 for $1,970 and the loan was repaid.
On August 31, 1999, COMI acquired an 80% interest in Martin G. Knott and
Associates, LLC ("MGK"), a limited liability company that provides heating and
air conditioning maintenance and repair services. COMI acquired its interest in
MGK for $160.
25
We account for our investment in COMI and its subsidiaries, CRM, CDS and
MGK, using the equity method of accounting. Our investment in and advances to
(from) the Service Companies included the following:
December 31,
---------------------
1999 1998
---------- ---------
Notes receivable $ 2,005 $3,205
Equity investment in Service Companies 807 609
Advances receivable (payable) 849 (1,463)
---------- ---------
Total $ 3,661 $2,351
========== =========
6. DEFERRED CHARGES
Deferred charges consisted of the following:
December 31,
---------------------
1999 1998
---------- ---------
Deferred financing costs $ 4,592 $ 2,611
Deferred leasing costs 4,658 1,468
Deferred other 24 24
---------- ---------
9,274 4,103
Accumulated amortization (1,749) (561)
---------- ---------
Deferred charges, net $ 7,525 $ 3,542
========== =========
26
7. MORTGAGE AND OTHER LOANS PAYABLE
Mortgage and other loans payable consisted of the following:
December 31,
---------------------
1999 1998
-------- --------
Deutsche Banc Alex. Brown, Term Credit Facility, 7.50%, maturing October 2000 (1) $100,000 $100,000
Teachers Insurance and Annuity Association of America, 6.89%, maturing November 2008 83,470 84,808
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 59,801 --
Deutsche Banc Alex. Brown, Revolving Credit Facility, LIBOR + 1.75%, maturing May 2000 (2) 57,500 76,800
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 27,750 --
Bank of America, LIBOR + 1.75%, maturing June 2000 16,720 --
Allfirst Bank, LIBOR + 1.75%, maturing May 2002 12,290 --
Provident Bank of Maryland, LIBOR + 1.75%, maturing February 2001 (3) 8,642 --
Allfirst Bank, LIBOR + 1.6%, maturing February 2001 (4) 8,167 --
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 6,214 6,369
Allfirst Bank, LIBOR + 1.75%, maturing October 2001(5) 4,490 --
Mellon Bank, yield on 5-year Treasury Securities + 2%, maturing August 2005 (6) 4,304 --
Bank of Maryland, LIBOR + 1.75%, maturing October 2001 (7) 3,437 --
Provident Bank of Maryland, LIBOR + 1.75%, maturing September 2000 2,825 2,907
Seller mortgage, 8%, maturing May 2007 1,542 --
Bank of America, LIBOR + 2%, repaid February 1999 -- 9,877
Security Life of Denver, 7.5%, repaid January 1999 -- 9,513
Howard Research and Development Corporation, 8%, repaid January 1999 -- 1,996
Mercantile-Safe Deposit and Trust Co., Prime + 0.5%, repaid February 1999 -- 500
Other Mortgages - Retail Properties, remaining loan carries 8% fixed rate, maturing February 2014 2,475 14,054
-------- --------
$399,627 $306,824
======== ========
(1) May be extended for two one-year periods, subject to certain conditions.
(2) On February 8, 2000, the maturity date of this loan was extended to May
2001.
(3) Construction loan with a total commitment of $10,875. Loan may be extended
for a one-year period, subject to certain conditions.
(4) Construction loan with a total commitment of $9,825. Loan may be extended
for a one-year period, subject to certain conditions.
(5) Construction loan with a total commitment of $12,375. Loan may be extended
for a one-year period, subject to certain conditions.
(6) Construction loan with a total commitment of $4,549.
(7) Construction loan with a total commitment of $7,400. Loan may be extended
for a one-year period, subject to certain conditions.
