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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark one)  

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                    to                                     

Commission file number 1-14023

GRAPHIC

Corporate Office Properties Trust
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization)
  23-2947217
(IRS Employer Identification No.)

6711 Columbia Gateway Drive, Suite 300
Columbia, MD

(Address of principal executive offices)

 

21046
(Zip Code)

Registrant's telephone number, including area code: (443) 285-5400


Securities registered pursuant to Section 12(b) of the Act:

(Title of Each Class)
  (Name of Exchange on Which Registered)
Common Shares of beneficial interest, $0.01 par value   New York Stock Exchange
Series G Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value   New York Stock Exchange
Series H Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value   New York Stock Exchange
Series J Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes ý No

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):

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

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) o Yes ý No

          The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was approximately $1.9 billion, as calculated using the closing price of the common shares of beneficial interest on the New York Stock Exchange and our outstanding shares as of June 29, 2007; for purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of the registrant's outstanding common shares of beneficial interest. At January 31, 2008, 47,383,967 of the registrant's common shares of beneficial interest, $0.01 par value, were outstanding.

          Portions of the annual shareholder report for the year ended December 31, 2007 are incorporated by reference into Parts I and II of this Form 10-K and portions of the proxy statement of the registrant for its 2008 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III of this Form 10-K.





Table of Contents

Form 10-K

 
   
   
PART I        
 
ITEM 1.

 

BUSINESS

 

4
  ITEM 1A.   RISK FACTORS   10
  ITEM 1B.   UNRESOLVED STAFF COMMENTS   19
  ITEM 2.   PROPERTIES   20
  ITEM 3.   LEGAL PROCEEDINGS   34
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   35

PART II

 

 

 

 
 
ITEM 5.

 

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

35
  ITEM 6.   SELECTED FINANCIAL DATA   37
  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   39
  ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   72
  ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   73
  ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   73
  ITEM 9A.   CONTROLS AND PROCEDURES   73
  ITEM 9B.   OTHER INFORMATION   74

PART III

 

 

 

 
 
ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

74
  ITEM 11.   EXECUTIVE COMPENSATION   74
  ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   74
  ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   74
  ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES   74

PART IV

 

 

 

 
 
ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

74

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FORWARD-LOOKING STATEMENTS

        This Form 10-K 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 and operations of our business. Forward-looking statements can be identified by the use of words such as "may," "will," "should," "expect," "estimate" or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:

        For further information on factors that could affect the company and the statements contained herein, you should refer to the section below entitled "Item 1A. Risk Factors." We undertake no obligation to update or supplement forward-looking statements.

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PART I

Item 1.    Business

OUR COMPANY

        General.    We are a fully-integrated and self-managed real estate investment trust ("REIT") that focuses on the acquisition, development, ownership, management and leasing of suburban office properties in select markets and submarkets. We also focus on servicing the multi-location requirements of strategic customers and strategic industries in which tenants have specialized product requirements. Our properties are typically concentrated in large office parks located in demographically strong markets and submarkets and/or near demand drivers for strategic customers and industries. As of December 31, 2007, our investments in real estate included the following:

        We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the "Operating Partnership"), a Delaware limited partnership, of 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 100% of Corporate Office Management, Inc. ("COMI") and owns, either directly or through COMI, 100% of the following entities that provide real estate services primarily to us but also to third parties (collectively defined as the "Service Companies"): COPT Property Management Services, LLC ("CPM"), COPT Development & Construction Services, LLC ("CDC"), Corporate Development Services, LLC ("CDS") and COPT Environmental Systems, LLC ("CES").

        Interests in our Operating Partnership are in the form of common and preferred units. As of December 31, 2007, we owned approximately 84.7% of the outstanding common units and approximately 95.8% of the outstanding preferred units in our Operating Partnership. The remaining common and preferred units in our Operating Partnership were owned by third parties, which included certain of our Trustees.

        We believe that we are organized and have operated in a manner that permits us to satisfy the requirements for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and we

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intend to continue to operate in such a manner. If we qualify for taxation as a REIT, we generally will not be subject to Federal income tax on our taxable income that is distributed to our shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute to its shareholders at least 90% of its annual taxable income (excluding net capital gains).

        Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our telephone number is (443) 285-5400.

        Corporate Office Properties Trust's Internet address is www.copt.com. We make available on our Internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably possible after we file such material with the Securities and Exchange Commission. In addition, we have made available on our Internet website under the heading "Corporate Governance" the charters for our Board of Trustees' Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not part of this report.

        The Securities and Exchange Commission (the "SEC") maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov. The public may also read and copy paper filings that we have made with the SEC at the SEC's Public Reference Room. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.

Significant 2007 Developments

        During 2007, we:

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Subsequent Events

        Subsequent to December 31, 2007, we:


Corporate Objectives and Strategies

        Our primary objectives are to achieve sustainable long-term growth in results of operations and to maximize long-term shareholder value. Important elements of our strategy are set forth below:

        Market Strategy.    We typically concentrate our operations in markets and submarkets where we believe that we already possess or can achieve the critical mass necessary to maximize management efficiencies, operating synergies and competitive advantages through our acquisition, property management, leasing and development programs. The attributes we look for in selecting markets and submarkets include, among others: (1) proximity to large demand drivers; (2) strong demographics; (3) attractiveness to high quality tenants, including strategic customers and strategic industries; (4) potential for growth and stability in economic down cycles; and (5) future acquisition and development opportunities. When we select a market or submarket, our strategy generally involves establishing an initial presence by acquiring properties in that market or submarket and then increasing our ownership through future acquisitions and development. We typically focus on owning and operating properties in business parks located outside of central business districts. We believe that such parks generally attract long-term, high-quality tenants seeking to attract and retain quality work forces

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because they are typically situated along major transportation routes with easy access to support services, amenities and residential communities.

        Customer Strategy.    We focus on establishing, maintaining and expanding strategic customer relationships in multiple locations with tenants that are large, financially sound entities with significant long-term space requirements. We believe that we differentiate ourselves from our competitors through our commitment to outstanding customer service, trust and integrity. We believe that this strategy enables us to establish long-term relationships with quality tenants and enhances our ability to become the landlord of choice in our targeted markets. To enhance the stability of our cash flow, we typically structure our leases with terms ranging from three to ten years. Given the terms of our leases, we monitor the timing of our lease maturities with the goal being that such timing should not be highly concentrated in any given one-year or five-year period.

        Industry Strategy.    As an outgrowth of our customer strategy, we also focus on strategic industries in which tenants have specialized product requirements. For example, a high concentration of our revenues is generated from tenants in the United States defense industry (comprised of the United States Government and defense contractors), predominantly in defense information technology. These tenants are particularly interested in a number of our property submarkets that are located near government installations. We also enable these tenants to benefit from our significant experience in constructing and operating secure properties and properties that meet the United States Government's Force Protection requirements. We believe that this experience coupled with our existing relationships in the United States defense industry position us well to continue and grow in this industry. We seek to reinforce and expand our relationships with current and prospective tenants in this industry, while monitoring our levels of concentration from a business risk perspective.

        Tenant Service Strategy.    Another outgrowth of our customer service strategy is our tenant service strategy, in which we seek to capitalize on our geographic focus and critical mass of properties in our core regions by providing high level, comprehensive services to our tenants. We conduct most of our tenant services activities through our subsidiary service companies. We believe that providing quality services is an integral part of our goal to achieve consistently high levels of tenant satisfaction and retention and, again, position ourselves as a landlord of choice.

        Acquisition Strategies.    We pursue the acquisition of suburban office properties through a three-part acquisition strategy. This strategy includes targeting: (1) entity acquisitions of significant portfolios along with their management to establish prominent ownership positions in new neighboring regions and enhance our management infrastructure; (2) portfolio purchases to enhance our existing submarket positions as well as enter selective new neighboring regions; and (3) opportunistic acquisitions of individual properties in our existing regions. We also pursue acquisition opportunities for properties that meet the multi-location requirements of our strategic customers and strategic industries. We typically seek to make acquisitions at attractive yields and below replacement cost. We also often seek to increase cash flow and enhance the underlying value of acquisitions through repositioning the properties and capitalizing on existing below market leases and expansion opportunities.

        Property Development Strategies.    We balance our acquisition program through selective development and expansion of suburban office properties as market conditions and leasing opportunities support favorable risk-adjusted returns. We generally develop sites that are located near our existing properties. We believe that developing such sites enhances our ability to effectively meet tenant needs and efficiently provide critical tenant services. We also develop sites acquired in other locations in order to meet the multi-location requirements of our strategic customers and strategic industries.

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        Internal Growth Strategies.    We aggressively manage our portfolio to maximize the operating performance of each property through: (1) proactive property management and leasing; (2) achieving operating efficiencies through increasing economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; (3) renewing tenant leases and re-tenanting at increased rents where market conditions permit; and (4) expanding our tenant and real estate service capabilities.

Financing Policy

        Our financing policy is aimed at maintaining a flexible capital structure in order to facilitate consistent growth and performance in the face of differing market conditions in the most cost-effective manner. Key components of our policy are set forth below:

Debt

        For information relating to future maturities of our debt, you should refer to the sections of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk," as well as Note 9 to our Consolidated Financial Statements and notes thereto, which is located in a separate section at the end of this report beginning on page F-1.

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Industry Segments

        We operate in one primary industry: suburban office real estate. At December 31, 2007, our suburban office real estate operations had nine primary geographical segments, as set forth below:

        As of December 31, 2007, 138 of our wholly owned properties were located in what is widely known as the Greater Washington, D.C. region, which includes the first four regions set forth above, and 64 were located in neighboring Suburban Baltimore. At December 31, 2007, we also owned 13 wholly owned properties in Colorado Springs and two in San Antonio. In addition, we owned eight properties in total as of December 31, 2007 in the last two locations set forth above that are considered non-core to the Company. For information relating to these geographic segments, you should refer to Note 16 to our Consolidated Financial Statements, which is included in a separate section at the end of this report beginning on page F-1.

Employees

        As of December 31, 2007, we had 351 employees. We believe that our relations with our employees are good.

Competition

        The commercial real estate market is highly competitive. Numerous commercial properties compete with our properties for tenants. Some of the properties competing with ours may be newer or have more desirable locations, or the competing properties' owners may be willing to accept lower rents than are acceptable to us. In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes in economic factors and supply and demand of space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meeting our short-term capital needs.

        We also compete for the purchase of commercial property with many entities, including other publicly-traded commercial REITs. Many of our competitors have substantially greater financial resources than ours. In addition, our competitors may be willing to accept lower returns on their

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investments. If our competitors prevent us from buying properties that we have targeted for acquisition, we may not be able to meet our property acquisition goals.

Item 1A.    Risk Factors

        Set forth below are risks and uncertainties relating to our business and the ownership of our securities. You should carefully consider each of the risks and uncertainties below and all of the information in this Form 10-K and its Exhibits, including our Consolidated Financial Statements and notes thereto for the year ended December 31, 2007, which are included in a separate section at the end of this report beginning on page F-1.

        We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue from renting our properties. Our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This means that our costs will not necessarily decline and may increase even if our revenues decline.

        For new tenants or upon lease expiration for existing tenants, we generally must make improvements and pay other tenant-related costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants may not reimburse us.

        If our properties do not generate revenue sufficient to meeting our operating expenses and capital costs, we may have to borrow additional amounts to cover these costs. In such circumstances, we would likely have lower profits or possibly incur losses. We may also find in such circumstances that we are unable to borrow to cover such costs, in which case our operations could be adversely affected. Moreover, there may be less or no cash available for distributions to our shareholders.

        In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes due to economic factors and supply and demand of space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meeting our short-term capital needs.

        Adverse developments concerning some of our major tenants and industry concentrations could have a negative impact on our revenue. As of December 31, 2007, 20 tenants accounted for 54.8% of the total annualized rental revenue of our wholly owned properties, excluding owner-occupied leasing activity, and our five largest of these tenants accounted for 35.0% of that total. We computed the annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio of wholly owned properties as of December 31, 2007. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under GAAP does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. Information regarding our five largest tenants is set forth below:

Tenant
  Annualized
Rental Revenue at
December 31, 2007

  Percentage of
Total Annualized
Rental Revenue of
Wholly Owned Properties

  Number
of Leases

 
  (in thousands)
   
   
United States of America   $ 57,395   16.3 % 62
Northrop Grumman Corporation(1)     26,199   7.4 % 17
Booz Allen Hamilton, Inc.      19,568   5.5 % 8
Computer Sciences Corporation(1)     11,446   3.2 % 4
Unisys Corporation     8,843   2.5 % 4

(1)
Includes affiliated organizations and agencies and predecessor companies.

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        If any of our five largest tenants fail to make rental payments to us or if the United States Government elects to terminate several of its leases and the space cannot be re-leased on satisfactory terms, there would be an adverse effect on our financial performance and ability to make distributions to our shareholders.

        As of December 31, 2007, the United States defense industry (comprising the United States Government and defense contractors) accounted for approximately 47.9% of the total annualized rental revenue of our wholly owned properties. Most of the 16.3% of our total annualized rental revenue that we derived from leases with agencies of the United States Government as of December 31, 2007 is included in the 47.9% of our total annualized revenue from the United States defense industry. We classify the revenue from our leases into industry groupings based solely on management's knowledge of the tenants' operations in leased space. Occasionally, classifications require subjective and complex judgments. For example, we have a tenant that is considered by many to be in the computer industry; however, since the nature of that tenant's operations in the space leased from us is focused on providing service to the United States Government's defense department, we classify the revenue we earn from the lease as United States defense industry revenue. We do not use independent sources such as Standard Industrial Classification codes for classifying our revenue into industry groupings and if we did, the resulting groupings would be materially different.

        We have become increasingly reliant on defense industry tenants in recent years due primarily to: (1) increased activity in that industry following the events of September 11, 2001; (2) the strong presence of the industry in a number of our submarkets; and (3) our strategy to form strategic alliances with tenants in that industry. The percentage of our total annualized rental revenue derived from the defense industry could continue to increase. A reduction in government spending for defense could affect the ability of these tenants to fulfill lease obligations or decrease the likelihood that these tenants will renew their leases. In the case of the United States Government, a reduction in government spending could result in the early termination of leases. Such occurrences could have an adverse effect on our results of operations, financial condition, cash flows and ability to make distributions to our shareholders.

        We rely on the ability of our tenants to pay rent and would be harmed by their inability to do so. Our performance depends on the ability of our tenants to fulfill their lease obligations by paying their rental payments in a timely manner. In addition, as noted above, we rely on a few major tenants for a large percentage of our total rental revenue. If one of our major tenants, or a number of our smaller tenants, were to experience financial difficulties, including bankruptcy, insolvency or general downturn of business, there could be an adverse effect on our financial performance and ability to make expected distributions to shareholders.

        Most of our properties are geographically concentrated in the Mid-Atlantic region, particularly in the Greater Washington, D.C. region and neighboring Suburban Baltimore, or in particular office parks. We may suffer economic harm in the event of a decline in the real estate market or general economic conditions in those regions. Most of our properties are located in the Mid-Atlantic region of the United States and, as of December 31, 2007, our properties located in the Greater Washington, D.C. region and neighboring Suburban Baltimore accounted for a combined 87.5% of our total annualized rental revenue from wholly owned properties. Our properties are also typically concentrated in office parks in which we own most of the properties. Consequently, we do not have a broad geographic distribution of our properties. As a result, a decline in the real estate market or general economic conditions in the Mid-Atlantic region, the Greater Washington, D.C. region or the office parks in which our properties are located could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders.