In the case of each of our mortgage loans, we have pledged
certain of our real estate assets as collateral. We use the term
collateralized to describe this arrangement. As of December 31, 1999,
substantially all of our real estate properties were collateralized on
loan obligations. Certain of our mortgage loans require that we comply
with a number of restrictive financial covenants, including adjusted
consolidated net worth, minimum property interest coverage, minimum
property hedged interest coverage, minimum consolidated interest
coverage, maximum consolidated unhedged floating rate debt and maximum
consolidated total indebtedness.
27
Our mortgage loans mature on the following schedule (excluding extension
options):
2000.............................................. $180,245
2001.............................................. 28,180
2002.............................................. 15,134
2003.............................................. 3,665
2004.............................................. 29,496
Thereafter........................................ 142,907
--------
Total............................................. $399,627
========
The fair value of our mortgage and other loans payable was $387,539 at
December 31, 1999 and $309,451 at December 31, 1998.
Weighted average borrowings under our secured revolving credit facility
with Deutsche Banc Alex. Brown totaled $70,165 in 1999 and $30,972 in 1998. The
weighted average interest rate on this credit facility totaled 7.2% in 1999 and
8.0% in 1998.
We also have a $50.0 million line of credit with Prudential Securities
Credit Corporation. This loan bears an interest rate of LIBOR plus 1.5%, matures
December 28, 2000 and may be extended for a three month period, subject to
certain conditions. No borrowings were made under this loan during 1999.
Amounts available under our lines of credit with Deutsche Banc Alex. Brown
and Prudential Securities Credit Corporation are computed based on 65% of the
appraised value of properties pledged as collateral for these loans. As of
December 31, 1999, the maximum amount available under our lines of credit
totaled $99,353, of which $41,853 was unused.
We capitalized interest costs of $1,510 during 1999 and $77 during 1998.
We had mortgage loans payable that were retired early during 1999 using
proceeds from sales of properties and refinancings. We recognized a loss on
these early debt retirements of $903 during 1999.
8. SHAREHOLDERS' EQUITY
On January 1, 1998, COPT changed its name from Royale Investments, Inc. to
Corporate Office Properties Trust, Inc. On March 16, 1998, COPT was reformed as
a Maryland REIT and changed its name to Corporate Office Properties Trust (the
"Reformation"). In connection with the Reformation, we authorized 45,000,000
Common Shares and 5,000,000 Preferred Shares. Each share of common stock in
Corporate Office Properties Trust, Inc. was exchanged for one Common Share in
COPT.
PREFERRED SHARES
In connection with the Constellation Transaction in 1998, we issued 984,308
Series A Preferred Shares. These shares are nonvoting and are convertible after
two years of issuance, subject to certain conditions, into Common Shares on the
basis of 1.8748 Common Shares for each Series A Preferred Share. Holders of
these shares are entitled to cumulative dividends, payable quarterly (as and if
declared by the Board of Trustees). Dividends accrue from the date of issue at
the annual rate of $1.375 per share, which is equal to 5.5% of the $25.00 per
share liquidation preference of the shares. We contributed the assets we
received in the transaction to our Operating Partnership in exchange for 984,308
Series A Preferred Units. The Series A Preferred Units carry terms that are
substantially the same as the Series A Preferred Shares.
In July 1999, we completed the sale of 1,250,000 Series B Cumulative
Redeemable Preferred Shares of beneficial interest ("Series B Preferred Shares")
to the public at a price of $25.00 per share. These shares are nonvoting and are
redeemable for cash at $25.00 per share at our option on or after July 15, 2004.
Holders of
28
these shares are entitled to cumulative dividends, payable quarterly (as and if
declared by the Board of Trustees). Dividends accrue from the date of issue at
the annual rate of $2.50 per share, which is equal to 10% of the $25.00 per
share redemption price. We contributed the net proceeds to our Operating
Partnership in exchange for 1,250,000 Series B Preferred Units. The Series B
Preferred Units carry terms that are substantially the same as the Series B
Preferred Shares.