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        We would suffer economic harm if we were unable to renew our leases on favorable terms.    When leases expire for our properties, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a property, we can expect to experience a vacancy for some period of time, as well as higher capital costs than if a tenant renews. As a result, our financial performance and ability to make expected distributions to our shareholders could be adversely affected if we experience a high volume of tenant departures at the end of their lease terms. Set forth below are the percentages of total annualized rental revenue from wholly owned properties as of December 31, 2007 that are subject to scheduled lease expirations in each of the next five years:

2008   11.2 %
2009   14.3 %
2010   13.3 %
2011   8.7 %
2012   14.7 %

        Most of the leases with our largest tenant, the United States Government, which account for 16.3% of our total annualized rental revenue in wholly owned properties at December 31, 2007, provide for consecutive one-year terms or provide for early termination rights. All of the leasing statistics set forth above assume that the United States Government will remain in the space that it leases through the end of the respective arrangements, without ending consecutive one-year leases prematurely or exercising early termination rights. We report the statistics in this manner since we manage our leasing activities using these same assumptions and believe these assumptions to be probable.

        We may not be able to compete successfully with other entities that operate in our industry.    The commercial real estate market is highly competitive. We compete for the purchase of commercial property with many entities, including other publicly traded commercial REITs. Many of our competitors have substantially greater financial resources than we do. If our competitors prevent us from buying properties that we target for acquisition, we may not be able to meet our property acquisition and development goals. Moreover, numerous commercial properties compete for tenants with our properties. Some of the properties competing with ours may have newer or more desirable locations, or the competing properties' owners may be willing to accept lower rates than are acceptable to us. Competition for property acquisitions, or for tenants in properties that we own, could have an adverse effect on our financial performance and distributions to our shareholders.

        We may be unable to successfully execute our plans to acquire existing commercial real estate properties.    We intend to acquire existing commercial real estate properties to the extent that suitable acquisitions can be made on advantageous terms. Acquisitions of commercial properties entail risks, such as the risks that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and that such acquisitions will fail to perform as expected. The failure of our acquisitions to perform as expected could adversely affect our financial performance and our ability to make distributions to our shareholders.

        We may suffer economic harm as a result of making unsuccessful acquisitions in new markets.    We expect to pursue selective acquisitions of properties in regions where we have not previously owned properties. These acquisitions may entail risks in addition to those we face in other acquisitions where we are familiar with the regions, such as the risk that we do not correctly anticipate conditions or trends in a new region and are therefore not able to operate the acquired property profitably. If this occurs, it could adversely affect our financial performance and our ability to make distributions to our shareholders.

        We may be unable to execute our plans to develop and construct additional properties.    Although the majority of our investments are in currently leased properties, we also develop, construct and

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renovate properties, including some that are not fully pre-leased. When we develop, construct and renovate properties, we assume the risk that actual costs will exceed our budgets, that we will experience delays and that projected leasing will not occur, any of which could adversely affect our financial performance and our ability to make distributions to our shareholders. In addition, we generally do not obtain construction financing commitments until the development stage of a project is complete and construction is about to commence. We may find that we are unable to obtain financing needed to continue with the construction activities for such projects.

        Certain of our properties containing data centers contain space not suitable for lease other than as data centers, which could make it difficult to reposition them for alternative use.    Certain of our properties contain data center space, which is highly specialized space containing extensive electrical and mechanical systems that are designed uniquely to run and maintain banks of computer servers. As a result, in the event we needed to reposition such data center space to being office or industrial rental space, major renovations and expenditures would be required in order for us to prepare the space for re-lease or for us to sell to a buyer for use other than as data center space.

        We may suffer economic harm as a result of the actions of our joint venture partners.    We invest in certain entities in which we are not the exclusive investor or principal decision maker. As of December 31, 2007, we owned 17 fully operational properties and four properties under construction or redevelopment, and control land for future development, through joint ventures. We also continue to pursue new investments in real estate through joint ventures. Aside from our inability to unilaterally control the operations of joint ventures, our investments in joint ventures entail the additional risks that (1) the other parties to these investments may not fulfill their financial obligations as investors, in which case we may need to fund such parties' share of additional capital requirements and (2) the other parties to these investments may take actions that are inconsistent with our objectives, either of which could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders.

        We are subject to possible environmental liabilities.    We are subject to various Federal, state and local environmental laws. These laws can impose liability on property owners or operators for the costs of removal or remediation of hazardous substances released on a property, even if the property owner was not responsible for the release of the hazardous substances. Costs resulting from environmental liability could be substantial. The presence of hazardous substances on our properties may also adversely affect occupancy and our ability to sell or borrow against those properties. In addition to the costs of government claims under environmental laws, private plaintiffs may bring claims for personal injury or other reasons. Additionally, various laws impose liability for the costs of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances at such a facility is potentially liable under such laws. These laws often impose liability on an entity even if the facility was not owned or operated by the entity.

        Real estate investments are illiquid, and we may not be able to sell our properties on a timely basis when we determine it is appropriate to do so.    Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions are depressed. Such illiquidity will tend to limit our ability to vary our portfolio of properties promptly in response to changes in economic or other conditions. Moreover, under certain circumstances, the Internal Revenue Code imposes certain penalties on a REIT that sells property held for less than four years. In addition, for certain of our properties that we acquired by issuing units in our Operating Partnership, we are restricted by agreements with the sellers of the properties for a certain period of time from entering into transactions (such as the sale or refinancing of the acquired property) that will result in a taxable gain to the sellers without the seller's consent. Due to all of these factors, we may be unable to sell a property at an advantageous time.

13


        We are subject to other possible liabilities that would adversely affect our financial position and cash flows.    Our properties may be subject to other risks related to current or future laws, including laws benefiting disabled persons, and state or local laws relating to zoning, construction and other matters. These laws may require significant property modifications in the future for which we may not have budgeted and could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other catastrophic events, including acts of war or terrorism. The occurrence of any of these events could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders.

        We may be subject to increased costs of insurance and limitations on coverage regarding acts of terrorism.    Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies through September 30, 2008. These policies include coverage for acts of terrorism. Future changes in the insurance industry's risk assessment approach and pricing structure may increase the cost of insuring our properties and decrease the scope of insurance coverage, either of which could adversely affect our financial position and operating results.

        We may suffer adverse effects as a result of the indebtedness that we carry and the terms and covenants that relate to this debt.    We have in the past operated with slightly higher debt levels than other REITs. Operating with higher debt levels could make it difficult to obtain additional financing when required and could also make us more vulnerable to an economic downturn. The majority of our properties are either collateralized or identified by us to support repayment on indebtedness. In addition, we rely on borrowings to fund some or all of the costs of new property acquisitions, construction and development activities and other items. Our organizational documents do not limit the amount of indebtedness that we may incur. As of December 31, 2007, our total outstanding debt was $1.8 billion and our debt to total assets (defined as (1) the sum of mortgage and other loans and exchangeable senior notes divided by (2) total assets) was 62.3%.

        Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay distributions to our shareholders required to maintain our qualification as a REIT. We are also subject to the risks that:

        Some of our debt is secured by not just one property but, rather, a group of properties. Some of our debt is cross-defaulted, which means that failure to pay interest or principal on a loan above a threshold value will create a default on certain of our other loans. In addition, some of our debt that is cross-defaulted also contains cross-collateralization provisions. Any foreclosure of our properties would result in loss of income and asset value that would negatively affect our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. In addition, in certain circumstances, if we are in default and the value of the properties securing a loan is less than the loan balance, we may be required to pay the resulting shortfall to the lender using other assets.

14


        As of December 31, 2007, 19.1% of our total debt had variable interest rates, including the effect of interest rate swaps. If short-term interest rates were to rise, our debt service payments on adjustable rate debt would increase, which would lower our net income and could decrease our distributions to our shareholders. We use interest rate swap agreements from time to time to reduce the impact of changes in interest rates. Decreases in interest rates would result in increased interest payments due under interest rate swap agreements in place and, in the event we decided to unwind such agreements, could result in us recognizing a loss and remitting a payment.

        We must refinance our debt in the future. As of December 31, 2007, our scheduled debt payments over the next five years, including maturities, were as follows:

Year

  Amount(1)
 
 
  (in thousands)

 
2008   $ 297,120 (2)
2009     62,643  
2010     74,033  
2011     470,814 (3)
2012     42,200  

        Our operations likely will not generate enough cash flow to repay some or all of this debt without additional borrowings or new equity issuances. If we cannot refinance our debt, extend the repayment dates, or raise additional equity prior to the date when our debt matures, we would default on our existing debt, which would have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders.

        We may be unable to continue to make shareholder distributions at expected levels.    We intend to make regular quarterly cash distributions to our shareholders. However, distribution levels depend on a number of factors, some of which are beyond our control.

        Our loan agreements contain provisions that could restrict future distributions. Our ability to sustain our current distribution level will also be dependent, in part, on other matters, including:

15


        In addition, we can make distributions to the holders of our common shares only after we make preferential distributions to holders of our preferred shares.

        Our ownership limits are important factors.    Our Declaration of Trust limits ownership of our common shares by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding common shares, whichever is more restrictive. Our Declaration of Trust also limits ownership by any single shareholder of our common and preferred shares in the aggregate to 9.8% of the aggregate value of the outstanding common and preferred shares. We call these restrictions the "Ownership Limit." Our Declaration of Trust allows our Board of Trustees to exempt shareholders from the Ownership Limit, and our Board of Trustees previously has exempted one entity from the Ownership Limit.

        Our Declaration of Trust includes other provisions that may prevent or delay a change of control.    Subject to the requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine, which could also delay or prevent a change in control.

        Our Board of Trustees is divided into three classes of Trustees, which could delay a change of control.    Our Declaration of Trust divides our Board of Trustees into three classes. The term of one class of the Trustees expires each year, at which time a successor class is elected for a term ending at the third succeeding annual meeting of shareholders. Such staggered terms make it more difficult for a third party to acquire control of us. On November 19, 2007, the Board of Trustees approved an amendment to the Declaration of Trust, subject to shareholder approval at the annual meeting of shareholders to be held on May 22, 2008, to eliminate the separate classes of Trustees and, instead, have all Trustees elected at each annual meeting of shareholders; if approved by the shareholders, all Trustees would be subject to re-election for a one-year term at the annual meeting of shareholders to be held in May 2009.

        The Maryland business statutes also impose potential restrictions on a change of control of our company.    Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to shareholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisions applicable to us.

        Our failure to qualify as a REIT would have adverse tax consequences.    We believe that since 1992 we have qualified for taxation as a REIT for Federal income tax purposes. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from certain sources that are itemized in the REIT tax laws. We are also required to distribute to shareholders at least 90% of our REIT taxable income (excluding capital gains). The fact that we hold most of our assets through our Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations and the courts might issue new rulings that make it more difficult or impossible for us to remain qualified as a REIT.

        If we fail to qualify as a REIT, we would be subject to Federal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify. If we fail

16



to qualify as a REIT, we would have to pay significant income taxes and would therefore have less money available for investments or for distributions to our shareholders. This would likely have a significant adverse effect on the value of our securities. In addition, we would no longer be required to make any distributions to our shareholders.

        We have certain distribution requirements that reduce cash available for other business purposes.    As a REIT, we must distribute at least 90% of our annual taxable income (excluding capital gains), which limits the amount of cash we have available for other business purposes, including amounts to fund our growth. Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period during which we report those items for distribution purposes, we may have to borrow funds to meet the 90% distribution requirement. We may also become subject to tax liabilities that adversely affect our operating cash flow and available cash for distribution to shareholders.

        A number of factors could cause our security prices to decline.    As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our common and preferred shares. These conditions include, but are not limited to:

        Generally, REITs are tax-advantaged relative to C corporations because they generally are not subject to corporate-level Federal income tax on income that they distribute to shareholders. However, Congress made changes to the tax laws and regulations that could make it less advantageous for investors to invest in REITs. The Jobs and Growth Tax Relief Reconciliation Act of 2003, or the 2003 Act, provides that generally for taxable years beginning after December 31, 2002 and before December 31, 2008, certain dividends received by domestic individual shareholders from certain C corporations are subject to a reduced rate of tax of up to 15%. Prior to the 2003 Act, such dividends received by domestic individual shareholders were generally subject to tax at ordinary income rates, which were as high as 38.6%. In general, the provisions of the 2003 Act do not benefit individual shareholders of REITs and could make an investment in a C corporation that is not a REIT more attractive than an investment in a REIT.

        The average daily trading volume of our common shares during the year ended December 31, 2007 was approximately 453,000 shares, and the average trading volume of our publicly-traded preferred shares is generally insignificant. As a result, relatively small volumes of transactions could have a pronounced effect on the market price of such shares.

        Our ability to pay dividends may be limited, and we cannot assure you that we will be able to pay dividends regularly.    Because we conduct substantially all of our operations through our Operating Partnership, our ability to pay dividends on any series of preferred shares will depend almost entirely on payments and dividends received on our interests in our Operating Partnership, the payment of which depends in turn on our ability to operate profitably and generate cash flow from our operations. We cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future. Additionally, the terms of some of the debt to which our Operating Partnership is a party limit its ability to make some types of payments and other dividends to us. This in turn limits our ability to make some types of payments, including payment of dividends on common or preferred shares, unless

17



we meet certain financial tests or such payments or dividends are required to maintain our qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay dividends on our shares in one or more periods. Furthermore, any new shares of beneficial interest issued will substantially increase the cash required to continue to pay cash dividends at current levels. Any common or preferred shares of beneficial interest that may in the future be issued to finance acquisitions, upon exercise of options or otherwise, would have a similar effect.

        Our ability to pay dividends is further limited by the requirements of Maryland law.    Our ability to pay dividends on any series of preferred shares is further limited by the laws of Maryland. Under applicable Maryland law, a Maryland REIT may not make a distribution if, after giving effect to the distribution, the REIT would not be able to pay its debts as the debts become due in the usual course of business, or the REIT's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the REIT were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Accordingly, we may not make a distribution on any series of preferred shares if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any series of preferred shares then outstanding, if any, with preferences senior to those of any such series of preferred shares.

        We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends on any series of preferred shares.    Our governing documents do not limit us from incurring additional indebtedness and other liabilities. As of December 31, 2007, we had $1.8 billion of consolidated indebtedness outstanding. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends. As a result, we may not have sufficient funds remaining to satisfy our dividend obligations relating to any series of preferred shares if we incur additional indebtedness.

        We are dependent on external sources of capital for future growth.    As noted above, because we are a REIT, we must distribute at least 90% of our annual taxable income to our shareholders. Due to this requirement, we will not be able to fund our acquisition, construction and development activities using cash flow from operations. Therefore, our ability to fund these activities is dependent on our ability to access capital funded by third parties. Such capital could be in the form of new debt, equity issuances of common shares, preferred shares, common and preferred units in our Operating Partnership or joint venture funding. Such capital may not be available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject us to covenants that restrict management's flexibility in directing our operations, and additional equity offerings may result in substantial dilution of our shareholders' interests. Our inability to obtain capital when needed could have a material adverse effect on our ability to expand our business and fund other cash requirements.

        Our business and operations would suffer in the event of system failures.    Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.

        Certain of our officers and Trustees have potential conflicts of interest.    Certain of our officers and members of our Board of Trustees own partnership units in our Operating Partnership. These

18



individuals may have personal interests that conflict with the interests of our shareholders. For example, if our Operating Partnership sells or refinances certain of the properties that these officers or Trustees contributed to the Operating Partnership, the officers or Trustees could suffer adverse tax consequences. Their personal interests could conflict with our interests if such a sale or refinancing would be advantageous to us. We have certain policies in place that are designed to minimize conflicts of interest. We cannot, however, assure you that these policies will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that might fail to reflect fully the interests of all of our shareholders.

        We are dependent on our key personnel, and the loss of any key personnel could have an adverse effect on our operations.    We are dependent on the efforts of our executive officers. The loss of any of their services could have an adverse effect on our operations. Although certain of our officers have entered into employment agreements with us, we cannot assure you that they will remain employed with us.