COMMON SHARES
In April 1998, we completed the sale of 7,500,000 Common Shares to the
public at a price of $10.50 per share and contributed the net proceeds to our
Operating Partnership in exchange for 7,500,000 Common Units. Our Operating
Partnership used the proceeds to fund acquisitions.
In connection with the Constellation Transaction in 1998, we issued
7,030,793 Common Shares and contributed the assets we received to our Operating
Partnership in exchange for 7,030,793 Common Units.
On August 4, 1999, 372,295 Common Units in our Operating Partnership were
converted to Common Shares.
On December 16, 1999, we issued 471,875 Common Shares subject to forfeiture
restrictions to certain officers. The forfeiture restrictions of specified
percentages of these shares lapse annually through 2004 upon the Company's
attainment of defined earnings or shareholder return growth targets. These
shares may not be sold, transferred or encumbered while the forfeiture
restrictions are in place. Forfeiture restrictions on 8,593 of these shares
lapsed during 1999.
9. SHARE OPTIONS
In 1993, we adopted a share option plan for directors under which we have
75,000 Common Shares reserved for issuance. These options become exercisable
beginning on the first anniversary of their grant and expire ten years after the
date of grant.
In March 1998, we adopted a share option plan for Trustees and employees of
the Service Companies under which we have 3,129,877 Common Shares reserved for
issuance. Trustee options under this plan become exercisable beginning on the
first anniversary of their grant. Service Company employees' options under this
plan become exercisable over a 3 to 5 year period. These options expire ten
years after the date of grant.
29
The following table summarizes share option transactions under the plans
described above:
Weighted
Range of Average
Exercise Exercise
Shares Price per Share Price per Share
----------- ----------------- -----------------
Outstanding at December 31, 1996 57,500 $5.38 - $10.38 $7.53
Granted - 1997 25,000 $5.25 - $7.59 $6.19
Forfeited - 1997 (7,500) $5.25 $5.25
----------
Outstanding at December 31, 1997 75,000 $5.25 - $10.38 $7.31
Granted - 1998 722,875 $9.25 - $12.25 $9.37
Forfeited - 1998 (6,050) $9.25 $9.25
Exercised - 1998 (5,000) $5.38 - $5.63 $5.51
----------
Outstanding at December 31, 1998 786,825 $5.25 - $12.25 $9.20
Granted - 1999 700,200 $7.38 - $9.25 $8.21
Forfeited - 1999 (59,050) $8.00 - $9.25 $8.48
1998 Options Repriced from (360,500) $9.25 $9.25
$9.25 to $8.00 during 1999 360,500 $8.00 $8.00
----------
Outstanding at December 31, 1999 1,427,975 $5.25 - $12.25 $8.46
==========
Available for future grant at December 31, 1999 1,771,902
----------
Exercisable at December 31, 1997 57,500 $5.38 - $10.38 $7.53
----------
Exercisable at December 31, 1998 70,000 $5.25 - $10.38 $7.77
----------
Exercisable at December 31, 1999 312,467 $5.25 - $12.25 (1) $8.73
==========
(1)32,500 of these options had an exercise price ranging from $5.25 to $5.63,
249,967 had an exercise price ranging from $7.59 to $10.38 and 30,000 had an
exercise price of $12.25.
The weighted average remaining contractual life of the options at December
31, 1999 was approximately nine years.
A summary of the weighted average grant-date fair value per option granted is as
follows:
1999 1998 1997
---- ---- ----
Weighted average grant-date fair value $ 0.75 $ 0.98 $ 1.25
Weighted average grant-date fair value - exercise price equals
Market price on grant-date $ 0.90 $ 2.03 $ 1.25
Weighted average grant-date fair value - exercise price exceeds
Market price on grant-date $ 0.46 $ 0.95 $ --
Weighted average grant-date fair value - exercise price less than
Market price on grant-date $ 0.98 $ -- $ --
We estimated the fair values using the Black-Scholes option-pricing model
using the following assumptions:
1999 1998 1997
---- ---- ----
Risk free interest rate 5.57% 4.65% 6.32%
Expected life - years 3.85 5.75 8.00
Expected volatility 27.00% 30.00% 34.00%
Expected dividend yield 8.40% 6.80% 6.70%
30
Our Service Companies do not record compensation expense for share option
grants unless the exercise price of such grants is less than the market price on
the option grant date. The following table summarizes results as if we elected
to account for share options based on Statement of Financial Accounting
Standards No. 123:
1999 1998 1997
---------- ---------- --------
Net income (loss) available to Common Shareholders, as reported $ 12,229 $ 4,369 $ (967)
Net income (loss) available to Common Shareholders, pro forma 11,947 3,660 (998)
Earnings (loss) per Common Share, as reported 0.72 0.48 (0.60)
Earnings (loss) per Common Share, pro forma 0.69 0.40 (0.61)
Diluted earnings (loss) per Common Share, as reported 0.66 0.47 (0.60)
Diluted earnings (loss) per Common Share, pro forma 0.63 0.40 (0.61)
10. RELATED PARTY TRANSACTIONS
MANAGEMENT
In September 1998, we entered into a contract with COMI under which COMI
provides asset management, managerial, financial and legal support. Under the
terms of this contract, we reimburse COMI for personnel and other
overhead-related expenses. We incurred management fees and related costs under
this contract of $3,072 in 1999 and $545 in 1998. We capitalized $430 of these
fees in 1999 and $73 in 1998.
In 1998, we entered into a management agreement with CRM under which CRM
provides property management services to most of our properties. Under the terms
of this arrangement, CRM is entitled to a fee equal to a percentage of revenue
from tenant billings (3% in 1999 and 3.5% in 1998). CRM is also entitled to
reimbursement for direct labor and out-of-pocket costs. We incurred property
management fees and related costs with CRM of $3,743 in 1999 and $557 in 1998.
We had a management agreement with Glacier Realty LLC ("Glacier"), a
company that was partially owned by one of our former Trustees. Under the
management agreement, Glacier was responsible for the management of our retail
properties for a base annual fee of $250 plus a percent of Average Invested
Assets (as defined in the management agreement). Glacier was also entitled to
fees upon our acquisition or sale of any net-leased retail real estate property,
a fee that increased in the event that all or substantially all of the
net-leased retail real estate properties were sold. The management agreement,
entered into on October 14, 1997, had a term of five years. A fee was also due
in the event that the management agreement was terminated or not renewed. We
incurred fees under this agreement of $63 in 1999, $250 in 1998 and $52 in 1997.
On March 19, 1999, our Operating Partnership issued 200,000 Common Units in
exchange for all of the ownership interests in Glacier. For accounting purposes,
we recorded $1,487, the value of this transaction, against the gain on the sale
of our retail properties in the Midwest region of the United States.
We also had a management agreement with a company for which one of our
Trustees serves on the Board of Directors. We incurred management fees and
related costs under this contract of $62 in 1999, $87 in 1998 and $22 in 1997.
Prior to 1998, we had an advisory agreement with Crown Advisors, Inc.
("Crown"), a company owned by one of our former Trustees. Under this agreement,
Crown acted as investment advisor to the Company and assisted in the management
of the day-to-day operations for a base annual fee of $250 plus incentives based
upon performance. We incurred advisory fees under this agreement of $198 in
1997. No performance fees were incurred under this agreement. In 1997, we issued
246,083 Common Shares (net of 27,646 Common Shares owned by Crown that were
retired) valued at $1,353 ($5.50 per share) in exchange for the assets of Crown,
which resulted in the termination of the advisory agreement with Crown. We
reported these costs of terminating the advisory agreement as an expense in our
Consolidated Statements of Operations.
31
CONSTRUCTION COSTS
In September 1998, we entered into a contract with CDS under which CDS
provides construction and development services. Under the terms of this
contract, we reimburse CDS for these services based on actual time incurred at
market rates. We incurred $1,274 in 1999 and $214 in 1998 under this contract, a
substantial portion of which was capitalized into the cost of the related
activities.