        We may change our policies without shareholder approval, which could adversely affect our financial condition, results of operations, market price of our common shares or ability to pay distributions.    Our Board of Trustees determines all of our policies, including our investment, financing and distribution policies. Although our Board of Trustees has no current plans to do so, it may amend or revise these policies at any time without a vote of our shareholders. Policy changes could adversely affect our financial condition, results of operations, the market price of our securities or distributions.

        Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses, affect our operations and affect our reputation.    Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations and New York Stock Exchange rules, continue to create uncertainty for public companies. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice is evolving over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting has required the commitment of significant financial and managerial resources. In addition, it has become more expensive for us to obtain director and officer liability insurance. We expect these efforts to require the continued commitment of significant resources. Further, our Trustees, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified Trustees and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

Item 1B.    Unresolved Staff Comments

        None

19


Item 2.    Properties

        The following table provides certain information about our wholly owned office properties as of December 31, 2007:

Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

Baltimore/Washington Corridor:                            
  2730 Hercules Road
Annapolis Junction, MD
  BWI Airport   1990   240,336   100.0 % $ 5,719,779   $ 23.80
  304 Sentinel Drive
Annapolis Junction, MD
  BWI Airport   2005   162,498   100.0 %   4,462,970     27.46
  306 Sentinel Drive
Annapolis Junction, MD
  BWI Airport   2006   157,896   100.0 %   4,317,201     27.34
  2720 Technology Drive
Annapolis Junction, MD
  BWI Airport   2004   156,730   100.0 %   7,016,377     44.77
  2711 Technology Drive
Annapolis Junction, MD
  BWI Airport   2002   152,000   100.0 %   4,353,608     28.64
  320 Sentinel Way
Annapolis Junction, MD
  BWI Airport   2007   125,681   100.0 %   3,160,877     25.15
  318 Sentinel Way
Annapolis Junction, MD
  BWI Airport   2005   125,681   100.0 %   3,159,856     25.14
  322 Sentinel Way
Annapolis Junction, MD
  BWI Airport   2006   125,568   100.0 %   3,023,364     24.08
  140 National Business Parkway
Annapolis Junction, MD
  BWI Airport   2003   119,904   100.0 %   3,683,231     30.72
  132 National Business Parkway
Annapolis Junction, MD
  BWI Airport   2000   118,598   100.0 %   3,231,822     27.25
  2721 Technology Drive
Annapolis Junction, MD
  BWI Airport   2000   118,093   100.0 %   3,390,056     28.71
  2701 Technology Drive
Annapolis Junction, MD
  BWI Airport   2001   117,450   100.0 %   3,579,456     30.48
  1306 Concourse Drive
Linthicum, MD
  BWI Airport   1990   114,046   94.8 %   2,586,891     23.92
  870-880 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1981   105,151   100.0 %   2,287,214     21.75
  2691 Technology Drive
Annapolis Junction, MD
  BWI Airport   2005   103,683   100.0 %   2,750,721     26.53
  1304 Concourse Drive
Linthicum, MD
  BWI Airport   2002   101,710   76.7 %   2,031,932     26.05
  900 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1982   97,261   91.5 %   2,199,342     24.71
  1199 Winterson Road
Linthicum, MD
  BWI Airport   1988   96,636   100.0 %   2,454,431     25.40
  920 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1982   96,566   100.0 %   1,762,329     18.25
  134 National Business Parkway
Annapolis Junction, MD
  BWI Airport   1999   93,482   100.0 %   2,571,315     27.51
  135 National Business Parkway
Annapolis Junction, MD
  BWI Airport   1998   87,655   100.0 %   2,491,462     28.42
  133 National Business Parkway
Annapolis Junction, MD
  BWI Airport   1997   87,401   66.3 %   1,676,398     28.92
  141 National Business Parkway
Annapolis Junction, MD
  BWI Airport   1990   87,247   97.5 %   2,172,909     25.54
  1302 Concourse Drive
Linthicum, MD
  BWI Airport   1996   84,406   73.1 %   1,500,457     24.31
  7467 Ridge Road
Hanover, MD
  BWI Airport   1990   74,326   100.0 %   1,773,426     23.86

20


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  7240 Parkway Drive
Hanover, MD
  BWI Airport   1985   73,970   76.3 % 1,275,642   22.60
  881 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1986   73,572   100.0 % 1,686,270   22.92
  1099 Winterson Road
Linthicum, MD
  BWI Airport   1988   70,569   27.9 % 460,109   23.39
  1190 Winterson Road
Linthicum, MD
  BWI Airport   1987   69,127   83.6 % 1,591,007   27.52
  131 National Business Parkway
Annapolis Junction, MD
  BWI Airport   1990   69,039   90.5 % 1,737,422   27.80
  849 International Drive
Linthicum, MD
  BWI Airport   1988   68,758   78.1 % 1,383,777   25.78
  911 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1985   68,296   100.0 % 1,463,145   21.42
  1201 Winterson Road
Linthicum, MD
  BWI Airport   1985   67,903   100.0 % 1,018,545   15.00
  999 Corporate Boulevard
Linthicum, MD
  BWI Airport   2000   67,455   91.8 % 1,863,299   30.09
  7272 Park Circle Drive
Hanover, MD
  BWI Airport   1991/1996   59,397   74.4 % 964,031   21.83
  7318 Parkway Drive
Hanover, MD
  BWI Airport   1984   59,204   100.0 % 1,131,240   19.11
  891 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1984   58,454   97.4 % 1,245,500   21.89
  7320 Parkway Drive
Hanover, MD
  BWI Airport   1983   58,453   95.9 % 893,054   15.94
  901 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1984   57,593   100.0 % 1,236,781   21.47
  930 International Drive
Linthicum, MD
  BWI Airport   1986   57,409   40.5 % 459,038   19.73
  800 International Drive
Linthicum, MD
  BWI Airport   1988   57,379   100.0 % 1,192,555   20.78
  900 International Drive
Linthicum, MD
  BWI Airport   1986   57,140   100.0 % 893,897   15.64
  921 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1983   54,175   100.0 % 1,083,500   20.00
  939 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1983   53,031   92.3 % 1,156,356   23.61
  938 Elkridge Landing Road
Linthicum, MD
  BWI Airport   1984   52,988   100.0 % 1,244,390   23.48
  302 Sentinel Drive
Annapolis Junction, MD
  BWI Airport   2007   48,377   100.0 % 1,745,545   36.08
  1340 Ashton Road
Hanover, MD
  BWI Airport   1989   46,400   100.0 % 994,434   21.43
  1334 Ashton Road
Hanover, MD
  BWI Airport   1989   37,565   36.7 % 258,159   18.72
  1331 Ashton Road
Hanover, MD
  BWI Airport   1989   29,153   100.0 % 610,632   20.95
  5522 Research Park Drive
Catonsville, MD
  BWI Airport   2007   23,500   100.0 % 599,250   25.50
  1350 Dorsey Road
Hanover, MD
  BWI Airport   1989   19,992   52.9 % 187,923   17.77
  1344 Ashton Road
Hanover, MD
  BWI Airport   1989   17,062   100.0 % 453,664   26.59
  1341 Ashton Road
Hanover, MD
  BWI Airport   1989   15,841   100.0 % 300,103   18.94

21


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  1343 Ashton Road
Hanover, MD
  BWI Airport   1989   9,962   100.0 % 202,484   20.33
  114 National Business Parkway
Annapolis Junction, MD
  BWI Airport   2002   9,908   100.0 % 210,523   21.25
  1348 Ashton Road
Hanover, MD
  BWI Airport   1988   3,108   100.0 % 74,856   24.08
  7125 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1973/1999   611,379   97.5 % 8,247,531   13.84
  Old Annapolis Road
Columbia, MD
  Howard County
Perimeter
  1974/1985   171,436   100.0 % 5,306,078   30.95
  7200 Riverwood Drive
Columbia, MD
  Howard County
Perimeter
  1986   160,000   100.0 % 3,516,124   21.98
  7000 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1999   145,806   100.0 % 1,539,347   10.56
  6731 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2002   123,911   84.8 % 2,768,112   26.35
  6711 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2006/2007   123,410   83.1 % 2,710,744   26.44
  6940 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1999   109,003   73.9 % 1,941,628   24.11
  6950 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1998   107,778   100.0 % 2,364,513   21.94
  8621 Robert Fulton Drive
Columbia, MD
  Howard County
Perimeter
  2005/2006   86,032   96.1 % 1,672,423   20.23
  7067 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2001   82,953   41.0 % 748,110   22.00
  6750 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  2001   78,460   64.5 % 1,270,882   25.12
  6700 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  1988   74,859   91.8 % 1,609,776   23.43
  6740 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  1992   63,480   100.0 % 1,561,837   24.60
  7160 Riverwood Drive
Columbia, MD
  Howard County
Perimeter
  2000   62,084   86.7 % 1,131,734   21.03
  7015 Albert Einstein Drive
Columbia, MD
  Howard County
Perimeter
  1999   61,203   100.0 % 906,700   14.81
  8671 Robert Fulton Drive
Columbia, MD
  Howard County
Perimeter
  2002   56,350   100.0 % 1,066,614   18.93
  6716 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  1990   52,005   74.9 % 884,281   22.70
  8661 Robert Fulton Drive
Columbia, MD
  Howard County
Perimeter
  2002   49,307   100.0 % 857,364   17.39
  9020 Mendenhall Court
Columbia, MD
  Howard County
Perimeter
  1982/2005   49,259   82.4 % 509,208   12.54
  7130 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1989   46,840   99.2 % 764,439   16.45
  7142 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1994   45,951   0.0 %  
  9140 Guilford Road
Columbia, MD
  Howard County
Perimeter
  1983   41,704   72.7 % 553,930   18.28
  7150 Riverwood Drive
Columbia, MD
  Howard County
Perimeter
  2000   41,382   100.0 % 661,518   15.99
  9720 Patuxent Woods Drive
Columbia, MD
  Howard County
Perimeter
  1986/2001   40,004   84.8 % 503,905   14.85
  6708 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  1988   39,203   100.0 % 831,809   21.22

22


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  7065 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2000   38,560   100.0 %   869,579     22.55
  9740 Patuxent Woods Drive
Columbia, MD
  Howard County
Perimeter
  1986/2001   38,292   100.0 %   390,958     10.21
  7138 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1990   38,225   100.0 %   821,278     21.49
  9160 Guilford Road
Columbia, MD
  Howard County
Perimeter
  1984   37,034   100.0 %   745,983     20.14
  7063 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2000   36,813   100.0 %   824,102     22.39
  6760 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  1991   36,440   96.3 %   810,647     23.10
  7150 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1991   35,812   100.0 %   646,989     18.07
  9700 Patuxent Woods Drive
Columbia, MD
  Howard County
Perimeter
  1986/2001   31,261   81.4 %   551,740     21.69
  9730 Patuxent Woods Drive
Columbia, MD
  Howard County
Perimeter
  1986/2001   30,986   100.0 %   448,791     14.48
  7061 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  2000   29,910   100.0 %   633,445     21.18
  7170 Riverwood Drive
Columbia, MD
  Howard County
Perimeter
  2000   29,162   87.9 %   465,828     18.18
  6724 Alexander Bell Drive
Columbia, MD
  Howard County
Perimeter
  2001   28,420   100.0 %   704,234     24.78
  7134 Columbia Gateway Drive
Columbia, MD
  Howard County
Perimeter
  1990   21,991   100.0 %   396,899     18.05
  9150 Guilford Drive
Columbia, MD
  Howard County
Perimeter
  1984   18,592   100.0 %   367,941     19.79
  10280 Old Columbia Road
Columbia, MD
  Howard County
Perimeter
  1988/2001   16,796   100.0 %   249,544     14.86
  10270 Old Columbia Road
Columbia, MD
  Howard County
Perimeter
  1988/2001   16,686   100.0 %   242,830     14.55
  9710 Patuxent Woods Drive
Columbia, MD
  Howard County
Perimeter
  1986/2001   15,229   100.0 %   317,357     20.84
  9130 Guilford Drive
Columbia, MD
  Howard County
Perimeter
  1984   13,700   100.0 %   263,734     19.25
  10290 Old Columbia Road
Columbia, MD
  Howard County
Perimeter
  1988/2001   10,890   60.4 %   102,629     15.59
  2500 Riva Road
Annapolis Junction, MD
  Annapolis   2000   155,000   100.0 %   2,089,800     13.48
           
     
     
  Subtotal/Average           7,668,383   92.6 % $ 162,847,470   $ 22.94
           
     
     

Suburban Maryland:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  11800 Tech Road
Silver Spring, MD
  North Silver Spring   1969/1989   228,179   100.0 % $ 4,033,725   $ 17.68
  400 Professional Drive
Gaithersburg, MD
  Gaithersburg   2000   129,311   100.0 %   3,785,763     29.28
  110 Thomas Johnson Drive
Frederick, MD
  Frederick   1987/1999   117,803   87.1 %   2,508,702     24.45
  45 West Gude Drive
Rockville, MD
  Rockville   1987   108,588   100.0 %   2,135,904     19.67
  15 West Gude Drive
Rockville, MD
  Rockville   1986   106,694   100.0 %   2,506,625     23.49
           
     
     
  Subtotal/Average           690,575   97.8 % $ 14,970,719   $ 22.17
           
     
     

23


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)


Suburban Baltimore:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  11311 McCormick Road
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1984/1994   212,691   52.0 % $ 2,541,792   $ 23.00
  10150 York Road
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1985   178,286   100.0 %   3,407,468     19.11
  9690 Deereco Road
Timonium, MD
  Hunt Valley/Rte 83
Corridor
  1988   134,167   100.0 %   3,391,213     25.28
  200 International Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1987   128,658   56.9 %   1,729,796     23.64
  375 W. Padonia Road
Timonium, MD
  Hunt Valley/Rte 83
Corridor
  1986   110,328   91.5 %   1,631,943     16.17
  226 Schilling Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1980   98,640   100.0 %   2,219,102     22.50
  201 International Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1982   78,634   79.7 %   1,543,079     24.63
  11011 McCormick Road
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1974   56,512   54.5 %   515,191     16.73
  216 Schilling Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1988/2001   36,003   89.4 %   656,811     20.40
  222 Schilling Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1978/1997   28,003   93.1 %   546,709     20.97
  224 Schilling Circle
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1978/1997   27,372   96.7 %   484,681     18.31
  11101 McCormick Road
Hunt Valley, MD
  Hunt Valley/Rte 83
Corridor
  1976   24,232   88.4 %   428,668     20.01
  7210 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1972   83,435   100.0 %   899,161     10.78
  7152 Windsor Boulevard
Woodlawn, MD
  Baltimore County
Westside
  1986   57,855   100.0 %   818,814     14.15
  21 Governor's Court
Woodlawn, MD
  Baltimore County
Westside
  1981/1995   56,063   64.6 %   615,935     17.01
  7125 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1985   50,488   100.0 %   935,564     18.53
  7253 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1988   38,930   100.0 %   517,197     13.29
  7104 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1988   30,257   100.0 %   511,693     16.91
  17 Governor's Court
Woodlawn, MD
  Baltimore County
Westside
  1981   14,619   100.0 %   256,355     17.54
  15 Governor's Court
Woodlawn, MD
  Baltimore County
Westside
  1981   14,568   100.0 %   213,725     14.67
  7127 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1985   11,144   64.9 %   130,230     18.00
  7129 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1985   11,075   100.0 %   171,663     15.50
  7108 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1988   9,018   47.1 %   81,517     19.21
  7102 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1988   8,879   100.0 %   169,282     19.07
  7106 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1988   8,820   100.0 %   162,077     18.38
  7131 Ambassador Road
Woodlawn, MD
  Baltimore County
Westside
  1985   7,453   100.0 %   128,931     17.30
  502 Washington Avenue
Towson, MD
  Towson   1984   91,188   90.9 %   1,731,588     20.89
  102 West Pennsylvania Avenue
Towson, MD
  Towson   1968/2001   49,497   85.1 %   797,253     18.92

24


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  100 West Pennsylvania Avenue
Towson, MD
  Towson   1952/1989   18,451   34.5 % 107,748   16.91
  109-111 Allegheny Avenue
Towson, MD
  Towson   1971   18,431   100.0 % 244,885   13.29
  10001 Franklin Square Drive
White Marsh, MD
  White Marsh   1997   216,000   83.7 % 1,475,910   8.16
  8140 Corporate Drive
White Marsh, MD
  White Marsh   2003   75,687   85.6 % 1,575,287   24.32
  8110 Corporate Drive
White Marsh, MD
  White Marsh   2001   75,687   100.0 % 1,571,524   20.76
  8031 Corporate Drive
White Marsh, MD
  White Marsh   1988/2004   66,000   100.0 % 1,005,010   15.23
  7941-7949 Corporate Drive
White Marsh, MD
  White Marsh   1996   57,600   100.0 % 589,722   10.24
  9910 Franklin Square Drive
White Marsh, MD
  White Marsh   2005   56,271   100.0 % 1,073,023   19.07
  8020 Corporate Drive
White Marsh, MD
  White Marsh   1997   51,600   100.0 % 834,741   16.18
  8094 Sandpiper Circle
White Marsh, MD
  White Marsh   1998   50,812   100.0 % 979,868   19.28
  4979 Mercantile Road
White Marsh, MD
  White Marsh   1985   50,498   100.0 % 662,607   13.12
  4940 Campbell Boulevard
White Marsh, MD
  White Marsh   1990   49,813   90.6 % 966,910   21.43
  8098 Sandpiper Circle
White Marsh, MD
  White Marsh   1998   47,680   100.0 % 761,422   15.97
  4969 Mercantile Road
White Marsh, MD
  White Marsh   1983   47,574   100.0 % 740,651   15.57
  8114 Sandpiper Circle
White Marsh, MD
  White Marsh   1986   45,399   87.1 % 966,522   24.45
  5020 Campbell Boulevard
White Marsh, MD
  White Marsh   1986/1988   44,701   76.0 % 469,755   13.82
  9920 Franklin Square Drive
White Marsh, MD
  White Marsh   2006   44,566   23.6 % 248,958   23.69
  8007 Corporate Drive
White Marsh, MD
  White Marsh   1995   43,197   85.0 % 646,849   17.62
  9930 Franklin Square Drive
White Marsh, MD
  White Marsh   2001   39,750   100.0 % 770,327   19.38
  8010 Corporate Drive
White Marsh, MD
  White Marsh   1998   39,351   57.0 % 435,495   19.41
  8013 Corporate Drive
White Marsh, MD
  White Marsh   1990   38,618   0.0 %  
  8615 Ridgely's Choice Drive
White Marsh, MD
  White Marsh   2005   37,797   52.3 % 383,971   19.42
  5325 Nottingham Ridge Road
White Marsh, MD
  White Marsh   2002   37,322   75.5 % 559,322   19.85
  9900 Franklin Square Drive
White Marsh, MD
  White Marsh   1999   33,912   100.0 % 624,525   18.42
  5024 Campbell Boulevard
White Marsh, MD
  White Marsh   1986/1988   33,858   100.0 % 483,234   14.27
  9940 Franklin Square Drive
White Marsh, MD
  White Marsh   2000   33,134   63.5 % 325,654   15.48
  5026 Campbell Boulevard
White Marsh, MD
  White Marsh   1986/1988   30,868   73.6 % 425,472   18.72
  7939 Honeygo Boulevard
White Marsh, MD
  White Marsh   1984   28,081   100.0 % 610,650   21.75

25


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  8133 Perry Hall Boulevard
White Marsh, MD
  White Marsh   1988   27,803   94.9 %   518,194     19.64
  5022 Campbell Boulevard
White Marsh, MD
  White Marsh   1986/1988   27,601   73.6 %   299,812     14.76
  8019 Corporate Drive
White Marsh, MD
  White Marsh   1990   25,461   100.0 %   444,641     17.46
  8029 Corporate Drive
White Marsh, MD
  White Marsh   1988/2004   25,000   100.0 %   387,548     15.50
  7923 Honeygo Boulevard
White Marsh, MD
  White Marsh   1985   24,053   100.0 %   473,343     19.68
  8003 Corporate Drive
White Marsh, MD
  White Marsh   1999   18,327   100.0 %   345,209     18.84
  8015 Corporate Drive
White Marsh, MD
  White Marsh   1990   16,610   100.0 %   281,699     16.96
  8023 Corporate Drive
White Marsh, MD
  White Marsh   1990   9,486   100.0 %   147,087     15.51
           
     
     
  Subtotal/Average           3,243,814   84.8 % $ 49,675,013   $ 18.06
           
     
     

Greater Philadelphia:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  753 Jolly Road
Blue Bell, PA
  Blue Bell   1960/92-94   419,472   100.0 % $ 4,189,907   $ 9.99
  785 Jolly Road
Blue Bell, PA
  Blue Bell   1970/1996   219,065   100.0 %   2,515,223     11.48
  760 Jolly Road
Blue Bell, PA
  Blue Bell   1974/1994   208,854   100.0 %   3,068,118     14.69
  751 Jolly Road
Blue Bell, PA
  Blue Bell   1966/1991   112,958   100.0 %   1,128,284     9.99
           
     
     
  Subtotal/Average           960,349   100.0 % $ 10,901,532   $ 11.35
           
     
     

Central New Jersey:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  431 Ridge Road
Dayton, NJ
  Exit 8A—Cranbury   1958/1998   171,200   100.0 % $ 1,959,932   $ 11.45
  429 Ridge Road
Dayton, NJ
  Exit 8A—Cranbury   1966/1996   142,385   21.1 %   741,216     24.65
  47 Commerce
Cranbury, NJ
  Exit 8A—Cranbury   1992/1998   41,398   100.0 %   547,600     13.23
  437 Ridge Road
Dayton, NJ
  Exit 8A—Cranbury   1962/1996   30,000   100.0 %   291,300     9.71
           
     
     
  Subtotal/Average           384,983   70.8 % $ 3,540,048   $ 12.98
           
     
     

Northern Virginia:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  15000 Conference Center Drive
Chantilly, VA
  Dulles South   1989   470,406   99.8 % $ 11,083,480   $ 23.61
  15010 Conference Center Drive
Chantilly, VA
  Dulles South   2006   223,610   100.0 %   5,994,549     26.81
  15059 Conference Center Drive
Chantilly, VA
  Dulles South   2000   145,192   100.0 %   4,408,801     30.37
  15049 Conference Center Drive
Chantilly, VA
  Dulles South   1997   145,053   100.0 %   4,202,340     28.97
  14900 Conference Center Drive
Chantilly, VA
  Dulles South   1999   127,115   81.3 %   2,818,381     27.27
  14280 Park Meadow Drive
Chantilly, VA
  Dulles South   1999   114,126   100.0 %   3,266,499     28.62
  4851 Stonecroft Boulevard
Chantilly, VA
  Dulles South   2004   88,094   100.0 %   2,664,207     30.24

26


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  14850 Conference Center Drive
Chantilly, VA
  Dulles South   2000   69,711   100.0 %   2,168,704     31.11
  14840 Conference Center Drive
Chantilly, VA
  Dulles South   2000   69,710   100.0 %   1,962,922     28.16
  13200 Woodland Park Drive
Herndon, VA
  Herndon   2002   404,665   100.0 %   11,279,746     27.87
  13454 Sunrise Valley Road
Herndon, VA
  Herndon   1998   112,633   100.0 %   2,744,755     24.37
  13450 Sunrise Valley Road
Herndon, VA
  Herndon   1998   53,728   98.6 %   1,270,169     23.98
  1751 Pinnacle Drive
McLean, VA
  Tysons Corner   1989/1995   260,469   96.5 %   8,205,927     32.65
  1753 Pinnacle Drive
McLean, VA
  Tysons Corner   1976/2004   181,637   100.0 %   6,399,128     35.23
           
     
     
  Subtotal/Average           2,466,149   98.6 % $ 68,469,608   $ 28.16
           
     
     

St. Mary's & King George Counties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  22309 Exploration Drive
Lexington Park, MD
  St. Mary's County   1984/1997   98,860   100.0 % $ 1,442,239   $ 14.59
  46579 Expedition Drive
Lexington Park, MD
  St. Mary's County   2002   61,156   87.3 %   1,155,492     21.65
  22289 Exploration Drive
Lexington Park, MD
  St. Mary's County   2000   61,059   94.9 %   1,151,274     19.86
  46591 Expedition Drive
Lexington Park, MD
  St. Mary's County   2005/2006   60,029   44.6 %   537,242     20.05
  44425 Pecan Court
California, MD
  St. Mary's County   1997   59,055   76.3 %   878,010     19.48
  22299 Exploration Drive
Lexington Park, MD
  St. Mary's County   1998   58,231   100.0 %   1,313,856     22.56
  44408 Pecan Court
California, MD
  St. Mary's County   1986   50,532   100.0 %   585,573     11.59
  23535 Cottonwood Parkway
California, MD
  St. Mary's County   1984   46,656   100.0 %   527,349     11.30
  22300 Exploration Drive
Lexington Park, MD
  St. Mary's County   1997   44,830   100.0 %   697,884     15.57
  44417 Pecan Court
California, MD
  St. Mary's County   1989   29,053   100.0 %   278,900     9.60
  44414 Pecan Court
California, MD
  St. Mary's County   1986   25,444   100.0 %   243,557     9.57
  44420 Pecan Court
California, MD
  St. Mary's County   1989   25,200   100.0 %   173,148     6.87
  16480 Commerce Drive
Dahlgren, VA
  King George
County
  2000   70,728   100.0 %   1,239,066     17.52
  16541 Commerce Drive
King George, VA
  King George
County
  1996   36,053   100.0 %   523,144     14.51
  16539 Commerce Drive
King George, VA
  King George
County
  1990   32,076   70.9 %   335,736     14.76
  16442 Commerce Drive
Dahlgren, VA
  King George County   2002   25,518   100.0 %   508,464     19.93
  16501 Commerce Drive
Dahlgren, VA
  King George
County
  2002   22,833   100.0 %   519,304     22.74
  16543 Commerce Drive
Dahlgren, VA
  King George
County
  2002   17,370   87.0 %   374,150     24.75
           
     
     
 
Subtotal/Average

 

 

 

 

 

824,683

 

91.6

%

$

12,484,388

 

$

16.54
           
     
     

27


Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized
Revenue per
Occupied
Square Foot(2)(3)

  8611 Military Drive   San Antonio   1982/1985   468,994   100.0 % $ 7,231,868   $ 15.42
    San Antonio, TX          
     
     
Colorado Springs:                            
  985 Space Center Drive
Colorado Springs, CO
  Colorado Springs
East
  1989   102,717   98.9 % $ 2,119,195   $ 20.86
  1670 North Newport Road
Colorado Springs, CO
  Colorado Springs
East
  1986/1987   67,500   100.0 %   1,428,696     21.17
  745 Space Center Drive
Colorado Springs, CO
  Colorado Springs
East
  2006   51,500   100.0 %   1,231,055     23.90
  1915 Aerotech Drive
Colorado Springs, CO
  Colorado Springs
East
  1985   37,946   85.8 %   554,635     17.03
  1925 Aerotech Drive
Colorado Springs, CO
  Colorado Springs
East
  1985   37,946   100.0 %   690,300     18.19
  980 Technology Court Colorado Springs, CO   Colorado Springs
East
  1995   33,190   100.0 %   561,343     16.91
  525 Babcock Road
Colorado Springs, CO
  Colorado Springs East   1967   14,000   100.0 %   130,194     9.30
  9950 Federal Drive
Colorado Springs, CO
  I-25 North Corridor   2001   66,222   83.6 %   663,691     11.99
  9960 Federal Drive
Colorado Springs, CO
  I-25 North Corridor   2001   46,948   100.0 %   844,841     18.00
  9965 Federal Drive
Colorado Springs, CO
  I-25 North Corridor   1983/2007   41,120   100.0 %   624,084     15.18
  5775 Mark Dabling Boulevard
Colorado Springs, CO
  Colorado Springs
Northwest
  1984   109,678   100.0 %   1,673,613     15.26
  5725 Mark Dabling Boulevard
Colorado Springs, CO
  Colorado Springs
Northwest
  1984   108,976   100.0 %   2,050,233     18.81
  5755 Mark Dabling Boulevard
Colorado Springs, CO
  Colorado Springs
Northwest
  1989   105,210   90.4 %   1,689,478     17.76
           
     
     
  Subtotal/Average           822,953   96.7 % $ 14,261,358   $ 17.93
           
     
     

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  11751 Meadowville Lane
Chester, VA
  Richmond
Southwest
  2007   193,000   100.0 % $ 5,133,615   $ 26.60
  201 Technology Park Drive
Lebanon, VA
  Southwest Virginia   2007   102,842   100.0 %   3,014,657     29.31
  607 Lakeside Drive
Cascade, MD
  Fort Ritchie   1990/2007   4,904   100.0 %   78,464     16.00
           
     
     
  Subtotal/Average           300,746   100.0 % $ 8,226,736   $ 27.35
           
     
     
  Total/Average           17,831,629   92.6 % $ 352,608,740   $ 21.36
           
     
     

(1)
This percentage is based upon all rentable square feet under lease terms that were in effect as of December 31, 2007.

(2)
Annualized rental revenue is the monthly contractual base rent as of December 31, 2007 multiplied by 12 plus the estimated annualized expense reimbursements under existing leases. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under GAAP does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis.

(3)
Annualized rental revenue per occupied square foot is the property's annualized rental revenue divided by that property's occupied square feet as of December 31, 2007.