RESTRICTED SHARE GRANTS
During 1999, the Service Companies paid us $63 for the value of earned
restricted Common Shares granted to its employees.
RENTAL INCOME
We recognized revenue on office space leased to COMI and CRM of $420 in
1999 and $92 in 1998. We recognized revenue of $944 in 1999 and $256 in 1998 on
office space leased to Constellation.
INTEREST INCOME
We earned interest income on notes receivable from the Service Companies of
$253 in 1999 and $66 in 1998. We also earned interest income of $723 on notes
receivable from Corporate Gateway in 1999.
CONSTRUCTION FEES
During 1999, the Service Companies earned construction management fees of
$60 from an entity owned by an officer and Trustee of ours. During 1998, we
earned construction management fees of $60 from an entity owned by an officer
and Trustee of ours.
LEASING COMMISSION
During 1999, the Service Companies earned a leasing commission of $117
from an entity owned by an officer and Trustee of ours.
FEES EARNED FROM CONSTELLATION AND BGE
The Service Companies earned fees from a project consulting and management
agreement with Constellation of $1,100 in 1999 and $750 in 1998. The Service
Companies also earned fees and expense reimbursements of $500 in 1999 and $206
in 1998 under a property management agreement with Baltimore Gas and Electric
Company ("BGE"), an affiliate of Constellation.
FEES EARNED FROM REAL ESTATE JOINT VENTURE
During 1999, we earned an acquisition services fee of $213 from Corporate
Gateway.
UTILITIES EXPENSE
BGE provided utility services to most of our properties in the
Baltimore/Washington Corridor during 1999 and 1998.
ACQUISITIONS
See Note 4.
32
11. OPERATING LEASES
We lease our properties to tenants under operating leases with various
expiration dates extending to the year 2017. Gross minimum future rentals on
noncancelable leases at December 31, 1999 are as follows:
2000............................................... $ 80,401
2001............................................... 59,849
2002............................................... 51,618
2003............................................... 41,714
2004............................................... 32,728
Thereafter......................................... 94,782
---------
Total............................................ $ 361,092
=========
The amounts above do not include the cancelable portion of future rentals
on long term leases with the United States Government that are structured with
consecutive automatic one-year renewable terms.
12. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-------------------------------
1999 1998 1997
--------- --------- --------
Interest paid, net of capitalized interest $21,258 $ 12,876 $ 2,220
========= ========= ========
Supplemental schedule of non-cash investing and financing activities:
Debt repaid in connection with sales of rental properties $ 20,928 $ -- $ --
--------- --------- --------
Debt assumed in connection with acquisitions $ 26,620 $ 84,679 $100,000
--------- --------- --------
Increase in minority interests resulting from issuance of Preferred and
Common Units in connection with property acquisitions $ 28,309 $ 1,559 $ 65,070
--------- --------- --------
Increase in minority interests resulting from issuance of Common Units in
connection with Glacier transaction $ 1,487 $ -- $ --
--------- --------- --------
Increase in shareholders' equity resulting from issuance of Common Shares and
Preferred Shares in connection with acquisitions $ -- $ 98,431 $ 2,981
--------- --------- --------
Note receivable balance applied to cost of property acquisition $ 1,575 $ -- $ --
--------- --------- --------
Increase in accrued capital improvements $ 1,212 $ 1,742 $ --
========= ========= ========
Adjustments to minority interests resulting from changes in ownership of
Operating Partnership by COPT $ 8,970 $ 11,331 $ --
========= ========= ========
Dividends/distribution payable $ 6,298 $ 4,692 $ 1,276
========= ========= ========
Decrease in minority interests and increase in shareholders' equity in
connection with conversion of Common Units into Common Shares $ 3,141 $ -- $ --
========= ========= ========
Changes in minority interests in connection with conversion of Preferred
Units into Common Units $ 52,500 $ -- $ --
========= ========= ========
Changes in shareholders' equity in connection with issuance of restricted
Common Shares $ 3,480 $ -- $ --
========= ========= ========
33
13. INFORMATION BY BUSINESS SEGMENT
We have five segments: Baltimore/Washington Corridor office, Greater
Philadelphia office, Northern/Central New Jersey office, Greater Harrisburg
office and retail. Our office properties represent our core-business. We manage
our retail properties as a single segment since they are considered outside of
our core business.