28


        The following table provides certain information about our wholly owned properties that are under construction, development and redevelopment as of December 31, 2007:

Property and Location

  Submarket
  Estimated
Rentable
Square
Feet Upon
Completion

  Percentage
Leased/
Committed

 
Under Construction              

Baltimore/Washington Corridor:

 

 

 

 

 

 

 
  302 Sentinel Drive (302 NBP)
Annapolis Junction, MD
  BWI Airport   157,146   51.33 %
  5520 Research Park Drive (UMBC)
Baltimore, MD
  BWI Airport   110,400   0.00 %
  1362 Mellon Road
Hanover, MD
  BWI Airport   44,134   0.00 %
       
     
  Subtotal/Average       311,680   25.88 %
       
     
Colorado Springs:              
  655 Space Center Drive (Patriot Park 6)
Colorado Springs, CO
  Colorado Springs East   103,970   72.14 %
  1055 North Newport Road
Colorado Springs, CO
  Colorado Springs East   59,763   100.00 %
  9945 Federal Drive (Hybrid I)
Colorado Springs, CO
  I-25 North Corridor   73,940   0.00 %
  9925 Federal Drive (Hybrid II)
Colorado Springs, CO
  I-25 North Corridor   53,845   0.00 %
       
     
  Subtotal/Average       291,518   46.23 %
       
     
San Antonio:              
  8611 Military Drive, Building HI
San Antonio, TX
  San Antonio   52,352   100.00 %
  8611 Military Drive, Building C
San Antonio, TX
  San Antonio   38,255   100.00 %
       
     
  Subtotal/Average       90,607   100.00 %
       
     
  Total Under Construction       693,805   44.11 %
       
     
Under Development              

Baltimore/Washington Corridor:

 

 

 

 

 

 

 
  300 Sentinel Drive (300 NBP)
Annapolis Junction, MD
  BWI Airport   190,000   N/A  
  324 Sentinel Drive (324 NBP)
Annapolis Junction, MD
  BWI Airport   125,000   N/A  
  6721 Columbia Gateway Drive
Columbia, MD
  Howard Co. Perimeter   125,000   N/A  
  Riverwood I & II
Columbia, MD
  Howard Co. Perimeter   70,000   N/A  
       
     
  Subtotal/Average       510,000   N/A  
       
     
Suburban Maryland:              
  110 Thomas Johnson Drive, Bldg #2
Frederick, MD
  Frederick   85,000   N/A  
       
     
Suburban Baltimore:              
  8130 Corporate Drive
White Marsh, MD
  White Marsh   125,000   N/A  
  Northgate Business Park (Lot A)
Aberdeen, MD
  Harford County   80,000   N/A  
       
     
  Subtotal/Average       205,000   N/A  
       
     
St. Mary's & King George Counties:              
  16444 Commerce Drive
Dahlgren, VA
  King George County   57,000   N/A  
       
     

29


Property and Location

  Submarket
  Estimated
Rentable
Square
Feet Upon
Completion

  Percentage
Leased/
Committed

 

Colorado Springs:

 

 

 

 

 

 

 
  10807 New Allegiance Drive (Epic One)
Colorado Springs, Colorado
  I-25 North Corridor   145,723   N/A  
  565 Space Center Drive (Patriot Park 7)
Colorado Springs, Colorado
  Colorado Springs East   89,773   N/A  
       
     
  Subtotal/Average       235,496   N/A  
       
     
  Total Under Development       1,092,496   N/A  
       
     
Under Redevelopment              

Colorado Springs:

 

 

 

 

 

 

 
 
9965 Federal Drive
Colorado Springs, CO

 

I-25 North Corridor

 

74,749

 

100.00

%
       
     
  Total Under Redevelopment       74,749   100.00 %
       
     

        The following table provides certain information about our wholly owned developable land holdings not under construction or development as of December 31, 2007:

Land Location

  Submarket
  Acres
  Estimated
Developable
Square
Feet

Baltimore/Washington Corridor:            
  National Business Park (Phase III)
Annapolis Junction, MD
  BWI Airport   194   1,125,000
  National Business Park (Phase II)
Annapolis Junction, MD
  BWI Airport   30   730,165
  1460 Dorsey Road
Hanover, MD
  BWI Airport   6   60,000
  940 Elkridge Landing Road (AS 7)
Linthicum, MD
  BWI Airport   3   53,941
  1243 Winterson Road (AS 22)
Linthicum, MD
  BWI Airport   2   30,000
  Columbia Gateway Parcel T-11
Columbia, MD
  Howard Co. Perimeter   14   220,000
  7125 Columbia Gateway Drive
Columbia, MD
  Howard Co. Perimeter   5   120,000
       
 
  Subtotal       254   2,339,106
       
 
Northern Virginia:            
  Westfields Corporate Center
Chantilly, VA
  Dulles South   32   674,200
  Westfields Corporate Center
Chantilly, VA
  Dulles South   17   377,300
  Westfields Corporate Center
Chantilly, VA
  Dulles South   19   246,800
  Woodland Park
Herndon, VA
  Herndon   5   225,000
       
 
  Subtotal       73   1,523,300
       
 

30


Land Location

  Submarket
  Acres
  Estimated
Developable
Square
Feet

Suburban Maryland:            
  110 Thomas Johnson Drive
Frederick, MD
  Frederick   3   85,000
  Rockville Corporate Center
Rockville, MD
  Rockville   10   220,000
       
 
  Subtotal       13   305,000
       
 

Suburban Baltimore:

 

 

 

 

 

 
  White Marsh
White Marsh, MD
  White Marsh   145   1,567,000
  37 Allegheny Avenue(1)
Towson, MD
  Towson     40,000
  Northgate Business Park
Aberdeen, MD
  Harford County   51   720,000
       
 
  Subtotal       196   2,327,000
       
 

St. Mary's & King George Counties:

 

 

 

 

 

 
  Dahlgren Technology Center
Dahlgren, MD
  King George County   32   65,000
  Expedition Park
Lexington Park, MD
  St. Mary's County   6   60,000
       
 
  Subtotal       38   125,000
       
 

Colorado Springs:

 

 

 

 

 

 
  InterQuest
Colorado Springs, CO
  I-25 North Corridor   111   1,626,492
  9965 Federal Drive
Colorado Springs, CO
  I-25 North Corridor   4   30,000
  Patriot Park
Colorado Springs, CO
  Colorado Springs East   71   770,000
  Aerotech Commerce
Colorado Springs, CO
  Colorado Springs East   6   90,000
       
 
  Subtotal       192   2,516,492
       
 

San Antonio:

 

 

 

 

 

 
  San Antonio
San Antonio, TX
  San Antonio   31   375,000
  San Antonio
San Antonio, TX
  San Antonio   27   350,000
       
 
 
Subtotal

 

 

 

58

 

725,000
       
 

Greater Philadelphia:

 

 

 

 

 

 
  Unisys Campus
Blue Bell, PA
  Blue Bell   45   600,000
       
 

Northern/Central New Jersey:

 

 

 

 

 

 
  Princeton Technology Center
Cranbury, NJ
  Exit 8A—Cranbury   19   250,000
       
 

Other:

 

 

 

 

 

 
  Fort Ritchie(2)
Cascade, MD
  Cascade, MD   591   1,700,000
       
 
  Total Land       1,479   12,410,898
       
 

(1)
This property contains 0.3 of an acre.

(2)
The Fort Ritchie acquisition includes 301,134 square feet of existing office space targeted for future development (of which 3,014 square feet were leased as of December 31, 2007) and 110 existing usable residential units.

31


        The following table provides certain information about our office properties owned through joint ventures as of December 31, 2007:

Property and Location

  Submarket
  Year
Built/
Renovated

  Rentable
Square
Feet

  Occupancy(1)
  Annualized
Rental
Revenue(2)

  Annualized Rental
Revenue per
Occupied
Square Foot(2)(3)

Suburban Maryland:                            
  4230 Forbes Boulevard
Prince Georges, MD
  Lanham   2003   55,866   76.2 % $ 671,487   $ 15.78
           
     
     

Northern Virginia:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  2900 Towerview Road(4)
Herndon, VA
  Route 28 South   1982   78,171   100.0 % $ 1,005,389   $ 12.86
           
     
     

Greater Harrisburg, Pennsylvania:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  2605 Interstate Drive
Harrisburg, PA
  East Shore   1990   79,456   100.0 % $ 1,451,661   $ 18.27
  6345 Flank Drive
Harrisburg, PA
  East Shore   1989   69,443   88.5 %   856,251     13.93
  6340 Flank Drive
Harrisburg, PA
  East Shore   1988   68,200   100.0 %   785,559     11.52
  2601 Market Place
Harrisburg, PA
  East Shore   1989   65,411   87.1 %   1,077,893     18.92
  6400 Flank Drive
Harrisburg, PA
  East Shore   1992   52,439   77.8 %   577,743     14.17
  6360 Flank Drive
Harrisburg, PA
  East Shore   1988   46,500   86.0 %   525,349     13.14
  6385 Flank Drive
Harrisburg, PA
  East Shore   1995   32,921   20.6 %   93,070     13.75
  6380 Flank Drive
Harrisburg, PA
  East Shore   1991   32,668   100.0 %   457,072     13.99
  6405 Flank Drive
Harrisburg, PA
  East Shore   1991   32,000   100.0 %   401,634     12.55
  95 Shannon Road
Harrisburg, PA
  East Shore   1999   21,976   100.0 %   394,919     17.97
  75 Shannon Road
Harrisburg, PA
  East Shore   1999   20,887   100.0 %   416,917     19.96
  6375 Flank Drive
Harrisburg, PA
  East Shore   2000   19,783   100.0 %   347,398     17.56
  85 Shannon Road
Harrisburg, PA
  East Shore   1999   12,863   100.0 %   231,154     17.97
  5035 Ritter Road
Mechanicsburg, PA
  West Shore   1988   56,556   100.0 %   908,500     16.06
  5070 Ritter Road—Building A
Mechanicsburg, PA
  West Shore   1989   32,309   89.6 %   407,249     14.06
  5070 Ritter Road—Building B
Mechanicsburg, PA
  West Shore   1989   28,347   100.0 %   409,525     14.45
           
     
     
Subtotal/Average           671,759   90.5 % $ 9,341,894   $ 15.37
           
     
     

Total/Average

 

 

 

 

 

805,796

 

90.4

%

$

11,018,770

 

$

15.13
           
     
     

(1)
This percentage is based upon all rentable square feet under lease terms that were in effect as of December 31, 2007.

(2)
Annualized rental revenue is the monthly contractual base rent as of December 31, 2007 multiplied by 12 plus the estimated annualized expense reimbursements under existing leases.

(3)
Annualized rental revenue per occupied square foot is the property's annualized rental revenue divided by that property's occupied square feet as of December 31, 2007.

(4)
This property totals 137,037 square feet, of which 58,866 is under redevelopment at December 31, 2007.

32


        The following table provides certain information about our office properties owned through joint ventures that were under construction or redevelopment as of December 31, 2007:

Property and Location

  Submarket
  Estimated Rentable Square Feet Upon Completion
  Percentage Leased/Committed
 
Under Construction              

Baltimore/Washington Corridor:

 

 

 

 

 

 

 
  7740 Milestone Parkway
Hanover, MD
  BWI Airport   151,800   0.00 %
       
     
  Total Under Construction       151,800   0.00 %
       
     

Under Redevelopment

 

 

 

 

 

 

 

Baltimore/Washington Corridor:

 

 

 

 

 

 

 
  7468 Candlewood Road
Hanover, MD
  BWI Airport   356,000   0.00 %
       
     

Northern Virginia:

 

 

 

 

 

 

 
  2900 Towerview Road(1)
Herndon, VA
  Route 28 South   58,866   0.00 %
  13849 Park Center Road
Herndon, VA
  Route 28 South   57,000   N/A(2 )
       
     
  Subtotal/Average       115,866   0.00 %
       
     
  Total Under Redevelopment       471,866   0.00 %
       
     

        The following table provides certain information about our developable land holdings owned through joint ventures that were not under construction or redevelopment as of December 31, 2007:

Land Location

  Submarket
  Acres
  Estimated
Developable
Square
Feet

Baltimore/Washington Corridor:            
  Arundel Preserve
Hanover, MD
  BWI Airport   56   1,648,200

Other:

 

 

 

 

 

 
  Indian Head
Charles County, MD
  Charles County MD   169   827,250
       
 
 
Total Land

 

 

 

225

 

2,475,450
       
 

33


Lease Expirations

        The following table provides a summary schedule of the lease expirations for leases in place for our wholly owned properties as of December 31, 2007, assuming that none of the tenants exercise renewal options:

Year of Lease Expiration(1)

  Number of Leases Expiring
  Square Footage of Leases Expiring
  Percentage of Total Occupied Square Feet
  Annualized Rental Revenue of Expiring Leases(2)
  Percentage of Total Annualized Rental Revenue Expiring(2)
  Total Annualized Rental Revenue of Expiring Leases per Occupied Square Foot
 
  (in thousands)

2008   184   1,936,220   11.7 % $ 39,323   11.2 % $ 20.31
2009   163   2,969,784   18.0 %   50,387   14.3 %   16.97
2010   160   2,056,484   12.5 %   46,978   13.3 %   22.84
2011   125   1,534,448   9.3 %   30,644   8.7 %   19.97
2012   126   2,447,463   14.8 %   51,997   14.7 %   21.25
2013   39   992,272   6.0 %   22,824   6.5 %   23.00
2014   27   727,776   4.4 %   20,769   5.9 %   28.54
2015   28   1,298,810   7.9 %   30,784   8.7 %   23.70
2016   20   485,182   2.9 %   12,054   3.4 %   24.84
2017   29   740,028   4.5 %   18,595   5.3 %   25.13
2018   5   333,455   2.0 %   8,566   2.4 %   25.69
2019   2   38,292   0.2 %   391   0.1 %   10.21
2020       0.0 %     0.0 %   0.00
2021   1   104,695   0.6 %   2,454   0.7 %   23.44
2022   2   295,842   1.8 %   8,148   2.3 %   27.54
2023       0.0 %     0.0 %   0.00
2024       0.0 %     0.0 %   0.00
2025   2   468,994   2.9 %   7,232   2.1 %   15.42
Other(3)   22   80,222   0.5 %   1,463   0.4 %   18.24
   
 
 
 
 
     
Total/Weighted Average   935   16,509,967   100.0 % $ 352,609   100.0 % $ 21.36
   
 
 
 
 
     

(1)
Most of our leases with the United States Government provide for consecutive one-year terms or provide for early termination rights. All of the leasing statistics set forth above assumed that the United States Government will remain in the space that it leases through the end of the respective arrangements, without ending consecutive one-year leases prematurely or exercising early termination rights. We reported the statistics in this manner because we manage our leasing activities using these same assumptions and believe these assumptions to be probable.

(2)
Annualized rental revenue is the monthly contractual base rent as of December 31, 2007 multiplied by 12, plus the estimated annualized expense reimbursements under existing office leases.

(3)
Other consists primarily of amenities, including cafeterias, concierge offices and property management space. In addition, month-to-month leases and leases that have expired but the tenant remains in holdover are included in this line item as the exact expiration date is unknown.

Item 3.    Legal Proceedings

        Jim Lemon and Robin Biser, as plaintiffs, initiated a suit on May 12, 2005, in The United States District Court for the District of Columbia (Case No. 1:05CV00949), against The Secretary of the

34



United States Army, PenMar Development Corporation ("PMDC") and the Company, as defendants, in connection with the then pending acquisition by the Company of the former army base known as Fort Ritchie located in Cascade, Washington County, Maryland. The case was dismissed by the United States District Court on September 28, 2006, due to the plaintiffs' lack of standing. The plaintiffs filed an appeal in the case in the United States Court of Appeals for the District of Columbia Circuit and the Court of Appeals reversed the findings of the District Court and remanded the case to the District Court for further proceedings. The plaintiffs were unsuccessful in their request for an emergency injunction pending appeal. The Company acquired from PMDC fee simple title to 500 acres of the 591 acres comprising Fort Ritchie on October 5, 2006 and the remaining 91 acres on November 29, 2007.

        We are not currently involved in any other material litigation nor, to our knowledge, is any material litigation currently threatened against the Company (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).

Item 4.    Submission of Matters to a Vote of Security Holders

        Not applicable.


PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

Market Information

        Our common shares trade on the New York Stock Exchange ("NYSE") under the symbol "OFC." The table below shows the range of the high and low sale prices for our common shares as reported on the NYSE, as well as the quarterly common share dividends per share declared:

 
  Price Range
   
 
  Dividends Per Share
 
  Low
  High
2006                  
First Quarter   $ 34.91   $ 46.12   $ 0.280
Second Quarter   $ 37.32   $ 45.74   $ 0.280
Third Quarter   $ 40.65   $ 47.54   $ 0.310
Fourth Quarter   $ 44.21   $ 51.45   $ 0.310
 
 
  Price Range
   
 
  Dividends Per Share
 
  Low
  High
2007                  
First Quarter   $ 44.85   $ 56.45   $ 0.310
Second Quarter   $ 40.47   $ 48.81   $ 0.310
Third Quarter   $ 35.21   $ 44.63   $ 0.340
Fourth Quarter   $ 30.81   $ 45.39   $ 0.340

        The number of holders of record of our common shares was 401 as of December 31, 2007. 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

35



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.

Unregistered Sales of Equity Securities and Use of Proceeds

        During the three months ended December 31, 2007, 1,200 of the Operating Partnership's common units were exchanged for 1,200 common shares in accordance with the Operating Partnership's Second Amended and Restated Limited Partnership Agreement, as amended. The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

Common Shares Performance Graph

        The graph and the table set forth below assume $100 was invested on December 31, 2002 in the common shares of Corporate Office Properties Trust. The graph and the table compare the cumulative return (assuming reinvestment of dividends) of this investment with a $100 investment at that time in the S&P 500 Index or the All Equity REIT Index of the National Association of Real Estate Investment Trusts ("NAREIT"):

LOGO

 
  Value at
Index

  12/31/02
  12/31/03
  12/31/04
  12/31/05
  12/31/06
  12/31/07
Corporate Office Properties Trust   $ 100.00   $ 157.63   $ 228.82   $ 286.84   $ 418.15   $ 269.75
S&P 500     100.00     128.68     142.69     149.70     173.34     182.86
NAREIT All Equity REIT Index     100.00     137.13     180.44     202.38     273.34     230.45

36


Item 6.    Selected Financial Data

        The following table sets forth summary financial data as of and for each of the years ended December 31, 2003 through 2007. The table illustrates the significant growth our Company experienced over the periods reported. Most of this growth, particularly pertaining to revenues, operating income and total assets, was attributable to our addition of properties through acquisition and development activities. We financed most of the acquisition and development activities by incurring debt and issuing preferred and common equity, as indicated by the growth in our interest expense, preferred share dividends and weighted average common shares outstanding. The growth in our general and administrative expenses reflects, in large part, the growth in management resources required to support the increased size of our portfolio. Since this information is only a summary, you should refer to our Consolidated Financial Statements and notes thereto 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 and Subsidiaries
(in thousands, except per share data and number of properties)

 
  2007
  2006
  2005
  2004
  2003
 
Revenues                                
  Revenues from real estate operations(1)   $ 368,949   $ 293,578   $ 236,809   $ 199,501   $ 159,767  
  Construction contract and other service operations revenues     41,225     60,084     79,234     28,903     31,740  
   
 
 
 
 
 
    Total revenues     410,174     353,662     316,043     228,404     191,507  
   
 
 
 
 
 
Expenses                                
  Property operating expenses(1)     123,282     92,907     70,337     57,888     46,513  
  Depreciation and other amortization associated with real estate operations(1)     106,331     78,054     60,427     48,708     34,019  
  Construction contract and other service operations expenses     39,793     57,345     77,287     26,996     30,933  
  General and administrative expenses     20,523     16,936     13,533     10,938     7,893  
   
 
 
 
 
 
    Total operating expenses     289,929     245,242     221,584     144,530     119,358  
   
 
 
 
 
 
Operating income     120,245     108,420     94,459     83,874     72,149  
Interest expense and amortization of deferred financing costs(1)     (85,708 )   (73,107 )   (56,135 )   (43,843 )   (40,662 )
Gain on sale of non-real estate investment     1,033                  
   
 
 
 
 
 
Income from continuing operations before equity in loss of unconsolidated entities, income taxes and minority interests     35,570     35,313     38,324     40,031     31,487  
Equity in loss of unconsolidated entities     (224 )   (92 )   (88 )   (88 )   (98 )
Income tax (expense) benefit     (569 )   (887 )   (668 )   (795 )   169  
   
 
 
 
 
 
Income from continuing operations before minority interests     34,777     34,334     37,568     39,148     31,558  
Minority interests in income from continuing operations(1)     (3,398 )   (3,826 )   (4,901 )   (5,029 )   (5,776 )
   
 
 
 
 
 
Income from continuing operations     31,379     30,508     32,667     34,119     25,782  
Income from discontinued operations, net of minority interests(1)(2)     1,845     17,987     6,096     3,026     4,759  
Gain (loss) on sales of real estate, net(1)(3)     1,560     732     268     (113 )   336  
   
 
 
 
 
 
Net income     34,784     49,227     39,031     37,032     30,877  
Preferred share dividends     (16,068 )   (15,404 )   (14,615 )   (16,329 )   (12,003 )
Issuance costs associated with redeemed preferred shares(4)         (3,896 )       (1,813 )    
Repurchase of preferred units in excess of recorded book value(5)                     (11,224 )
   
 
 
 
 
 
Net income available to common shareholders   $ 18,716   $ 29,927   $ 24,416   $ 18,890   $ 7,650  
   
 
 
 
 
 

37


 
  2007
  2006
  2005
  2004
  2003
 
Basic earnings per common share                                
  Income from continuing operations   $ 0.36   $ 0.29   $ 0.49   $ 0.48   $ 0.11  
  Net income available to common shareholders   $ 0.40   $ 0.72   $ 0.65   $ 0.57   $ 0.29  
Diluted earnings per common share                                
  Income from continuing operations   $ 0.35   $ 0.28   $ 0.47   $ 0.45   $ 0.10  
  Net income available to common shareholders   $ 0.39   $ 0.69   $ 0.63   $ 0.54   $ 0.27  
Weighted average common shares outstanding—basic     46,527     41,463     37,371     33,173     26,659  
Weighted average common shares outstanding—diluted     47,630     43,262     38,997     34,982     28,021  
Balance Sheet Data (as of year end):                                
Investment in real estate   $ 2,603,472   $ 2,111,310   $ 1,888,106   $ 1,544,501   $ 1,189,258  
Total assets   $ 2,931,853   $ 2,419,601   $ 2,129,759   $ 1,732,026   $ 1,332,076  
Debt   $ 1,825,842   $ 1,498,537   $ 1,348,351   $ 1,022,688   $ 738,698  
Total liabilities   $ 1,979,116   $ 1,629,111   $ 1,442,036   $ 1,111,224   $ 801,899  
Minority interests   $ 130,095   $ 116,187   $ 105,210   $ 98,878   $ 79,796  
Shareholders' equity   $ 822,642   $ 674,303   $ 582,513   $ 521,924   $ 450,381  
Other Financial Data (for the year ended):                                
Cash flows provided by (used in):                                
  Operating activities   $ 137,701   $ 113,151   $ 95,944   $ 84,494   $ 67,783  
  Investing activities   $ (327,714 ) $ (253,834 ) $ (420,301 ) $ (268,720 ) $ (172,949 )
  Financing activities   $ 206,728   $ 137,822   $ 321,320   $ 188,566   $ 108,656  
Numerator for diluted EPS   $ 18,716   $ 29,927   $ 24,416   $ 18,911   $ 7,650  
Diluted funds from operations(6)   $ 125,309   $ 98,937   $ 88,801   $ 76,248   $ 61,268  
Diluted funds from operations per share(6)   $ 2.24   $ 1.91   $ 1.86   $ 1.74   $ 1.56  
Cash dividends declared per common share   $ 1.30   $ 1.18   $ 1.07   $ 0.98   $ 0.91  
Property Data (as of year end):                                
Number of properties owned(1)(7)     228     170     165     143     118  
Total rentable square feet owned(1)(7)     17,832     15,050     13,708     11,765     9,876  

(1)
Certain prior period amounts pertaining to properties included in discontinued operations have been reclassified to conform with the current presentation. These reclassifications did not affect consolidated net income or shareholders' equity.

(2)
Reflects income derived from one operating real estate property that we sold in 2003, three operating real estate properties that we sold in 2005, seven operating real estate properties we sold in 2006, four operating real estate properties we sold in 2007 and one operating real estate property that we were under contract to sell as of December 31, 2007 that we classified as held for sale (see Note 18 to our Consolidated Financial Statements).

(3)
Reflects gain (loss) from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.

(4)
Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized upon the redemption of the Series E and Series F Preferred Shares of beneficial interest in 2006 and the Series B Preferred Shares of beneficial interest in 2004.

(5)
Reflects a decrease to net income available to common shareholders representing the excess of the repurchase price of the Series C Preferred Units in our Operating Partnership over the sum of the recorded book value of the units and the accrued and unpaid return to the unitholder.

(6)
For definitions of diluted funds from operations per share and diluted funds from operations and reconciliations of these measures to their comparable measures under generally accepted accounting principles, you should refer to the section entitled "Funds from Operations" within the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."

(7)
Amounts reported reflect only wholly owned properties.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        You should refer to our Consolidated Financial Statements and the notes thereto and our 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 and operations of our business. Forward-looking statements can be identified by the use of words such as "may," "will," "should," "expect," "estimate" or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:

We undertake no obligation to update or supplement forward-looking statements.

Overview

        We are a real estate investment trust ("REIT") that focuses on the acquisition, development, ownership, management and leasing of suburban office properties in select markets and submarkets. We also focus on servicing the multi-location requirements of strategic customers and strategic industries in which tenants have specialized product requirements. Our properties are typically concentrated in large office parks located in demographically strong markets and submarkets where we believe we can achieve critical mass, operating synergies and key competitive advantages, including attracting high quality tenants and securing acquisition and development opportunities, and/or located near demand drivers for strategic customers and industries. As of December 31, 2007, our investments in real estate included the following:

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        REITs were created by the United States Congress in order to provide large numbers of investors with the ability to make investments into entities that own large scale commercial real estate. One unique aspect of a REIT is that the entity typically does not pay corporate income tax, provided that the entity distributes 100% of its taxable income to its shareholders and meets a number of other specific requirements of the Internal Revenue Code of 1986, as amended (it is noteworthy that REITs are required to distribute a minimum of only 90% of taxable income to maintain their tax status as a REIT, although any differential between the 90% and 100% would be taxable). Most of our revenues relating to our real estate operations are derived from rents and property operating expense reimbursements earned from tenants leasing space in our properties. Most of our expenses relating to our real estate operations take the form of: (1) property operating costs, such as real estate taxes, utilities and repairs and maintenance; (2) financing costs, such as interest and loan costs; and (3) depreciation and amortization associated with our operating properties.

        Of the 228 wholly owned operating properties in our portfolio, 213 were located in the Mid-Atlantic region of the United States. Our primary regions as of December 31, 2007 are set forth below:

        As of December 31, 2007, 138 of our properties were located in what is widely known as the Greater Washington, D.C. region, which includes the first four regions set forth above, and 64 were located in neighboring Suburban Baltimore. At December 31, 2007, we also owned 13 wholly owned properties in Colorado Springs and two in San Antonio. In addition, we owned eight properties in total as of December 31, 2007 in the last two locations set forth above that are considered non-core to the Company. The most significant change in our geographical concentration in 2007 occurred as a result of our completion of the Nottingham Acquisition (discussed below), which approximately doubled our concentration in the Suburban Baltimore region. We discuss further the geographic concentrations of our property ownership in the section below entitled "Concentration of Operations."

        Part of our strategy for operations and growth focuses on establishing, maintaining and expanding strategic customer relationships in multiple locations to make us the landlord of choice for such customers. As a result of this strategy, a large concentration of our revenue is derived from several large tenants. Our largest tenants are also heavily concentrated with the United States defense industry,

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with such tenants predominantly concentrated in the area of defense information technology. Several noteworthy statistics that demonstrate our tenant and industry concentrations are set forth below:

 
  Percentage of Annualized Rental Revenue(1) of Wholly Owned Properties at December 31, 2007
 
Largest tenant, United States Government   16.3 %
Five largest tenants   35.0 %
Twenty largest tenants   54.8 %
Tenants in the United States defense industry   47.9 %

We discuss further our lease concentrations in the section below entitled "Concentration of Operations."

        In order to maximize the revenue potential of our properties, we try to maintain high levels of occupancy; as a result, we consider occupancy rates to be an important measure of the productivity of our properties. One way that we attempt to maximize occupancy rates is by renewing a high percentage of our existing tenants; accordingly, tenant renewal rates are important to us in monitoring our leasing activities and tenant relationships. In managing the effect of our leasing activities on our financial position and future operating performance stability, we also monitor the timing of our lease maturities with the objective that the timing of such maturities not be highly concentrated in a given one-year or five-year period. The table below sets forth certain occupancy and leasing information as of or for the year ended December 31, 2007 for our portfolio of wholly owned properties:

Occupancy     92.6 %
Renewal rate of square footage for scheduled lease expirations during year     69.1 %
Average contractual annual rental rate per square foot(1)   $ 21.36  
Weighted average lease term (in years)(2)     5.0  

We discuss further in the section below entitled "Results of Operations," in the subsection entitled "Occupancy and Leasing."

        Achieving optimal performance from our properties is highly important to us. We evaluate the performance of our properties by focusing on changes in revenues from real estate operations (comprised of (1) rental revenue and (2) tenant recoveries and other real estate operations revenue) and property operating expenses. However, since we have experienced significant growth in a number of operating properties, assessing performance from our growth in revenues from real estate operations and property operating expenses without further analysis of the components of such growth can be misleading. Therefore, we evaluate (1) changes in revenues from real estate operations and property operating expenses attributable to property additions separately from (2) the changes attributable to properties that were owned and 100% operational throughout any two periods being compared (properties that we collectively refer to as the Same-Office Properties). During 2007, we:

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We discuss these changes further in the section below entitled "Results of Operations," in the subsection entitled "Revenues from Real Estate Operations and Property Operating Expenses."

        In addition to owning real estate properties, we provide real estate-related services that include: (1) property management; (2) construction and development management; and (3) heating and air conditioning services and controls. The gross revenue and costs associated with these services generally bear little relationship to the level of our activity from these operations since a substantial portion of the costs are subcontracted costs that are reimbursed to us by the customer at no mark up. As a result, the operating margins from these operations are small relative to the revenue. We use the net of such revenues and expenses to evaluate the performance of our service operations. For 2007, the operating margins of our service operations decreased $1.3 million compared to 2006 due primarily to: (1) a slow down in activity on certain third party constructions jobs; and (2) a decrease in third party work for heating and air conditioning controls and plumbing services. These operations are discussed further in the section below entitled "Results of Operations," in the subsection entitled "Construction Contract and Other Service Revenue and Expenses."

        Our 2007 net income available to common shareholders decreased 37.5% and our diluted earnings per share decreased 43.5% compared to 2006. We discuss significant factors contributing to these changes within subsections of the section below entitled "Results of Operations."

        The investment portion of our growth strategy focuses primarily on two activities: acquisitions and property development. These activities typically target suburban office properties in our existing geographic regions, neighboring regions or new regions meeting our investment criteria, but they may also target other properties that meet the multi-location requirements of our strategic customers and strategic industries. Since we take an opportunistic yet disciplined approach to our investment activities, the volume of these activities and allocation between acquisitions versus development naturally change from year to year. Highlights of our 2007 acquisition and development activities are set forth below:

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        While we generally do not acquire properties with the intent of selling them, we do sell properties from time to time when we believe that most of the earnings growth potential in those properties have been realized, or determine that the property no longer fits within our strategic plans due to its type and/or location. During 2007, we sold four operating properties totaling 128,000 square feet (including two from one of our non-core regions and one acquired in the Nottingham Acquisition) and three parcels of land acquired in the Nottingham Acquisition totaling approximately 16 acres and developable into approximately 230,000 square feet for a total of $26.5 million, resulting in recognized gains before minority interest and taxes on gain on sale of real estate totaling $6.9 million (we incurred $1.1 million in income tax expense on these sales due primarily to built in gains that existed for certain of these properties).

        Our financing policy is aimed at maintaining a flexible capital structure in order to facilitate consistent growth and performance in the face of differing market conditions in the most cost-effective manner. As part of this policy, we monitor: (1) levels of debt relative to our overall capital structure; (2) the relationship of certain measures of earnings to certain financing cost requirements (coverage ratios); (3) the relationship of our total variable-rate debt to our total debt; and (4) the timing of our debt maturities to ensure that the maximum maturities of debt in any year do not exceed a defined percentage of total assets. We also pursue opportunities, when we believe market conditions to be favorable, to: (1) reduce financing costs by refinancing existing debt or redeeming existing preferred equity; (2) issue common and preferred shares of beneficial interest ("common shares" and "preferred shares"); (3) issue equity units in our Operating Partnership; and (4) reduce our equity investment requirements in certain properties through the use of joint venture structures. Highlights of our 2007 financing activities are set forth below:

        We discuss our 2007 investing and financing activities further in the section below entitled "Liquidity and Capital Resources," along with discussions of, among other things, the following:


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Critical Accounting Policies and Estimates

        Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), which require us to make certain estimates and assumptions. A summary of our significant accounting policies is provided in Note 2 to our Consolidated Financial Statements. The following section is a summary of certain aspects of those accounting policies involving estimates and assumptions that (1) require our most difficult, subjective or complex judgments in accounting for highly uncertain matters or matters that are susceptible to change and (2) materially affect our reported operating performance or financial condition. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our Consolidated Financial Statements. While reviewing this section, you should refer to Note 2 to our Consolidated Financial Statements, including terms defined therein.