The table below reports segment financial information. Our retail segment
is not separately reported since it does not meet the reporting thresholds. We
measure the performance of our segments based on total revenues less property
operating expenses. Accordingly, we do not report other expenses by segment in
the table below.
Baltimore/ Northern/
Washington Greater Central New Greater
Corridor Philadelphia Jersey Harrisburg
Office Office Office Office Other Total
-----------------------------------------------------------------------------
Year Ended December 31, 1999:
Revenues $ 45,716 $ 10,024 $ 17,764 $ 3,716 $ 3,892 $ 81,112
Property operating expenses 14,025 82 6,761 1,083 374 22,325
--------- --------- --------- --------- --------- ---------
Income from operations $ 31,691 $ 9,942 $ 11,003 $ 2,633 $ 3,518 $ 58,787
========= ========= ========= ========= ========= =========
Commercial real estate property
expenditures $ 148,577 $ 17 $ 14,364 $ 47,176 $ 331 $ 210,465
========= ========= ========= ========= ========= =========
Segment assets at December 31, 1999 $ 410,029 $ 107,516 $ 111,872 $ 70,648 $ 20,969 $ 721,034
========= ========= ========= ========= ========= =========
Year Ended December 31, 1998:
Revenues $ 13,548 $ 10,024 $ 9,997 $ 2,835 $ 3,810 $ 40,214
Property operating expenses 4,293 15 3,914 946 464 9,632
--------- --------- --------- --------- --------- ---------
Income from operations $ 9,255 $ 10,009 $ 6,083 $ 1,889 $ 3,346 $ 30,582
========= ========= ========= ========= ========= =========
Commercial real estate property
expenditures $ 275,502 $ -- $ 64,571 $ 18,019 $ 6,415 $ 364,507
========= ========= ========= ========= ========= =========
Segment assets at December 31, 1998 $ 277,751 $ 108,894 $ 97,035 $ 23,888 $ 56,109 $ 563,677
========= ========= ========= ========= ========= =========
Year Ended December 31, 1997:
Revenues $ -- $ 2,100 $ 1,359 $ 589 $ 2,570 $ 6,618
Property operating expenses -- 3 455 227 43 728
--------- --------- --------- --------- --------- ---------
Income from operations $ -- $ 2,097 $ 904 $ 362 $ 2,527 $ 5,890
========= ========= ========= ========= ========= =========
Commercial real estate property
expenditures $ -- $ 110,401 $ 32,144 $ 24,137 $ 140 $ 166,822
========= ========= ========= ========= ========= =========
Segment assets at December 31, 1997 $ -- $ 110,111 $ 32,123 $ 24,286 $ 27,014 $ 193,534
========= ========= ========= ========= ========= =========
34
The following table reconciles our income from operations for reportable
segments to income (loss) before extraordinary item as reported in our
Consolidated Statements of Operations.
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
Income from operations for reportable segments $ 58,787 $ 30,582 $ 5,890
Add:
Equity in income of Service Companies 198 139 --
Gain on sales of rental properties 1,140 -- --
Less:
General and administrative (3,204) (1,890) (533)
Interest (21,808) (12,207) (2,855)
Amortization of deferred financing costs (975) (423) (64)
Depreciation and other amortization (12,075) (6,285) (1,267)
Reformation costs -- (637) --
Termination of advisory agreement -- -- (1,353)
Minority interests (6,077) (4,583) (785)
------- ------- -------
Income (loss) before extraordinary item $15,986 $ 4,696 $ (967)
======= ======= =======
We did not allocate gain on sales of rental properties, interest expense,
amortization of deferred financing costs and depreciation and other amortization
to segments since they are not included in the measure of segment profit
reviewed by management. We also did not allocate equity in income of Service
Companies, general and administrative, reformation costs, termination of
advisory agreement costs and minority interests since these items represent
general corporate expenses not attributable to segments.
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we are involved in legal actions arising
from our ownership and administration of properties. In management's opinion,
any liabilities that may result are not expected to have a materially adverse
effect on our financial position, operations or liquidity. We are subject to
various federal, state and local environmental regulations related to our
property ownership and operation. We have performed environmental assessments of
our properties, the results of which have not revealed any environmental
liability that we believe would have a materially adverse effect on our
financial position, operations or liquidity.
OFFICE LEASE
We have an office lease for our corporate headquarters in Bala Cynwyd,
Pennsylvania. The monthly rent under this lease is subject to an annual increase
based on the Consumer Price Index. Future minimum rental payments due under the
term of this lease are as follows:
2000.......................................... $ 171
2001.......................................... 171
2002.......................................... 171
2003.......................................... 128
--------
Total......................................... $ 641
========
CONTRACT TO ACQUIRE PROPERTIES
We are under contract to purchase from Constellation two parcels of land
contiguous to certain of our existing operating properties. The purchase price
will be determined based upon the square footage of the area contained in the
buildings to be constructed on the land parcels.
35
WARRANTS
In connection with a property acquisition in December 1999, we issued
ten-year detachable warrants exercisable for an additional number of Common
Units (up to 476,200 units) to be determined based upon the share price of our
Common Shares over the first five years following the acquisition. However, if
the price of the Common Shares used to determine the additional number of Common
Units equals or exceeds $14.21, no warrants will be issuable.
15. QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 1999
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues $ 18,523 $ 19,542 $ 20,460 $ 22,587
======== ======== ======== ========
Income before minority interests and
extraordinary item $ 5,588 $ 5,225 $ 5,490 $ 5,760
Minority interests (1,349) (1,523) (1,444) (1,761)
-------- -------- -------- --------
Income before extraordinary item 4,239 3,702 4,046 3,999
Extraordinary item (694) (144) -- (65)
-------- -------- -------- --------
Net income 3,545 3,558 4,046 3,934
Preferred Share dividends (338) (338) (1,060) (1,118)
-------- -------- -------- --------
Net income available to Common
Shareholders $ 3,207 $ 3,220 $ 2,986 $ 2,816
======== ======== ======== ========
Basic earnings per share:
Income before extraordinary item $ 0.23 $ 0.20 $ 0.18 $ 0.17
======== ======== ======== ========
Net income $ 0.19 $ 0.19 $ 0.18 $ 0.16
======== ======== ======== ========
Diluted earnings per share:
Income before extraordinary item $ 0.19 $ 0.17 $ 0.16 $ 0.17
======== ======== ======== ========
Net income $ 0.17 $ 0.17 $ 0.16 $ 0.16
======== ======== ======== ========
Weighted average Common Shares-basic
(in thousands) 16,802 16,802 17,037 17,176
======== ======== ======== ========
Weighted average Common
Shares-diluted (in thousands) 28,914 24,311 24,555 27,621
======== ======== ======== ========
36
Year Ended December 31, 1998
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
Revenues $ 5,525 $ 7,842 $ 9,812 $17,035
======== ======== ======= =======
Income before minority interests $ 490 $ 2,058 $ 2,493 $ 4,238
Minority interests (989) (1,129) (1,154) (1,311)
-------- -------- ------- -------
Net (loss) income (499) 929 1,339 2,927
Preferred Share dividends -- -- (10) (317)
-------- -------- ------- -------
Net (loss) income available to
Common Shareholders $ (499) $ 929 $ 1,329 $ 2,610
======== ======== ======= =======
Basic (loss) earnings per share $ (0.22) $ 0.12 $ 0.13 $ 0.16
======== ======== ======= =======
Diluted (loss) earnings per share $ (0.22) $ 0.12 $ 0.12 $ 0.15
======== ======== ======= =======
Weighted average Common Shares-basic
(in thousands) 2,268 7,628 9,973 16,361
======== ======== ======= =======
Weighted average Common
Shares-diluted (in thousands) 2,294 17,731 20,065 23,868
======== ======== ======= =======
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
We accounted for our 1999 and 1998 acquisitions using the purchase method
of accounting. We included the results of operations for the acquisitions in our
Consolidated Statements of Operations from their respective purchase dates
through December 31, 1999.
We prepared our pro forma condensed consolidated financial information
presented below as if all of our 1999 and 1998 acquisitions had occurred on
January 1, 1998. Accordingly, we were required to make pro forma adjustments
where deemed necessary. The pro forma financial information is unaudited and is
not necessarily indicative of the results which actually would have occurred if
these acquisitions had occurred on January 1, 1998, nor does it intend to
represent our results of operations for future periods.
Year Ended December 31,
-----------------------------
1999 1998
------------- -----------
(Unaudited) (Unaudited)
Pro forma total revenues $ 95,658 $ 82,227
=========== ===========
Pro forma net income available to Common Shareholders $ 12,103 $ 8,242
=========== ===========
Pro forma earnings per Common Share
Basic $ 0.71 $ 0.49
=========== ===========
Diluted $ 0.65 $ 0.48
=========== ===========
37
17. SUBSEQUENT EVENT
CONSTRUCTION LOAN
On February 10, 2000, we entered into a $6,900 construction loan
facility with Summit Bank to finance the redevelopment of a 57,000 square foot
warehouse facility into office space. This loan bears interest at LIBOR plus
1.75%. The loan matures on February 28, 2001 and may be extended for a two-year
period, subject to certain conditions.
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Corporate Office Properties Trust
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Corporate
Office Properties Trust (the "Company") at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 26, 2000
39
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Shares began trading on the NYSE on April 27, 1998, under the
symbol "OFC". During the first quarter of 1998 and through April 26, 1998, our
Common Shares traded on the Nasdaq -Registered Trademark- under the symbols
"COPT" and "COPTD". The table below shows the range of the high and low sale
prices for our Common Shares as reported on the NYSE and the Nasdaq, as well as
the quarterly Common Share dividends per share declared. The quotations shown
for shares traded on Nasdaq represent interdealer prices without adjustment for
retail markups, markdowns or commissions, and may not reflect actual
transactions.
PRICE RANGE
-------------------------
DIVIDENDS
1999 LOW HIGH PER SHARE
First Quarter.................................... $6.3750 $8.3125 $0.18
Second Quarter................................... 5.8750 8.6875 0.18
Third Quarter.................................... 7.0000 9.0000 0.19
Fourth Quarter................................... 7.0625 8.2500 0.19
1998
First Quarter.................................... 9.7500 14.1250 0.15
Second Quarter................................... 8.6250 14.0000 0.15
Third Quarter.................................... 6.4375 9.9375 0.18
Fourth Quarter................................... 6.3750 8.0625 0.18
The approximate number of holders of record of our shares was approximately
230 as of December 31, 1999. This number does not include shareholders whose
shares are held of record by a brokerage house or clearing agency, but does
include any such brokerage house or clearing agency as one record holder.
We will pay future dividends at the discretion of our Board of Trustees.
Our ability to pay cash dividends in the future will be dependent upon (i) the
income and cash flow generated from our operations, (ii) cash generated or used
by our financing and investing activities and (iii) the annual distribution
requirements under the REIT provisions of the Code described above and such
other factors as the Board of Trustees deems relevant. Our ability to make cash
dividends will also be limited by the terms of our Operating Partnership
Agreement and our financing arrangements as well as limitations imposed by state
law and the agreements governing any future indebtedness.
40