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Concentration of Operations

        One measure that we refer to in various sections of the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report on Form 10-K is annualized rental revenue. Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases as of a point in time. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under GAAP does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis.

        Our market strategy is to concentrate our operations in select markets and submarkets where we believe we already possess or can achieve the critical mass necessary to maximize management efficiencies, operating synergies and competitive advantages through our acquisition, property management, leasing and development programs. A result of this strategy is that our property positions and operations are highly concentrated in a small number of geographic regions. The table below sets forth the regional allocation of our annualized rental revenue as of the end of the last three calendar years:

 
  Percentage of Annualized Rental Revenue of
Wholly Owned Properties
as of December 31,

  Number of
Wholly Owned Properties
as of December 31,

Region

  2007
  2006
  2005
  2007
  2006
  2005
Baltimore/Washington Corridor   46.2 % 51.2 % 47.8 % 101   87   82
Northern Virginia   19.4 % 20.5 % 21.5 % 14   14   13
Suburban Baltimore   14.1 % 7.5 % 10.1 % 64   23   25
Suburban Maryland   4.3 % 4.1 % 5.2 % 5   5   7
Colorado Springs   4.0 % 4.2 % 1.7 % 13   11   5
St. Mary's and King George Counties   3.5 % 4.2 % 4.3 % 18   18   18
Greater Philadelphia   3.1 % 3.7 % 4.0 % 4   4   4
San Antonio   2.1 % 2.4 % 1.5 % 2   2   2
Northern/Central New Jersey   1.0 % 2.2 % 3.9 % 4   6   9
Other   2.3 % N/A   N/A   3   N/A   N/A
   
 
 
 
 
 
    100.0 % 100.0 % 100.0 % 228   170   165
   
 
 
 
 
 

        The most significant change in the regional allocation from December 31, 2006 to December 31, 2007 occurred as a result of the Nottingham Acquisition which, due to the large number of properties located in Suburban Baltimore, significantly increased that region's allocation and had a decreasing effect on the other regions, although the resulting decrease in the Baltimore/Washington Corridor was offset slightly by the effects in that region of (1) the properties acquired in that region in the Nottingham Acquisition and (2) newly-constructed properties placed into service in 2007. The most significant changes in the regional allocation from December 31, 2005 to December 31, 2006 occurred as a result of property acquisitions in the Baltimore/Washington Corridor and Colorado Springs and the sale of properties in Suburban Baltimore and Suburban Maryland. It is also noteworthy that our

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allocation in Northern/Central New Jersey has decreased over the last two years due primarily to our sale of properties in that region.

        As of December 31, 2007, we had construction underway on four wholly owned properties in Colorado Springs, three wholly owned properties in the Baltimore/Washington Corridor and two wholly owned properties in San Antonio; we expect that these properties will be completed and begin generating rental revenue between 2008 and 2009. We also have redevelopment activities underway on one wholly owned property in Colorado Springs that we expect to be completed and to begin generating rental revenue between 2008 and 2009.

        Our customer strategy focuses on establishing, maintaining and expanding strategic customer relationships in multiple locations. A result of this strategy is that the source of our revenue is highly concentrated with certain tenants. The following schedule lists our 20 largest tenants in our portfolio of wholly owned properties based on percentage of annualized rental revenue:

 
  Percentage of Annualized Rental Revenue of Wholly Owned Properties for 20 Largest Tenants as of December 31,
 
Tenant

 
  2007
  2006
  2005
 
United States Government   16.3 % 16.3 % 15.2 %
Northrop Grumman Corporation(1)   7.4 % 4.2 % 4.5 %
Booz Allen Hamilton, Inc.    5.6 % 6.9 % 5.0 %
Computer Sciences Corporation(1)   3.2 % 3.8 % 4.1 %
Unisys Corporation(2)   2.5 % 3.0 % 3.1 %
L-3 Communications Holdings, Inc.(1)   2.5 % 3.0 % 3.4 %
General Dynamics Corporation   2.1 % 2.4 % 2.6 %
The Aerospace Corporation   1.9 % 2.1 % 2.2 %
Wachovia Corporation(1)   1.9 % 2.1 % 2.1 %
Comcast Corporation   1.7 % N/A   N/A  
AT&T Corporation(1)   1.7 % 3.0 % 2.7 %
The Boeing Company(1)   1.2 % 1.4 % 1.6 %
ITT Corporation(1)   1.1 % 0.8 % N/A  
Ciena Corporation   1.0 % 1.2 % 1.3 %
Science Applications International Corporation   0.9 % 1.1 % N/A  
BAE Systems PLC(1)   0.8 % 1.0 % N/A  
Johns Hopkins University   0.8 % N/A   1.0 %
Merck & Co., Inc.(2)   0.8 % 0.8 % 0.9 %
Magellan Health Services, Inc.    0.7 % 1.0 % 1.1 %
Wyle Laboratories, Inc.    0.7 % 0.8 % 0.9 %
Lockheed Martin Corporation   N/A   1.0 % 1.0 %
Harris Corporation   N/A   0.8 % N/A  
VeriSign, Inc.    N/A   N/A   1.3 %
PricewaterhouseCoopers LLP   N/A   N/A   1.0 %
Carefirst, Inc. and Subsidiaries(1)   N/A   N/A   0.9 %
   
 
 
 
Subtotal of 20 largest tenants   54.8 % 56.7 % 55.9 %
All remaining tenants   45.2 % 43.3 % 44.1 %
   
 
 
 
Total   100.0 % 100.0 % 100.0 %
   
 
 
 

        Most of the changes in our tenant concentration over the last two years occurred as a result of development, acquisition and leasing activities. From a development perspective in 2007, we had

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548,614 square feet in newly-constructed properties become operational, of which 295,842 square feet were leased to Northrop Grumman Corporation and 166,179 to the United States Government. From an acquisition perspective in 2007, the Nottingham Acquisition was our only significant acquisition of properties; since none of our 20 largest tenants as of December 31, 2006 had significant leasing positions in the properties acquired in that transaction, the transaction: (1) had a decreasing effect on the level of concentration with those tenants; and (2) led to the addition of Comcast Corporation and Johns Hopkins University as being among our 20 largest tenants.

        Most of our leases with the United States Government provide for a series of one-year terms or provide for early termination rights. The government may terminate its leases if, among other reasons, the United States Congress fails to provide funding.

        Under our industry strategy, we focus on strategic industries in which tenants have specialized product requirements. A high concentration of our revenues is generated from the United States defense industry (comprised of the United States Government and defense contractors), of which substantially all is associated with defense information technology activities. These tenants are particularly interested in a number of our property markets and submarkets that are located near government installations. We also enable these tenants to benefit from our significant experience in constructing and operating secure properties and properties that meet the United States Government's Force Protection requirements. The table below sets forth the percentage of annualized rental revenue in our portfolio of wholly owned properties derived from that industry:

 
  Percentage of Annualized Rental
Revenue of Wholly Owned
Properties from Defense Industry
Tenants as of December 31,

 
 
  2007
  2006
  2005
 
Total Portfolio   47.9 % 54.4 % 49.7 %
Baltimore/Washington Corridor   65.3 % 66.7 % 65.7 %
Northern Virginia   50.3 % 54.5 % 50.4 %
Suburban Baltimore   5.3 % 9.8 % 6.8 %
Suburban Maryland   11.2 % 13.3 % 2.2 %
Colorado Springs   37.8 % 39.4 % 74.1 %
St. Mary's and King George Counties   90.0 % 89.8 % 90.7 %
San Antonio   100.0 % 100.0 % 100.0 %

        With the exception of 2007, the percentage of our annualized rental revenue in our wholly owned properties derived from the United States defense industry has generally increased in recent years due in large part to the continuing expansion trend of the industry in the Greater Washington, D.C. region and, in particular, in our submarkets since the events of September 11, 2001. This percentage did decrease for the total portfolio and in the Suburban Baltimore and Baltimore/Washington Corridor regions in 2007 due primarily to the Nottingham Acquisition, since the properties included in the transaction had an insignificant number of tenants in that industry. This decreasing effect overall and in the Baltimore/Washington Corridor was offset to a certain extent by new leasing in 2007 to tenants in that industry which included, among other things, the effect of the delivery of 166,179 square feet in newly constructed properties in the Baltimore/Washington Corridor. The increase in 2006 for the total portfolio included the effect of certain properties that we acquired or constructed and placed in service in 2006 having leases with the United States Government and defense contractors.

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        We classify the revenue from our leases into industry groupings based solely on our knowledge of the tenants' operations in leased space. Occasionally, classifications require subjective and complex judgments. For example, we have a tenant that is considered by many to be in the computer industry; however, since the nature of that tenant's operations in the space leased from us is focused on providing service to the United States Government's defense department, we classify the revenue we earn from the lease as United States defense industry revenue. We do not use independent sources such as Standard Industrial Classification codes for classifying our revenue into industry groupings and if we did, the resulting groupings would be materially different.

        In 2007, leases commenced for two newly constructed properties totaling 295,842 square feet that will function as data centers. These properties, when added to a number of data centers already existing in our portfolio, represent a growing concentration in that industry/property type.

Results of Operations

        While reviewing this section, you should refer to the tables in the section entitled "Selected Financial Data." You should also refer to the section below entitled "Liquidity and Capital Resources" for certain factors that could negatively affect various aspects of our operations.

        The table below sets forth leasing information pertaining to our portfolio of wholly owned operating properties:

 
  December 31,
 
 
  2007
  2006
  2005
 
Occupancy rates at year end                    
  Total     92.6 %   92.8 %   94.0 %
  Baltimore/Washington Corridor     92.6 %   95.1 %   96.2 %
  Northern Virginia     98.6 %   90.9 %   96.4 %
  Suburban Baltimore     84.8 %   81.1 %   84.7 %
  Suburban Maryland     97.8 %   83.2 %   79.8 %
  Colorado Springs     96.7 %   92.8 %   85.8 %
  St. Mary's and King George Counties     91.6 %   92.1 %   95.4 %
  Greater Philadelphia     100.0 %   100.0 %   100.0 %
  San Antonio     100.0 %   100.0 %   100.0 %
  Northern/Central New Jersey     70.8 %   97.2 %   96.4 %
  Other     100.0 %   N/A     N/A  

 
Renewal rate of square footage for scheduled lease expirations during year(1)     69.1 %   55.4 %   66.6 %

 
Average contractual annual rental rate per square foot at year end(2)   $ 21.36   $ 20.90   $ 20.28  

        As shown in the above table, the total year end occupancy rate for our portfolio of wholly owned properties did not change significantly from 2006 to 2007. The 2007 year end occupancy was negatively affected by the operating properties included in the Nottingham Acquisition, which were 85.7% occupied at the time the transaction was completed and 86.5% occupied at December 31, 2007. We also had a decrease in occupancy in our Northern/Central New Jersey region that was attributable primarily to a lease termination at our 429 Ridge Road property in Dayton, New Jersey (we sold the 429 Ridge Road property on January 31, 2008). However, we had a net increase in occupancy in our other properties that significantly offset the decreasing effects of the Nottingham Acquisition and the

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429 Ridge Road property. The significant increase in the year end occupancy rate of our Northern Virginia region from 2006 to 2007 was attributable to two large building spaces that had leases commence in early 2007. The significant increase in the year end occupancy rate of our Suburban Maryland region from 2006 to 2007 was due primarily to significant leasing activity in two properties in that region.

        The decrease in our total year end occupancy rate from 2005 to 2006 for our portfolio of wholly owned properties reflected the adverse impact of the two large building spaces in Northern Virginia discussed above that were vacant at December 31, 2006 and leased in early 2007. The 2006 year end occupancy rates were positively impacted by acquisitions of wholly owned properties completed in 2006, with such properties carrying a weighted average occupancy rate of 95.1% at December 31, 2006.

        Our renewal rates of square footage for scheduled lease expirations decreased in 2006 but increased in 2007; the 2006 rate in particular was low in comparison to the other calendar years within the 2000 through 2007 timeframe, when the annual renewal rate ranged from 66% to 76% and averaged 70% (when excluding the 2006 calendar year). The 2006 renewal rate was adversely affected by large amounts of space in newly acquired properties that we knew were not going to be renewed when we acquired such properties, including 197,000 square feet in two properties; our renewal rates would have been in the low to mid 60% range without the effect of this space. We believe if we are successful in implementing our customer strategy that we should be able to post renewal rates that approximate our historical average in the future.

        Our average contractual annual rent per square foot increased 2.2% from December 31, 2006 to December 31, 2007 despite the fact that such rate was negatively affected by the operating properties included in the Nottingham Acquisition, the rate per square foot of which was $16.98 at December 31, 2007, or 21% below our wholly owned portfolio rate. Our average contractual annual rent per square foot increased 3.0% from December 31, 2005 to December 31, 2006 despite the fact that such rate was negatively affected by acquisitions completed during 2006, the rate per square foot of which was $14.12 at December 31, 2006, or 32% below our wholly owned portfolio rate. The year end average contractual rental rate per square foot increased from 2006 to 2007 and from 2005 to 2006 despite being negatively affected by these acquisitions due primarily to the effect of new leases entered into at a higher rate during each of those years and scheduled increases that took place at leases remaining in place. The lower average contractual annual rent per square foot on operating properties included in the Nottingham Acquisition and the acquisitions completed in 2006 can be attributed primarily to the following: (1) lower rents in geographic areas where certain of these acquisitions took place; (2) lower costs for operating expenses and tenant improvements associated with underlying leases in certain of these acquisitions; and (3) lower rents associated with lower grade space in certain of these acquisitions.

        We believe that there is a fair amount of uncertainty surrounding the outlook for leasing activity for our overall portfolio in 2008 and 2009. Certain national key economic indicators such as employment growth, gross domestic product and housing starts, combined with turmoil in the financial markets brought about in large part in response to the sub-prime mortgage market decline, have caused disruption to the United States economy and capital markets. While we do not believe that the effects of these developments in the economy significantly impacted our 2007 leasing performance, we believe that it could impact our performance in 2008 and 2009, and possibly beyond, as we believe that there is generally a lag in time before economic developments affect the office real estate market. We do believe that our overall portfolio from a leasing and occupancy perspective may not be affected to the same extent as some of our peers in the office real estate industry due in large part to: (1) the quality of our tenant base from a credit risk perspective and our ability to retain such tenants; (2) our concentration of tenants in the United States defense industry, particularly in the area of defense information technology, the need for which we do not believe will diminish in the foreseeable future; and (3) higher than average likelihood for stability in our markets and submarkets due to their proximity to large demand drivers (such as government installations), strong demographics and

50



attractiveness to high quality tenants. We believe that reporting by the Base Realignment and Closure Commission of the United States Congress ("BRAC"), which is charged with reallocating personnel between government installations, favors the reallocation of additional personnel to many of the regions in which our properties are located, although there is some uncertainty over the level and timing of such reallocations.

        We believe that market level occupancy rates in many of our markets may have peaked or started to decline during 2007 from a quarter to quarter trending perspective, although we believe that the occupancy rate in our properties was generally higher than the market level occupancy rate in most of our markets. In our largest geographic region concentration, the Baltimore/Washington Corridor, we are facing a higher level of competition than we have historically due to new firms entering the market with additional new space to a large extent in anticipation of the expansion brought about by the BRAC activities. In our second largest regional concentration, Northern Virginia, market level occupancy rates are trending downwards and speculative construction of additional space in the market is nearing completion and, as a result, could further decrease occupancy rates; however, we believe that we are somewhat protected in the short run in the Northern Virginia region since, with the exception of calendar year 2010 (when 20.6% of our annualized rental revenues at December 31, 2007 from that region were scheduled to expire), no more than 7.0% of the annualized rental revenues at December 31, 2007 from that region were scheduled to expire in any one calendar year between 2008 and 2013. All of our properties in the Greater Philadelphia region are concentrated under three leases with Unisys that expire in June 2009 (although Unisys subleases approximately 20% of this space to Merck), and we believe that Unisys does not intend to renew the majority of the space; we have commenced activities to re-lease this space.

        We did experience increased delays in 2007 in the leasing of certain projects under construction that were not pre-leased. These delays resulted in the delay of some square footage under construction from becoming operational and also led to our deferral of certain projects under development on which we were about to commence construction. We do believe that we need to continue to commence construction on properties that are not pre-leased to a certain extent in certain of our markets to enable us to meet the demand of tenants that require space meeting their needs in a short timeframe.

        Despite the continued uncertainty regarding our 2008 leasing outlook, we believe that we are somewhat protected in the short run from a slow down in leasing activity since the weighted average lease term for our wholly owned properties at December 31, 2007 was five years. In addition, only 11.2% of our annualized rental revenues at December 31, 2007 were from leases scheduled to expire by the end of 2008. Looking longer term, 62.2% of our annualized rental revenues on leases in place as of December 31, 2007 were from leases scheduled to expire by the end of 2012, with no more than 15% scheduled to expire in any one calendar year between 2008 and 2012.

        As noted above, most of the leases with our largest tenant, the United States Government, provide for consecutive one-year terms or provide for early termination rights; all of the leasing statistics set forth above assume that the United States Government will remain in the space that they lease through the end of the respective arrangements, without ending consecutive one-year leases prematurely or exercising early termination rights. We report the statistics in this manner since we manage our leasing activities using these same assumptions and believe these assumptions to be probable. Please refer to the section entitled "Liquidity and Capital Resources" where we further discuss our leases with the United States Government and the underlying risks.

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        The table below sets forth occupancy information pertaining to operating properties in which we have a partial ownership interest:

 
   
  Occupancy Rates at
December 31,

 
Geographic Region

  Ownership
Interest

 
  2007
  2006
  2005
 
Suburban Maryland   50.0 % 76.2 % 47.9 % 47.9 %
Northern Virginia(1)   92.5 % 100.0 % 100.0 % 100.0 %
Greater Harrisburg   20.0 % 90.5 % 91.2 % 89.4 %
Northern/Central New Jersey(2)   20.0 % N/A   N/A   80.9 %

        We typically view our changes in revenues from real estate operations and property operating expenses as being comprised of three main components:

        The tables below set forth the components of our changes in revenues from real estate operations and property operating expenses (dollars in thousands). The tables and the discussion that follows in this section include results and information pertaining to properties included in continuing operations:

 
  Changes from 2006 to 2007
 
   
  Same-Office Properties
   
   
 
  Property
Additions
Dollar
Change(1)

   
   
 
  Dollar
Change

  Percentage
Change

  Other
Dollar
Change(2)

  Total
Revenues from real estate operations                            
  Rental revenue   $ 56,257   $ 5,092   2.1 % $ 326   $ 61,675
  Tenant recoveries and other real estate operations revenue     8,880     4,221   11.9 %   595     13,696
   
 
     
 
    Total   $ 65,137   $ 9,313   3.4 % $ 921   $ 75,371
   
 
     
 
Property operating expenses   $ 21,488   $ 6,854   7.8 % $ 2,033   $ 30,375
   
 
     
 
Straight-line rental revenue adjustments included in rental revenue   $ 3,574   $ (1,765 ) N/A   $ 81   $ 1,890
   
 
     
 
Amortization of deferred market rental revenue   $ 28   $ 372   N/A   $   $ 400
   
 
     
 
Number of operating properties included in component category     76     153   N/A         229
   
 
     
 

(1)
Includes 62 acquired properties, 12 newly-constructed properties and two redevelopment properties placed into service.

(2)
Includes, among other things, the effects of amounts eliminated in consolidation. Certain amounts eliminated in consolidation are attributable to the Property Additions and Same-Office Properties.

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  Changes from 2005 to 2006
 
   
  Same-Office Properties
   
   
   
 
  Property
Additions
Dollar
Change(1)

  Sold
Properties
Dollar
Change(2)

   
   
 
  Dollar
Change

  Percentage
Change

  Other
Dollar
Change(3)

  Total
Revenues from real estate operations                                  
  Rental revenue   $ 51,645   $ 1,086   0.6 % $ (5,586 ) $ (1,376 ) $ 45,769
  Tenant recoveries and other real estate operations revenue     8,232     2,933   11.4 %   (1,025 )   860     11,000
   
 
     
 
 
    Total   $ 59,877   $ 4,019   1.8 % $ (6,611 ) $ (516 ) $ 56,769
   
 
     
 
 
Property operating expenses   $ 20,022   $ 5,025   7.5 % $ (2,259 ) $ (218 ) $ 22,570
   
 
     
 
 
Straight-line rental revenue adjustments included in rental revenue   $ 5,194   $ (1,824 ) N/A   $ (56 ) $ (826 ) $ 2,488
   
 
     
 
 
Amortization of deferred market rental revenue   $ 1,272   $ 27   N/A   $   $ (27 ) $ 1,272
   
 
     
 
 
Number of operating properties included in component category     53     114   N/A     16     1     184
   
 
     
 
 

(1)
Includes 43 acquired properties and 10 newly-constructed properties.

(2)
Includes sold properties that are not reported as discontinued operations.

(3)
Includes, among other things, the effects of amounts eliminated in consolidation. Certain amounts eliminated in consolidation are attributable to the Property Additions and Same-Office Properties.

        As the tables above indicate, our total increase in revenues from real estate operations and property operating expenses from 2006 to 2007 and from 2005 to 2006 was attributable primarily to the Property Additions. The increase from 2005 to 2006 in revenues from real estate operations associated with the Property Additions included the effect of certain of our 2005 acquisitions carrying occupancy rates that were lower than the average occupancy rate of our previously existing properties. Acquisitions in 2005 with particularly low occupancy rates upon acquisition included the following: (1) a 1.1 million square foot portfolio acquired in December 2005 that had an occupancy rate averaging approximately 80% in 2005 and 2006; (2) a 118,000 square foot property acquired in October 2005 that was 58% occupied from the date of its acquisition until December 2006; and (3) a 113,000 square foot property acquired in April 2005 that was 23% occupied from its acquisition until December 2005, when it became 100% operational. We occasionally acquire lower occupancy properties such as these for what we view to be the potential for particularly high rates of return on our investment in these properties if we are successful in stabilizing their operations.

        With regard to changes in the Same-Office Properties' revenues from real estate operations:

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        With regard to changes in the Same-Office Properties' property operating expenses:

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        The $2.0 million increase in property operating expenses from 2006 to 2007 that was not attributable to Property Additions or Same-Office Properties included a $1.3 million increase associated with the former Fort Ritchie United States Army base in Cascade, Washington County, Maryland, of which we acquired 500 acres on October 5, 2006 and 91 acres on November 29, 2007. While we had development activities underway at the Fort Ritchie project in 2007, the $1.3 million in operating expenses was associated with the portions of the project held for future lease or development.

        The table below sets forth changes in our construction contract and other service revenues and expenses (dollars in thousands):

 
  Changes from 2006 to 2007
  Changes from 2005 to 2006
 
 
  Construction
Contract
Dollar
Change

  Other
Service
Operations
Dollar
Change

  Total Dollar
Change

  Construction
Contract
Dollar
Change

  Other
Service
Operations
Dollar
Change

  Total Dollar
Change

 
Service operations                                      
  Revenues   $ (15,108 ) $ (3,751 ) $ (18,859 ) $ (22,175 ) $ 3,025   $ (19,150 )
  Expenses     (14,238 )   (3,314 )   (17,552 )   (22,573 )   2,631     (19,942 )
   
 
 
 
 
 
 
Income from service operations   $ (870 ) $ (437 ) $ (1,307 ) $ 398   $ 394   $ 792  
   
 
 
 
 
 
 

        The gross revenues and costs associated with these services generally bear little relationship to the level of activity from these operations since a substantial portion of the costs are subcontracted costs that are reimbursed to us by the customer at no mark up. As a result, the operating margins from these operations are small relative to the revenue. We use the net of service operations revenues and expenses to evaluate performance. Income from service operations decreased from 2006 to 2007 due primarily to: (1) a slow down in activity on certain third party constructions jobs; and (2) a decrease in third party work for heating and air conditioning controls and plumbing services. While we believe that the change in third party construction job activity represents normal fluctuation of activity, the decrease in third party work for heating and air conditioning controls and plumbing services was attributable to our decision in 2007 to limit the amount of these services that we provide to third parties and, instead, focus on providing these services predominantly for our properties. We do not believe that the changes in net amounts from 2005 to 2006 reflected above were significant.

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        Construction contract revenues were significantly higher in 2005 compared to 2007 and 2006 due primarily to a large volume of activity for certain existing contracts in that year. Construction contract revenues were significantly lower in 2007 compared to 2006 due primarily to decreased construction activity on certain third party jobs. It is noteworthy that our revenue from construction contract activity is highly concentrated, with three contracts representing approximately 82% of our 2007 construction contract revenue and five contracts representing approximately 81% of our 2006 construction contract revenue.

        Other service operations revenue increased 62.0% from 2005 to 2006 but decreased 47.5% from 2006 to 2007. While the increase from 2005 to 2006 was due primarily to a higher volume of work for heating and air conditioning controls and plumbing services, much of which was attributable to one client relationship, the decrease from 2006 to 2007 was attributable to our decision in 2007 discussed above to limit the amount of these services that we provide to third parties.

        Our depreciation and other amortization expense from continuing operations increased from 2006 to 2007 by $28.3 million, or 36.2%, due primarily to a $30.4 million increase attributable to the Property Additions. Of the increase attributable to the Property Additions, $22.8 million was attributable to the Nottingham Acquisition. Compared to other acquisitions that we have completed in recent years, a considerably larger portion of the value of the operating properties included in the Nottingham Acquisition was allocated to assets with lives that are based on the lives of the underlying leases; due to that fact and the fact that a large number of the leases in these properties have lives of four years or less, much of the depreciation and amortization associated with these properties is front-loaded to the four years following the completion of the acquisition. This will result in increased depreciation and amortization expense over the initial four years following the acquisition. The net increase in depreciation and other amortization expense from 2006 to 2007 also included a decrease of $2.9 million attributable to one of the Same-Office Properties that had significant depreciation and amortization expense in 2006 associated with a lease that terminated in 2006.

        Our depreciation and other amortization expense from continuing operations increased from 2005 to 2006 by $17.6 million, or 29.2%, due primarily to a $19.7 million increase attributable to the Property Additions, offset in part by a $1.6 million decrease attributable to the absence of depreciation and amortization in 2006 on the Harrisburg portfolio due to its contribution into an unconsolidated real estate joint venture in September 2005.

        General and administrative expenses increased as a percentage of operating income from 14.3% in 2005 to 15.6% in 2006 and to 17.1% in 2007. Much of this trend can be attributed to an increase in the size of our employee base in response to the continued growth of the Company. We expect this trend to continue over the next year and then stabilize as we determine that the Company's employee base and processes are positioned appropriately in anticipation of our future growth expectations.

        Our general and administrative expense increased from 2006 to 2007 by $3.6 million, or 21.2%, which included the following:

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        Our general and administrative expense increased from 2005 to 2006 by $3.4 million, or 25.1%, which was attributable primarily to an increase of $2.5 million, or 21.5%, in compensation expense due to: (1) the increased number of employees; (2) increased salaries and bonuses for existing employees; and (3) an increase of $537,000 in expense associated with options issued to employees that was attributable to our adoption of SFAS 123(R) on January 1, 2006.

        Our interest expense and amortization of deferred financing costs included in continuing operations increased from 2006 to 2007 by $12.6 million, or 17.2%. This increase included the effects of the following:

        Our interest expense and amortization of deferred financing costs included in continuing operations increased from 2005 to 2006 by $17.0 million, or 30.2%, from 2005 to 2006. This increase included the effects of the following:

        Interest expense and deferred financing costs as a percentage of net operating income increased from 59.4% in 2005 to 67.4% in 2006 and to 71.3% in 2007 due in large part to a higher proportion of our investing and financing activities having been funded by debt versus equity and the reasons discussed above for the changes in interest expense. We historically have financed our long-term capital needs, including property acquisition and development activities, through a combination of the following:

        Many factors go into our decisions regarding when to finance investing and financing activities using debt versus equity. We generally use long-term borrowings as attractive financing conditions arise

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and equity issuances as attractive equity market conditions arise. As a result, the change in the proportion of our investing and financing activities funded by debt versus equity described above is not a trend that necessarily should be expected to continue.

        As of December 31, 2007, 19.1% of our total debt had variable interest rates, including the effect of interest rate swaps. As of December 31, 2007, 88.0% of our fixed-rate debt was scheduled to mature after 2008. For a more comprehensive quantitative analysis of our debt, please refer to the section below entitled "Quantitative and Qualitative Disclosures About Market Risk."

        Included as income for the year ended December 31, 2007 was a $1.0 million gain recognized on the disposition of most of our investment in TractManager, Inc., an investment that we account for using the cost method of accounting. TractManager, Inc. is an entity that developed an Internet-based contract imaging system for sale to real estate owners and healthcare providers.

        Interests in our Operating Partnership are in the form of preferred and common units. The line entitled "minority interests in income from continuing operations" includes primarily income from continuing operations allocated to preferred and common units not owned by us. Income is allocated to minority interest preferred unitholders in an amount equal to the priority return from the Operating Partnership to which they are entitled. Income is allocated to minority interest common unitholders based on the income earned by the Operating Partnership, after allocation to preferred unitholders, multiplied by the percentage of the common units in the Operating Partnership owned by those common unitholders.

        As of December 31, 2007, we owned 84.7% of the outstanding common units and 95.8% of the outstanding preferred units. The percentage of the Operating Partnership owned by minority interests during the last three years decreased in the aggregate due primarily to the effect of the following transactions:

        Our income from continuing operations allocated to minority interests decreased by $428,000, or 11.1%, from 2006 to 2007 and by $1.1 million, or 21.9%, from 2005 to 2006. These decreases are due to: (1) a decrease in the income available to allocate to minority interests holders of common units attributable primarily to the reasons set forth above for changes in revenue and expense items combined with the effect of increasing preferred share dividends; and (2) our increasing ownership of common units (from 80.3% at December 31, 2004 to 84.7% at December 31, 2007).

        Our income from discontinued operations decreased $16.1 million, or 89.7%, from 2006 to 2007 and increased $11.9 million, or 195.1%, from 2005 to 2006 due primarily to changes in gain from sales of real estate included in discontinued operations. See Note 18 to the Consolidated Financial Statements for a summary of the components of income from discontinued operations.

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        Preferred share dividends increased from 2005 to 2006 and from 2006 to 2007 due to the additional dividends attributable to the Series J Preferred Shares of beneficial interest issued in July 2006 and Series K Preferred Shares issued in January 2007 exceeding the decrease in dividends attributable to the redemption of the Series E and Series F Preferred Shares of beneficial interest ("Series E Preferred Shares" and "Series F Preferred Shares") in 2006.

        In 2006, we recognized a $3.9 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series E and Series F Preferred Shares that were redeemed in 2006.

        Diluted earnings per common share on net income available to common shareholders decreased 43.5% from 2006 to 2007 and increased 9.5% from 2005 to 2006 due primarily to the effects of the following: