- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30 , 1999 --------------------------------------------- or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from____________________ to __________________________ Commission file number 0-20047 CORPORATE OFFICE PROPERTIES TRUST (Exact name of registrant as specified in its charter) MARYLAND 23-2947217 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 401 CITY AVENUE, SUITE 615, BALA CYNWYD, PA 19004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 538-1800 ---------- 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. /X/ Yes / / No On August 13, 1999, 17,174,171 shares of the Company's Common Shares of Beneficial Interest, $0.01 par value, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS FORM 10-Q
PAGE ---- PART I: FINANCIAL INFORMATION Item 1: Financial Statements: Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited) 5 Notes to Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3: Quantitative and Qualitative Disclosures About Market Risk 27 PART II: OTHER INFORMATION Item 1: Legal Proceedings 28 Item 2: Changes in Securities 28 Item 3: Defaults Upon Senior Securities 28 Item 4: Submission of Matters to a Vote of Security Holders 29 Item 5: Other Information 29 Item 6: Exhibits and Reports on Form 8-K 29 SIGNATURES 36
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CORPORATE OFFICE PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
June 30, December 31, 1999 1998 ----------- ------------ (unaudited) ASSETS Commercial real estate properties: Operating properties, net $ 534,530 $ 536,228 Projects under construction 25,553 10,659 - -------------------------------------------------------------- --------- --------- Total commercial real estate properties, net 560,083 546,887 Cash and cash equivalents 6,250 2,349 Accounts receivable, net 2,040 2,986 Investment in and advances to Service Companies 4,200 2,351 Deferred rent receivable 3,297 2,263 Deferred charges, net 3,862 3,542 Prepaid and other assets 3,661 3,299 - -------------------------------------------------------------- --------- --------- TOTAL ASSETS $ 583,393 $ 563,677 - -------------------------------------------------------------- --------- --------- - -------------------------------------------------------------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage and other loans payable $ 318,179 $ 306,824 Accounts payable and accrued expenses 5,127 3,395 Rents received in advance and security deposits 2,743 2,789 Dividends/distributions payable 4,792 4,692 Other liabilities 1,217 -- - -------------------------------------------------------------- --------- --------- Total liabilities 332,058 317,700 - -------------------------------------------------------------- --------- --------- Minority interests: Preferred Units 52,500 52,500 Common Units 29,548 24,696 - -------------------------------------------------------------- --------- --------- Total minority interests 82,048 77,196 - -------------------------------------------------------------- --------- --------- Commitments and contingencies (Note 13) Shareholders' equity: Preferred Shares ($0.01 par value; 5,000,000 authorized); 1,025,000 designated as Series A Cumulative Convertible Preferred Shares of beneficial interest (984,308 shares issued and outstanding) 10 10 1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (none issued and outstanding) -- -- Common Shares of beneficial interest ($0.01 par value; 45,000,000 authorized, 16,801,876 shares issued and outstanding) 168 168 Additional paid-in capital 175,930 175,802 Accumulated deficit (6,821) (7,199) - -------------------------------------------------------------- --------- --------- Total shareholders' equity 169,287 168,781 - -------------------------------------------------------------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 583,393 $ 563,677 - -------------------------------------------------------------- --------- --------- - -------------------------------------------------------------- --------- ---------
See accompanying notes to financial statements. 3 CORPORATE OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
For the three months For the six months ended June 30, ended June 30, --------------------- --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Rental income $ 17,023 $ 7,058 $ 33,202 $ 11,977 Tenant recoveries and other income 2,519 784 4,863 1,390 - -------------------------------------------------------- -------- -------- -------- -------- Total revenues 19,542 7,842 38,065 13,367 - -------------------------------------------------------- -------- -------- -------- -------- EXPENSES Property operating 5,385 1,645 10,388 2,544 General and administrative 796 359 1,685 658 Interest 5,226 2,416 10,419 4,575 Amortization of deferred financing costs 322 83 547 147 Depreciation and other amortization 2,887 1,281 5,679 2,258 Reformation costs -- -- -- 637 - -------------------------------------------------------- -------- -------- -------- -------- Total expenses 14,616 5,784 28,718 10,819 - -------------------------------------------------------- -------- -------- -------- -------- Income before equity in income of Service Companies, gain on sales of rental properties, minority interests and extraordinary item 4,926 2,058 9,347 2,548 Equity in income of Service Companies 145 -- 326 -- - -------------------------------------------------------- -------- -------- -------- -------- Income before gain on sales of rental properties, minority interests and extraordinary item 5,071 2,058 9,673 2,548 Gain on sales of rental properties 154 -- 1,140 -- - -------------------------------------------------------- -------- -------- -------- -------- Income before minority interests and extraordinary item 5,225 2,058 10,813 2,548 Minority interests Preferred Units (853) (853) (1,706) (1,706) Common Units (670) (276) (1,166) (412) - -------------------------------------------------------- -------- -------- -------- -------- Income before extraordinary item 3,702 929 7,941 430 Extraordinary item - loss on early retirement of debt (144) -- (838) -- - -------------------------------------------------------- -------- -------- -------- -------- NET INCOME 3,558 929 7,103 430 Preferred Share dividends (338) -- (676) -- - -------------------------------------------------------- -------- -------- -------- -------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,220 $ 929 $ 6,427 $ 430 - -------------------------------------------------------- -------- -------- -------- -------- - -------------------------------------------------------- -------- -------- -------- -------- BASIC EARNINGS PER COMMON SHARE Income before extraordinary item $ 0.20 $ 0.12 $ 0.43 $ 0.09 Extraordinary item (0.01) -- (0.05) -- - -------------------------------------------------------- -------- -------- -------- -------- Net income $ 0.19 $ 0.12 $ 0.38 $ 0.09 - -------------------------------------------------------- -------- -------- -------- -------- - -------------------------------------------------------- -------- -------- -------- -------- DILUTED EARNINGS PER COMMON SHARE Income before extraordinary item $ 0.17 $ 0.12 $ 0.37 $ 0.09 Extraordinary item -- -- (0.04) -- - -------------------------------------------------------- -------- -------- -------- -------- Net income $ 0.17 $ 0.12 $ 0.33 $ 0.09 - -------------------------------------------------------- -------- -------- -------- -------- - -------------------------------------------------------- -------- -------- -------- --------
See accompanying notes to financial statements. 4 CORPORATE OFFICE PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
For the six months ended June 30, --------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,103 $ 430 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 2,872 2,118 Depreciation and amortization 5,679 2,258 Amortization of deferred financing costs 547 147 Equity in income of Service Companies (326) -- Gain on sales of properties (1,140) -- Increase in deferred rent receivable (1,502) (742) Decrease (increase) in accounts receivable and prepaid and other assets 1,646 (1,029) Increase in accounts payable, accrued expenses, rents received in advance and security deposits 991 1,517 - ------------------------------------------------------ -------- -------- Net cash provided by operating activities 15,870 4,699 - ------------------------------------------------------ -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of and additions to commercial real estate properties (57,370) (95,836) Proceeds from sales of operating properties 29,970 -- Investments in and advances to Service Companies (1,523) -- Leasing commissions paid (531) (151) Increase in prepaid and other assets (18) (143) - ------------------------------------------------------ -------- -------- Net cash used in investing activities (29,472) (96,130) - ------------------------------------------------------ -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgage and other loans payable 69,478 23,750 Repayments of mortgage and other loans payable (42,292) (174) Increase in other liabilities 1,217 -- Deferred financing costs paid (507) (510) Increase in prepaid and other assets (958) -- Net proceeds from issuance of Common Shares -- 72,742 Dividends/distributions paid (9,435) (2,858) - ------------------------------------------------------ -------- -------- Net cash provided by financing activities 17,503 92,950 - ------------------------------------------------------ -------- -------- Net increase in cash and cash equivalents 3,901 1,519 CASH AND CASH EQUIVALENTS Beginning of period 2,349 3,395 - ------------------------------------------------------ -------- -------- End of period $ 6,250 $ 4,914 - ------------------------------------------------------ -------- -------- - ------------------------------------------------------ -------- --------
See accompanying notes to financial statements. 5 CORPORATE OFFICE PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE 1 ORGANIZATION Corporate Office Properties Trust ("COPT") and subsidiaries is a fully integrated and self-managed real estate investment trust ("REIT"). We focus on the ownership, management, leasing, acquisition and development of suburban office properties in select Mid-Atlantic submarkets. COPT is qualified as a REIT as defined in the Internal Revenue Code and is the successor to a corporation organized in 1988. As of June 30, 1999, our portfolio included 61 commercial real estate properties leased principally for office purposes. We conduct our operations principally through our operating partnership, Corporate Office Properties, L.P. (the "Operating Partnership"), for which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies ("LLCs"). The Operating Partnership also owns the principal economic interest and, collectively with our Chief Executive Officer and Chief Operating Officer, 49.5% of the voting stock of Corporate Office Management, Inc. ("COMI") (together with its subsidiaries defined as the "Service Companies"). A summary of our Operating Partnership's forms of ownership and the percentage of those ownership forms owned by COPT as of June 30, 1999 follows:
% Owned by COPT --------------- Common Units (see Notes 3 and 15) 82% Series A Preferred Units 100% Initial Preferred Units (see Notes 3 and 15) 0%
All Preferred Units are convertible into Common Units in the Operating Partnership. NOTE 2 BASIS OF PRESENTATION These notes to our interim financial statements highlight significant changes to the notes to the financial statements included in our 1998 Form 10-K. As a result, these notes to our interim financial statements should be read together with the financial statements and notes thereto included in our 1998 Form 10-K. The interim financial statements on the previous pages reflect all adjustments which we believe are necessary for the fair presentation of our financial position and results of operations for the interim periods presented. These adjustments are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of the results for a full year. We use two different accounting methods to report our investments in entities: the consolidation method and the equity method. CONSOLIDATION METHOD We use the consolidation method when we own most of the outstanding voting interests in an entity and can control its operations. This means the accounts of the entity are combined with our accounts. We eliminate balances and transactions between companies when we consolidate these accounts. Our consolidated financial statements include the accounts of: - - COPT, - - the Operating Partnership and its subsidiary partnerships and LLCs, and - - Corporate Office Properties Holdings, Inc. (we own 100%). 6 EQUITY METHOD We use the equity method of accounting to report our investment in the Service Companies. Under the equity method, we report: - - our ownership interest in the Service Companies' capital as an investment on our Consolidated Balance Sheets and - - our percentage share of the earnings or losses from the Service Companies in our Consolidated Statements of Operations. NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS We make estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters, including: - - our reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, - - our disclosure of contingent assets and liabilities at the dates of the financial statements, and - - our reported amounts of revenues and expenses in our Consolidated Statements of Operations during the reporting periods. These estimates involve judgements with respect to, among other things, future economic factors that are difficult to predict and are often beyond management's control. As a result, actual amounts could differ from these estimates. MINORITY INTERESTS As discussed previously, we consolidate the accounts of our Operating Partnership into our financial statements. However, we do not own 100% of the Operating Partnership. The amounts reported for minority interests on our Consolidated Balance Sheets represent the portion of the Operating Partnership's equity that we do not own. The amounts reported for minority interests on our Consolidated Statements of Operations represent the portion of the Operating Partnership's net income not allocated to us. Common Units of the Operating Partnership are substantially similar economically to our Common Shares of beneficial interest ("Common Shares"). The Common Units are also exchangeable into our Common Shares, subject to certain conditions. We have accrued distributions related to Common Units owned by minority interests of $576 at June 30, 1999 and $488 at December 31, 1998. The owners of our Operating Partnership's Initial Preferred Units are entitled to a 6.5% priority annual return. Income of our Operating Partnership is also allocated to holders of Initial Preferred Units using the 6.5% priority annual return. These units are convertible by unitholders at their option on or after October 1, 1999, into Common Units on the basis of 3.5714 Common Units for each Initial Preferred Unit, plus any accrued return (see Note 15). We have accrued distributions related to Initial Preferred Units owned by minority interests of $853 at June 30, 1999 and December 31, 1998. INTEREST RATE SWAP ARRANGEMENTS We recognize the interest rate differential to be paid or received on interest rate swap agreements as an adjustment to interest expense. 7 EARNINGS PER SHARE ("EPS") We present both basic and diluted EPS. We compute basic EPS by dividing income available to common shareholders by the weighted-average number of Common Shares outstanding during the period. Our computation of diluted EPS is similar except that: - - the denominator is increased to include the weighted average number of potential additional Common Shares that would have been outstanding if securities that are convertible now or in the future into our Common Shares were converted and - - the numerator is adjusted to add back any convertible preferred dividends and any other changes in income or loss that would result from the assumed conversion into Common Shares. Our computation of diluted EPS does not assume conversion of securities into our Common Shares if conversion of those securities would increase our diluted EPS in a given period. A summary of the numerator and denominator for purposes of our basic and diluted EPS calculations for income before extraordinary item is as follows (dollars and shares in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Numerator: Net income available to Common Shareholders $ 3,220 $ 929 $ 6,427 $ 430 Extraordinary loss 144 -- 838 -- ------- ------- ------- ------- Numerator for basic earnings per share before extraordinary item 3,364 929 7,265 430 Minority interests - Initial Preferred Units 853 853 1,706 -- Minority interests - Preferred Shares -- -- 676 -- Minority interests - Common Units -- 276 -- -- ------- ------- ------- ------- Numerator for diluted earnings per share before extraordinary item $ 4,217 $ 2,058 $ 9,647 $ 430 ------- ------- ------- ------- ------- ------- ------- ------- Denominator: Weighted average Common Shares - basic 16,802 7,628 16,802 4,964 Assumed conversion of share options 9 21 9 21 Conversion of Initial Preferred Units 7,500 7,500 7,500 -- Conversion of Preferred Shares -- -- 1,845 -- Conversion of Common Units -- 2,582 -- -- ------- ------- ------- ------- Weighted average Common Shares - diluted 24,311 17,731 26,156 4,985 ------- ------- ------- ------- ------- ------- ------- -------
Our diluted EPS computation for the three months ended June 30, 1999 only assumes conversion of Initial Preferred Units because conversions of Preferred Shares and Common Units would increase diluted EPS in that period. Our diluted EPS computation for the three months ended June 30, 1998 only assumes conversion of Initial Preferred Units and Common Units because conversions of Preferred Shares would increase diluted EPS in that period. Our diluted EPS computation for income before extraordinary item for the six months ended June 30, 1999 as reported above only assumes conversion of Preferred Shares and Initial Preferred Units because conversions of Common Units would increase diluted EPS in that period. Our diluted EPS computation for net income for the six months ended June 30, 1999 only assumes conversion of Initial Preferred Units because conversions of Preferred Shares and Common Units would increase diluted EPS in that period. Our diluted EPS computation for the six months ended June 30, 1998 does not assume conversion of Initial Preferred Units or Common Units since these conversions would increase diluted EPS in that period. 8 NOTE 4 COMMERCIAL REAL ESTATE PROPERTIES Operating properties consisted of the following:
June 30, December 31, 1999 1998 --------- --------- Land $ 107,830 $ 108,433 Buildings and improvements 438,301 436,932 Furniture, fixtures and equipment 339 332 --------- --------- 546,470 545,697 Less: accumulated depreciation (11,940) (9,469) --------- --------- $ 534,530 $ 536,228 --------- --------- --------- ---------
Projects we had under development consisted of the following:
June 30, December 31, 1999 1998 -------- ------------ Land $12,271 $ 8,941 Construction in progress 13,282 1,718 ------- ------- $25,553 $10,659 ------- ------- ------- -------
1999 ACQUISITIONS We acquired the following office properties during the six months ended June 30, 1999:
Number Date of of Total Rentable Initial Project Name Location Acquisition Buildings Square Feet Cost - ------------------------------- ---------------------- ----------- --------- ------------- ------- Airport Square XXI Linthicum, MD 2/23/99 1 67,913 $ 6,751 Parkway Crossing Properties Hanover, MD 4/16/99 2 99,026 9,524 Commons Corporate Portfolio (1) Hanover, MD 4/28/99 8 250,413 25,442 Princeton Executive Building Monmouth Junction, NJ 6/24/99 1 61,300 6,020
- ------------------- (1) Does not include $400 allocated to projects under development and $50 relating to land under a ground lease. We also acquired for $2,908 a parcel of land located in Annapolis Junction, Maryland that is contiguous to certain of our existing operating properties. 9 1999 DISPOSITIONS We sold the following properties during the six months ended June 30, 1999:
Property Type (1) Date of Total Rentable Project Name Location Sale Square Feet Sale Price - ------------------- ---------------- -------- -------- -------------- ---------- Cranberry Square Westminster, MD R 1/22/99 139,988 $ 18,900 Delafield Retail Delafield, WI R 2/26/99 52,800 3,303 Indianapolis Retail Indianapolis, IN R 3/09/99 67,541 5,735 Plymouth Retail Plymouth, MN R 3/09/99 67,510 5,465 Glendale Retail Glendale, WI R 5/04/99 36,248 1,900 Peru Retail Peru, IL R 6/16/99 60,232 3,750 Browns Wharf Baltimore, MD O 6/24/99 103,670 10,575 Oconomowoc Retail Oconomowoc, WI R 6/25/99 39,272 2,575
- ------------------- (1) "R" indicates retail property; "O" indicates office property. 1999 CONSTRUCTION IN PROGRESS At June 30, 1999, we had development underway on three new buildings. We also had an expansion project underway that will increase the rentable square footage of one of our properties by approximately 6,000 square feet. NOTE 5 ACCOUNTS RECEIVABLE Our accounts receivable are reported net of an allowance for bad debts of $51 at June 30, 1999 and $50 at December 31, 1998. NOTE 6 INVESTMENT IN AND ADVANCES TO SERVICE COMPANIES We account for our investment in COMI and its subsidiaries, Corporate Realty Management, LLC ("CRM") and Corporate Development Services, LLC ("CDS"), using the equity method of accounting. Our investment in and advances to these Service Companies included the following:
June 30, December 31, 1999 1998 ------- ------- Notes receivable $ 3,205 $ 3,205 Equity investment in Service Companies 935 609 Advances receivable (payable) 60 (1,463) ------- ------- Total $ 4,200 $ 2,351 ------- ------- ------- -------
NOTE 7 DEFERRED CHARGES Deferred charges consisted of the following:
June 30, December 31, 1999 1998 ------- ------------ Deferred financing costs $ 3,055 $ 2,611 Deferred leasing costs 1,915 1,468 Deferred other 24 24 ------- ------- 4,994 4,103 Accumulated amortization (1,132) (561) ------- ------- Deferred charges, net $ 3,862 $ 3,542 ------- ------- ------- -------
10 NOTE 8 MORTGAGE AND OTHER LOANS PAYABLE This section highlights new borrowing arrangements entered into during the six months ended June 30, 1999. On January 5, 1999, we entered into an interest rate swap agreement with Deutsche Banc Alex. Brown. This swap agreement fixes our one-month LIBOR base at 5.085% per annum on a notional amount of $30,000 through May 2001. On January 13, 1999, we entered into a $9,825 construction loan with Allfirst Bank to finance the construction of a building at our 134 National Business Parkway property. This loan has an interest rate of LIBOR plus 1.6%. This loan matures on February 1, 2001 and may be extended for a one-year period, subject to certain conditions. Borrowings under this loan totaled $6,075 at June 30, 1999. On February 8, 1999, we entered into a $10,875 construction loan with Provident Bank of Maryland to finance the construction of a building at our Woodlands II property. This loan has an interest rate of LIBOR plus 1.75%. This loan matures on February 8, 2001 and may be extended for a one-year period, subject to certain conditions. Borrowings under this loan totaled $4,780 at June 30, 1999. On April 8, 1999, we obtained a $12,500 mortgage loan payable from Allfirst Bank, $9,000 of which is nonrecourse. The loan provides for monthly payments of interest, at a rate of LIBOR plus 1.75%, and principal of $23 in the loan's first year, $25 in the second year and $27 in the third year. The loan matures on May 1, 2002. We pledged three of our operating properties and one parcel of land as collateral to the lender. We use the term collateralize to describe all such arrangements. On April 16, 1999, we assumed three nonrecourse loans in connection with the acquisition of the Parkway Crossing Properties. We assumed a $3,200 mortgage loan payable from IDS Life Insurance Company. The loan provides for monthly payments of principal and interest at a fixed rate of 8.375%. The loan matures on June 1, 2007. We also assumed two loans with the seller totaling $1,897 that carry identical terms. These loans provide for monthly payments of interest at a rate equal to the lesser of prime plus 0.5% (currently 8.5%) or 9.38% plus fixed principal payments of $4. These loans mature on May 25, 2007. On May 5, 1999, we obtained a $10,000 loan from Deutsche Banc Alex. Brown. The loan bears interest at a rate of LIBOR plus 1.75% and provides for monthly payments of interest only. The loan matures on November 5, 1999 and is collateralized by the Commons Corporate Portfolio. 11 NOTE 9 DIVIDENDS AND DISTRIBUTIONS The following summarizes our dividends/distributions for the six months ended June 30, 1999:
Dividend/ Total Distribution Dividend/ Record Date Payable Date Per Share Distribution ----------- ------------ --------- ------------ Preferred Shares: Fourth Quarter 1998 December 31, 1998 January 15, 1999 $ 0.34375 $ 327 First Quarter 1999 March 31, 1999 April 15, 1999 $ 0.34375 $ 338 Second Quarter 1999 June 30, 1999 July 15, 1999 $ 0.34375 $ 338 Common Shares: Fourth Quarter 1998 December 31, 1998 January 15, 1999 $ 0.18 $ 3,025 First Quarter 1999 March 31 ,1999 April 15, 1999 $ 0.18 $ 3,025 Second Quarter 1999 June 30, 1999 July 15, 1999 $ 0.18 $ 3,025 Initial Preferred Units: Fourth Quarter 1998 December 31, 1998 January 15, 1999 $ 0.40625 $ 853 First Quarter 1999 March 31, 1999 April 15, 1999 $ 0.40625 $ 853 Second Quarter 1999 June 30, 1999 July 15, 1999 $ 0.40625 $ 853 Common Units: Fourth Quarter 1998 December 31, 1998 January 15, 1999 $ 0.18 $ 487 First Quarter 1999 March 31, 1999 April 15, 1999 $ 0.18 $ 527 Second Quarter 1999 June 30, 1999 July 15, 1999 $ 0.18 $ 576
NOTE 10 RELATED PARTY TRANSACTIONS MANAGEMENT We have a contract with COMI under which COMI provides asset management, managerial, financial and legal support. Under the terms of this contract, we reimburse COMI for personnel and other overhead-related expenses. During the six months ended June 30, 1999, we incurred management fees and related costs of $1,529 under this contract. We have a management agreement with CRM under which CRM provides property management services to most of our properties. Under the terms of this arrangement, CRM is entitled to a fee equal to 3% of revenue from tenant billings. CRM is also entitled to reimbursement for direct labor and out-of-pocket costs. We incurred property management fees and related costs of $1,831 under this agreement during the six months ended June 30, 1999. We had a management agreement with Glacier Realty LLC ("Glacier"), a company that was partially owned by one of our former Trustees. Under the management agreement, Glacier was responsible for the management of our retail properties for a base annual fee of $250 plus a percentage of Average Invested Assets (as defined in the management agreement). Glacier was also entitled to fees upon our acquisition or sale of any net-leased retail real estate property, a fee that increased in the event that all or substantially all of the net-leased retail real estate properties were sold. The management agreement, entered into on October 14, 1997, had a term of five years. A fee was also due in the event that the management agreement was terminated, including for non-renewal. We incurred fees under this agreement of $63 for the six months ended June 30, 1999 and $125 for the six months ended June 30, 1998. On March 19, 1999, our Operating Partnership issued 200,000 Common Units in exchange for all of the ownership interests in Glacier. For accounting purposes, we recorded the value of this transaction against the gain on the sale of our retail properties in the Midwest region of the United States. 12 We also have a management agreement with a company for which one of our Trustees serves on the Board of Directors. We incurred management fees and related costs under this contract of $41 for the six months ended June 30, 1999 and $40 for the six months ended June 30, 1998. CONSTRUCTION COSTS We have entered into a contract with CDS under which CDS provides construction and development services. Under the terms of this contract, we reimburse CDS for these services based on actual time incurred at market rates. During the six months ended June 30, 1999, we incurred $570 under this contract, a substantial portion of which was capitalized into the cost of the related activities. RENTAL INCOME During the six months ended June 30, 1999, we recognized revenue of $206 on office space leased to COMI and CRM. During the six months ended June 30, 1999, we recognized revenue of $462 on office space leased to Constellation Real Estate, Inc. ("Constellation"), which owns 42% of our Common Shares and 100% of our Preferred Shares, and its affiliate, Baltimore Gas and Electric Company ("BGE"). INTEREST INCOME During the six months ended June 30, 1999, we earned interest income of $144 on notes receivable from the Service Companies. CONSTRUCTION FEES During the six months ended June 30, 1999, the Service Companies earned construction management fees of $58 from an entity owned by an officer and Trustee of ours. LEASING COMMISSION During the six months ended June 30, 1999, the Service Companies earned a leasing commission of $117 from an entity owned by an officer and Trustee of ours. FEES EARNED FROM CONSTELLATION AND BGE During the six months ended June 30, 1999, the Service Companies earned $750 from a project consulting and management agreement with Constellation. The Service Companies also earned $242 in fees and expense reimbursements during the six months ended June 30, 1999 under a property management agreement with BGE. UTILITIES EXPENSE During the six months ended June 30, 1999, BGE provided utility services to most of our properties in the Baltimore/Washington Corridor. 13 NOTE 11 SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, -------------------------- 1999 1998 -------- -------- Supplemental schedule of non-cash investing and financing activities: Debt repaid in connection with sales of properties $ 20,928 $ -- -------- -------- -------- -------- Debt assumed in connection with acquisitions $ 5,097 $ 6,465 -------- -------- -------- -------- Increase in minority interests resulting from issuance of Common Units in connection with property acquisitions $ 3,431 $ -- -------- -------- -------- -------- Increase in minority interests resulting from issuance of Common Units in connection with Glacier acquisition $ 1,487 $ -- -------- -------- -------- -------- Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT $ (128) $ -- -------- -------- -------- -------- Increase in accrued capital improvements $ 765 $ -- -------- -------- -------- -------- Dividends/distributions payable $ 4,792 $ 2,706 -------- -------- -------- --------
14 NOTE 12 INFORMATION BY BUSINESS SEGMENT We have five segments: Baltimore/Washington office, Greater Philadelphia office, Northern/Central New Jersey office, Greater Harrisburg office and retail. Our office properties represent our core-business. We manage our retail properties as a single segment since they are considered outside of our core-business. The table below reports segment financial information. Our Greater Harrisburg and retail segments are not separately reported since they do not meet the reporting thresholds. We measure the performance of our segments based on total revenues less property operating expenses. Accordingly, we do not report other expenses by segment in the table below.
Baltimore/ Greater Northern/ Washington Philadelphia Central New Office Office Jersey Office Other Total ------------------------------------------------------------------------ Three Months Ended June 30, 1999: Revenues $ 11,420 $ 2,507 $ 4,067 $ 1,548 $ 19,542 Property operating expenses 3,460 20 1,546 359 5,385 -------- -------- -------- -------- -------- Income from operations $ 7,960 $ 2,487 $ 2,521 $ 1,189 $ 14,157 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial real estate property expenditures $ 36,819 $ -- $ 7,131 $ 8,760 $ 52,710 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Three Months Ended June 30, 1998: Revenues $ 1,913 $ 2,507 $ 1,988 $ 1,434 $ 7,842 Property operating expenses 631 3 696 315 1,645 -------- -------- -------- -------- -------- Income from operations $ 1,282 $ 2,504 $ 1,292 $ 1,119 $ 6,197 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial real estate property expenditures $ 72,710 $ -- $ 29,467 $ 42 $102,219 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Six Months Ended June 30, 1999: Revenues $ 21,734 $ 5,013 $ 8,163 $ 3,155 $ 38,065 Property operating expenses 6,527 42 3,050 769 10,388 -------- -------- -------- -------- -------- Income from operations $ 15,207 $ 4,971 $ 5,113 $ 2,386 $ 27,677 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial real estate property expenditures $ 43,904 $ -- $ 7,911 $ 14,848 $ 66,663 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Segment assets at June 30, 1999 $301,440 $108,242 $104,787 $ 68,924 $583,393 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Six Months Ended June 30, 1998: Revenues $ 1,913 $ 5,013 $ 3,608 $ 2,833 $ 13,367 Property operating expenses 631 6 1,280 627 2,544 -------- -------- -------- -------- -------- Income from operations $ 1,282 $ 5,007 $ 2,328 $ 2,206 $ 10,823 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial real estate property expenditures $ 72,710 $ -- $ 29,467 $ 124 $102,301 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Segment assets at June 30, 1998 $ 72,877 $109,548 $ 61,367 $ 53,733 $297,525 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
15 The following table reconciles our income from operations for reportable segments to income before extraordinary item as reported in our Consolidated Statements of Operations.
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Income from operations for reportable segments $ 14,157 $ 6,197 $ 27,677 $ 10,823 Add: Equity in income of Service Companies 145 -- 326 -- Gain on sales of rental properties 154 -- 1,140 -- Less: General and administrative (796) (359) (1,685) (658) Interest (5,226) (2,416) (10,419) (4,575) Amortization of deferred financing costs (322) (83) (547) (147) Depreciation and amortization (2,887) (1,281) (5,679) (2,258) Reformation costs -- -- -- (637) Minority interests (1,523) (1,129) (2,872) (2,118) -------- -------- -------- -------- Income before extraordinary item $ 3,702 $ 929 $ 7,941 $ 430 -------- -------- -------- -------- -------- -------- -------- --------
We did not allocate gain on sales of rental properties, interest expense, amortization of deferred financing costs and depreciation and other amortization to segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate equity in income of Service Companies, general and administrative and reformation costs and minority interests since these items represent general corporate items not attributable to segments. NOTE 13 COMMITMENTS AND CONTINGENCIES In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. In management's opinion, any liabilities that may result are not expected to have a materially adverse effect on our financial position, operations or liquidity. We are subject to various federal, state and local environmental regulations related to our property ownership and operation. We have performed environment assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity. In June 1999, we sold an office building and assigned our rights to purchase two office buildings to an unrelated third party. Simultaneously with these transactions, we entered into a contract with the third party under which the third party has the right to transfer these three office buildings to us on or before March 31, 2000 for total consideration of approximately $40.5 million. Under the terms of the contract, we would pay up to $25.0 million (but in no event less than $23.9 million) of the acquisition price in convertible Preferred Units (the "Convertible Preferred Units") in the Operating Partnership and the balance in cash or debt assumption. We would also issue ten-year detachable warrants exercisable for an additional number of Common Units in the Operating Partnership to be determined based upon the share price of the Common Shares over the first five years following the acquisition. However, if the price of our Common Shares used to determine the additional number of Common Units equals or exceeds $14.21, no warrants will be issuable. The Convertible Preferred Units issuable under the terms of the contract will be entitled to a 9% priority annual return for the first ten years following issuance, 10.5% for the five following years and 12% thereafter. The Convertible Preferred Units are convertible, subject to certain restrictions, commencing one year after their issuance into Common Units in the Operating Partnership on the basis of 2.381 Common Units for each Convertible Preferred Unit, plus any accrued return. The Common Units are exchangeable for Common Shares, subject to certain conditions. The Convertible Preferred Units also carry a liquidation preference of $25.00 per unit, plus any accrued return, and may be redeemed for cash by the Operating Partnership at any time after the tenth anniversary of their issuance. 16 NOTE 14 PRO FORMA FINANCIAL INFORMATION (UNAUDITED) We accounted for our 1999 and 1998 acquisitions using the purchase method of accounting. We included the results of operations for the acquisitions in our Consolidated Statements of Operations from their respective purchase dates through June 30, 1999. We prepared our pro forma condensed consolidated financial information presented below as if all of our 1999 and 1998 acquisitions and dispositions had occurred on January 1, 1998. Accordingly, we were required to make pro forma adjustments where deemed necessary. The pro forma financial information is unaudited and is not necessarily indicative of the results which actually would have occurred if these acquisitions and dispositions had occurred on January 1, 1998, nor does it intend to represent our results of operations for future periods.
Six Months Ended June 30, ------------------------- 1999 1998 -------- -------- Pro forma total revenues $ 39,331 $ 33,052 -------- -------- -------- -------- Pro forma net income available to Common Shareholders $ 6,332 $ 2,899 -------- -------- -------- -------- Pro forma earnings per Common Share Basic $ 0.38 $ 0.17 -------- -------- -------- -------- Diluted $ 0.33 $ 0.17 -------- -------- -------- --------
NOTE 15 SUBSEQUENT EVENTS In July 1999, we completed the offering of 1,250,000 Series B Cumulative Redeemable Preferred Shares of beneficial interest ("Series B Preferred Shares") to the public at a price of $25.00 per share. These shares are nonvoting and are redeemable for cash at $25.00 per share at our option on or after July 15, 2004. Holders of these shares are entitled to cumulative dividends, payable quarterly (as and if declared by the Board of Trustees). Dividends accrue from the date of issue at the annual rate of $2.50 per share, which is equal to 10% of the $25.00 per share redemption price. We contributed the net proceeds from the offering to our Operating Partnership in exchange for 1,250,000 Series B Preferred Units. The Series B Preferred Units carry terms that are substantially the same as the Series B Preferred Shares. In connection with the Series B Preferred Share offering, all of the holders of the Initial Preferred Units in our Operating Partnership have agreed to effectively subordinate their priority return distributions to distributions designated to the Series B Preferred Shares. Additionally, these unitholders have agreed to convert their Initial Preferred Units into Common Units on October 1, 1999. On July 9, 1999, we acquired a 57,000 square foot warehouse facility located on 8.5 acres of land contiguous to properties we own in South Brunswick, New Jersey. We acquired this property for $2,172. On August 4, 1999, 372,295 of our Common Units were converted to Common Shares. On August 12, 1999, we acquired an 89% ownership interest in three newly constructed office buildings located in Harrisburg, Pennsylvania totaling approximately 56,000 square feet. We acquired this ownership interest for $5,960 from an entity owned by an officer and Trustee of ours. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Over the last five quarters, we completed a significant number of acquisitions. Our portfolio consisted of seven retail properties and ten office properties at March 31, 1998. During the last three quarters of 1998, we acquired 38 office and two retail properties. During the first two quarters of 1999, we acquired 12 office properties and sold seven retail properties and one office property. We financed the acquisitions using debt and issuing Common Shares, Preferred Shares and ownership interests in our Operating Partnership. To accommodate our growth and changing needs as an organization, we added significant management capabilities. As of June 30, 1999, our portfolio included 61 commercial real estate properties leased principally for office purposes. Due to these significant changes, our results of operations changed dramatically. In this section, we discuss our financial condition and results of operations for the three months and six months ended June 30, 1999. This section includes discussions on: - - why various components of our Consolidated Statements of Operations changed for the three and six months ended June 30, 1999 compared to the same periods in 1998, - - what our primary sources and uses of cash were for the six months ended June 30, 1999, - - how we raised cash for investing and financing activities during the six months ended June 30, 1999, - - how we intend to generate cash for future capital expenditures, and - - the computation of our funds from operations. It may be helpful as you read this section to refer to our consolidated financial statements and accompanying notes and operating data variance analysis set forth above. This section contains "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition of our business. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are not guarantees of future performance, events or results and involve potential risks and uncertainties. Accordingly, actual results may differ materially. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important facts that may affect these expectations, estimates or projections include, but are not limited to: our ability to borrow on favorable terms; general economic and business conditions, which will, among other things, affect office property demand and rents, tenant creditworthiness and financing availability; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate acquisition and development; governmental actions and initiatives and environmental requirements. 18 CORPORATE OFFICE PROPERTIES TRUST OPERATING DATA VARIANCE ANALYSIS (DOLLARS FOR THIS TABLE ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, Six Months Ended June 30, ---------------------------------------- ------------------------------------------- 1999 1998 Variance % Change 1999 1998 Variance % Change ------- ------- ------- ------- ------- -------- -------- ------- Revenues Rental income $17,023 $ 7,058 $ 9,965 141% $33,202 $ 11,977 $ 21,225 177% Tenant recoveries and other income 2,519 784 1,735 221% 4,863 1,390 3,473 250% ------- ------- ------- ----- ------- -------- -------- ----- Total revenues 19,542 7,842 11,700 149% 38,065 13,367 24,698 185% ------- ------- ------- ----- ------- -------- -------- ----- Expenses Property operating 5,385 1,645 3,740 227% 10,388 2,544 7,844 308% General and administrative 796 359 437 122% 1,685 658 1,027 156% Interest expense and amortization of finance costs 5,548 2,499 3,049 122% 10,966 4,722 6,244 132% Depreciation and other amortization 2,887 1,281 1,606 125% 5,679 2,258 3,421 152% Reformation costs -- -- -- -- -- 637 (637) (100%) ------- ------- ------- ----- ------- -------- -------- ----- Total expenses 14,616 5,784 8,832 153% 28,718 10,819 17,899 165% ------- ------- ------- ----- ------- -------- -------- ----- Income before equity in income of Service Companies, gain on sales of rental properties, minority interests and extraordinary item 4,926 2,058 2,868 139% 9,347 2,548 6,799 267% Equity in income of Service Companies 145 -- 145 N/A 326 -- 326 N/A Gain on sales of rental properties 154 -- 154 N/A 1,140 -- 1,140 N/A ------- ------- ------- ----- ------- -------- -------- ----- Income before minority interests and extraordinary item 5,225 2,058 3,167 154% 10,813 2,548 8,265 324% Minority interests (1,523) (1,129) (394) 35% (2,872) (2,118) (754) 36% Extraordinary item (144) -- (144) N/A (838) -- (838) N/A ------- ------- ------- ----- ------- -------- -------- ----- Net income 3,558 929 2,629 283% 7,103 430 6,673 1,552% Preferred Share dividends (338) -- (338) N/A (676) -- (676) N/A ------- ------- ------- ----- ------- -------- -------- ----- Net income available to Common at Shareholders $ 3,220 $ 929 2,291 247% $ 6,427 $ 430 $ 5,997 1,395% ------- ------- ------- ----- ------- -------- -------- ----- ------- ------- ------- ----- ------- -------- -------- ----- Earnings per Common Share on net income Basic $ 0.19 $ 0.12 $ 0.07 58% $ 0.38 $ 0.09 $ 0.29 322% Diluted $ 0.17 $ 0.12 $ 0.05 42% $ 0.33 $ 0.09 $ 0.24 267%
19 COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 Our total revenues increased $24.7 million or 185%, of which $21.2 million was generated by rental income and $3.5 million by tenant recoveries and other income. Tenant recovery income includes payments from tenants as reimbursement for property taxes, insurance and other property operating expenses. Our growth in revenues was due primarily to our property acquisitions in 1998 and 1999, although revenues increased $363,000 due to the operations of office properties owned since the beginning of 1998 and decreased $491,000 due to our Midwest region retail property sales. Our total expenses increased $17.9 million or 165% due mostly to the effects of the increases in property operating, interest expense and amortization of deferred finance costs, depreciation and amortization and general and administrative expenses described below. However, our expenses for the six months ended June 30, 1998 also included $637,000 in nonrecurring costs associated with our reformation into a Maryland REIT in March 1998. Our property operating expenses increased $7.8 million or 308% due mostly to our property acquisitions, although $220,000 of the increase is attributable to increases at office properties owned since the beginning of 1998. Our interest expense and amortization of deferred financing costs increased $6.2 million or 132% due mostly to our borrowings and assumptions of debt needed to finance property acquisitions, although a decrease of $230,000 is attributable to our Midwest region retail property sales. Our depreciation and amortization expense increased $3.4 million or 152% due mostly to our property acquisitions, although a decrease of $116,000 is attributable to our Midwest region retail property sales. Our general and administrative expenses increased $1.0 million or 156%. Much of this increase is due to the addition of management and other staffing functions necessitated by our growing portfolio of properties and the desire to enhance our organizational infrastructure to more efficiently meet tenant needs and further the growth of the Company. Approximately $180,000 of this increase is due to additional professional fees for audit, legal and tax preparation required to support the increased complexity of our organization resulting from our growth and creation of our Operating Partnership and the Service Companies. In addition, approximately $100,000 of this increase resulted from external costs we incurred for public relations and marketing. Our general and administrative expenses decreased as a percentage of total revenue from 4.9% to 4.4%. Our income before minority interests for the six months ended June 30, 1999 includes our equity in income from the Service Companies and the gain we realized on the sale of six of our retail properties, items that were not present for the six months ended June 30, 1998. As a result of the above factors, income before minority interests increased by $8.3 million or 324%. Our income allocation to minority interests increased $754,000 or 36%. The amounts reported for minority interests on our Consolidated Statements of Operations represent the portion of the Operating Partnership's net income not allocated to us. Minority interests owned 16% of the Operating Partnership during the six months ended June 30, 1999 versus 61% during the six months ended June 30, 1998. Accordingly, the increase in income allocated to minority interests is due to the increase in the Operating Partnership's net income, offset by the decreased percentage of income allocated to minority interests. Our net income available to Common Shareholders increased $6.0 million due to the factors discussed above partially offset by a $838,000 loss on the retirement of debt and $676,000 in dividends declared on our Series A Preferred Shares, items that were not present for the six months ended June 30, 1998. Our diluted earnings per Common Share increased $0.24 per share due to the effect of the increase in net income being proportionately greater than the dilutive effects of (i) our share offering in April 1998, (ii) the issuance of Common Shares and Common Units in our Operating Partnership in connection with our property acquisitions during the later portion of 1998 and (iii) the issuance of Common Units in connection with the acquisition of Glacier in March 1999. 20 COMPARISON OF THE THREE MONTHS ENDED JUNE 30,1999 AND 1998 Our total revenues increased $11.7 million or 149%, of which $10.0 million was generated by rental income and $1.7 million by tenant recoveries and other income. Our growth in revenues was due primarily to our property acquisitions in 1998 and 1999, although revenues increased $143,000 due to the operations of office properties owned since the beginning of 1998 and decreased $399,000 due to our Midwest region retail property sales. Our total expenses increased $8.8 million or 153% due mostly to the effects of the increases in property operating, interest expense and amortization of deferred finance costs, depreciation and amortization and general and administrative expenses described below. Our property operating expenses increased $3.7 million or 227% due mostly to our property acquisitions, although $135,000 of the increase is attributable to increases at office properties owned since the beginning of 1998. Our interest expense and amortization of deferred financing costs increased $3.0 million or 122% due mostly to our borrowings and assumptions of debt needed to finance property acquisitions, although a decrease of $179,000 is attributable to our Midwest region retail property sales. Our depreciation and amortization expense increased $1.6 million or 125% due mostly to our property acquisitions. Our general and administrative expenses increased $437,000 or 122%. Much of this increase is due to the addition of management and other staffing functions necessitated by our growing portfolio of properties and the desire to enhance our organizational infrastructure to more efficiently meet tenant needs and further the growth of the Company. Approximately $80,000 of this increase is due to additional professional fees for audit, legal and tax preparation required to support the increased complexity of our organization resulting from our growth and creation of our Operating Partnership and the Service Companies. Our general and administrative expenses decreased as a percentage of total revenue from 4.6% to 4.1%. Our income before minority interests for the three months ended June 30, 1999 includes our equity in income from the Service Companies and the gain we realized on the sale of three of our retail properties, items that were not present for the three months ended June 30, 1998. As a result of the above factors, income before minority interests increased by $3.2 million, or 154%. Our income allocation to minority interests increased $394,000 or 35%. Minority interests owned 17% of the Operating Partnership during the three months ended June 30, 1999 versus 40% during the three months ended June 30, 1998. Accordingly, the increase in income allocated to minority interests is due to the increase in the Operating Partnership's net income, offset by the decreased percentage of income allocated to minority interests. Our net income available to Common Shareholders increased $2.3 million due to the factors discussed above partially offset by a $144,000 loss on the retirement of debt and $338,000 in dividends declared on our Series A Preferred Shares, items that were not present for the three months ended June 30, 1998. Our diluted earnings per Common Share increased $0.05 per share due to the effect of the increase in net income being proportionately greater than the dilutive effects of (i) our share offering in April 1998, (ii) the issuance of Common Shares and Common Units in our Operating Partnership in connection with our property acquisitions during the later portion of 1998 and (iii) the issuance of Common Units in connection with the acquisition of Glacier in March 1999. LIQUIDITY AND CAPITAL RESOURCES CAPITALIZATION AND LIQUIDITY Cash provided from operations represents our primary source of liquidity to fund shareholder and unitholder distributions, pay debt service and fund working capital requirements. We expect to continue to use our property cash flow to meet our short-term cash requirements, including all property expenses, general and administrative 21 expenses, debt service, distribution requirements and recurring capital improvements and leasing commissions. We do not anticipate borrowing to meet these requirements. We have financed our property acquisitions using a combination of borrowings secured by our properties and the equity issuances of Common and Preferred Units in our Operating Partnership and Common and Preferred Shares. We use our secured revolving credit facility with Deutsche Banc Alex. Brown (the "Revolving Credit Facility") to finance much of our investing and financing activities. We pay down our Revolving Credit Facility using proceeds from long-term borrowings collateralized by our properties as attractive financing conditions arise and equity issuances as attractive equity market conditions arise. As of August 10, 1999, the maximum amount available under our Revolving Credit Facility was $100.0 million, of which $47.3 million was unused. Our debt strategy favors long-term, fixed-rate, secured debt over variable-rate debt to minimize the risk of short-term increases in interest rates. As of June 30, 1999, 71% of our mortgage loans payable balance carried fixed interest rates. Mortgage and other loans payable at June 30, 1999 consisted of the following (dollars in thousands): Term Credit Facility, 7.50%, maturing October 2000 (1) $ 100,000 TIAA Mortgage, 6.89%, maturing November 2008 84,150 Revolving Credit Facility, LIBOR + 1.75%, maturing May 2000 (2) 84,050 Allfirst Bank, LIBOR + 1.75%, maturing May 2002 12,430 Deutsche Banc Alex. Brown, LIBOR + 1.75%, maturing November 1999 10,000 Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 6,293 Allfirst Bank, LIBOR + 1.6%, maturing February 2001 (3) 6,075 Provident Bank of Maryland, LIBOR + 1.75%, maturing February 2001 (4) 4,780 IDS Life Insurance Company, 8.375%, maturing June 2007 3,129 Provident Bank of Maryland, LIBOR + 1.75%, maturing September 2000 2,866 Northern Life Insurance Company, 8%, maturing February 2014 2,519 Seller mortgage, lesser of Prime + 0.5% or 9.38%, maturing May 2007 1,887 --------- $ 318,179 --------- ---------
(1) May be extended for two one-year periods, subject to certain conditions. (2) May be extended for a one-year period, subject to certain conditions. (3) Construction loan with a total commitment of $9,825. (4) Construction loan with a total commitment of $10,875. In June 1999, we sold an office building and assigned our rights to purchase two office buildings to an unrelated third party. Simultaneously with these transactions, we entered into a contract with the third party under which the third party has the right to transfer these three office buildings to us on or before March 31, 2000 for total consideration of approximately $40.5 million. Under the terms of the contract, we would pay up to $25.0 million (but in no event less than $23.9 million) of the acquisition price in Convertible Preferred Units in the Operating Partnership and the balance in cash or debt assumption. We would also issue ten-year detachable warrants exercisable for an additional number of Common Units in the Operating Partnership to be determined based upon the share price of the Common Shares over the first five years following the acquisition. However, if the price of our Common Shares used to determine the additional number of Common Units equals or exceeds $14.21, no warrants will be issuable. The Convertible Preferred Units issuable under the terms of the contract will be entitled to a 9% priority annual return for the first ten years following issuance, 10.5% for the five following years and 12% thereafter. The Convertible Preferred Units are convertible, subject to certain restrictions, commencing one year after their 22 issuance into Common Units in the Operating Partnership on the basis of 2.381 Common Units for each Convertible Preferred Unit, plus any accrued return. The Common Units are exchangeable for Common Shares, subject to certain conditions. The Convertible Preferred Units also carry a liquidation preference of $25.00 per unit, plus any accrued return, and may be redeemed for cash by the Operating Partnership at any time after the tenth anniversary of their issuance. We have no contractual obligations for property acquisitions or material capital costs other than the contract to acquire three office buildings from an unrelated third-party described above, the July and August property acquisitions discussed below, the completion of the three development projects discussed below and tenant improvements in the ordinary course of business. We expect to meet our long-term capital needs through a combination of cash from operations, additional borrowings and additional equity issuances of Common Shares, Preferred Shares, Common Units and/or Preferred Units. We have an effective Form S-3 shelf registration statement on file with the Securities and Exchange Commission under which we may sell up to $218.8 million in debt or equity securities depending upon our needs and market conditions. INVESTING AND FINANCING ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 1999: During the six months ended June 30, 1999, we acquired 12 operating properties and three parcels of land for an aggregate acquisition cost of $51.1 million. Of the 12 operating properties acquired, 11 are located in the Baltimore/Washington Corridor and one in New Jersey. The land parcels are located in the Baltimore/ Washington Corridor. The operating property acquisitions increased our rentable square footage by 479,000. These acquisitions were financed by: - using $41.3 million in borrowings under our Revolving Credit Facility, - assuming $5.1 million in mortgage loans, - issuing 326,775 Common Units in our Operating Partnership, and - using cash reserves for the balance. During the six months ended June 30, 1999, we had construction underway on an aggregate of 317,000 square feet of new office space that was 85% pre-leased at our Woodlands II and 132 and 134 National Business Parkway properties. We entered into $20.7 million in construction loans during this period to finance the construction of two of these projects. Borrowings under these loans totaled $10.9 million at June 30, 1999. Also during the six months ended June 30, 1999, CDS had construction underway on 66,000 square feet of new office space in Linthicum, Maryland. During the six months ended June 30, 1999, we sold eight properties for $52.2 million, of which $20.9 million was used to pay off the mortgage loans payable on the properties. We realized a gain of $1.1 million on the sales of these properties, including the value of the transaction involving Glacier (see Note 10 to the Consolidated Financial Statements). Net proceeds from these sales totaled $30.0 million, $24.3 million of which was used to repay a portion of our Revolving Credit Facility and the remainder was applied to working capital. On March 19, 1999, our Operating Partnership issued 200,000 Common Units in exchange for all of the ownership interests in Glacier. For accounting purposes, we recorded the value of this transaction against the gain on the sale of our retail properties in the Midwest region of the United States (see Note 10 to the Consolidated Financial Statements). On April 8, 1999, we obtained a $12.5 million mortgage loan payable from Allfirst Bank, $9.0 million of which is nonrecourse. The loan provides for monthly payments of interest, at a rate of LIBOR plus 1.75%, and principal of $23,000 in the loan's first year, $25,000 in the second year and $27,000 in the third year. The loan matures on May 1, 2002. This loan is collateralized by three of our operating properties and one parcel of land. The proceeds from this loan were used to pay down our Revolving Credit Facility. 23 In connection with the acquisition of the Parkway Crossing Properties, we assumed three nonrecourse mortgage loans payable collateralized by these buildings. One of these loans is with IDS Life Insurance Company. This loan has a balance of $3.2 million, bears interest at a fixed rate of 8.375% and provides for monthly principal and interest payments of $44,000. This loan matures on June 1, 2007. We also assumed two loans with the seller totaling $1.9 million that carry identical terms. These loans provide for monthly payments of interest at a rate equal to the lesser of prime plus 0.5% (currently 8.5%) or 9.38% plus fixed principal payments of $4,000. These loans mature on May 25, 2007. On May 5, 1999, we obtained a $10.0 million loan from Deutsche Banc Alex. Brown. The loan bears interest at a rate of LIBOR plus 1.75% and provides for monthly payments of interest only. The proceeds from this loan were used to pay down our Revolving Credit Facility. The loan matures on November 5, 1999 and is collateralized by the Commons Corporate Portfolio. INVESTING AND FINANCING ACTIVITIES SUBSEQUENT TO THE SIX MONTHS ENDED JUNE 30, 1999: In July 1999, we completed the offering of 1,250,000 Series B Preferred Shares to the public at a price of $25.00 per share. These shares are nonvoting and are redeemable for cash at $25.00 per share at our option on or after July 15, 2004. Holders of these shares are entitled to cumulative dividends, payable quarterly (as and if declared by the Board of Trustees). Dividends accrue from the date of issue at the annual rate of $2.50 per share, which is equal to 10% of the $25.00 per share redemption price. We contributed the net proceeds from the offering to our Operating Partnership in exchange for 1,250,000 Series B Preferred Units. Our Operating Partnership used most of the proceeds to pay down our Revolving Credit Facility. The Series B Preferred Units carry terms that are substantially the same as the Series B Preferred Shares. In connection with the Series B Preferred Share offering, all of the holders of the Initial Preferred Units in our Operating Partnership have agreed to effectively subordinate their priority return distributions to distributions designated to the Series B Preferred Shares. Additionally, these unitholders have agreed to convert their Initial Preferred Units into Common Units on October 1, 1999. On July 9, 1999, we acquired a 57,000 square foot warehouse facility located on 8.5 acres of land contiguous to properties we own in South Brunswick, New Jersey. We acquired this property for $2.2 million by applying the balance of a $1.6 million note receivable from the seller to the purchase price, issuing 50,476 Common Units in our Operating Partnership and using cash reserves for the balance. This building will undergo redevelopment to convert the building into Class A office space and upon completion will be 100% leased to AT&T Local Services. On August 4, 1999, 372,295 of our Common Units were converted to Common Shares. On August 12, 1999, we acquired an 89% ownership interest in three newly constructed office buildings located in Harrisburg, Pennsylvania totaling approximately 56,000 square feet. We acquired these buildings for $6.0 million from an entity owned by an officer and Trustee of ours. This acquisition was financed by assuming a $4.3 million construction loan payable with Mellon Bank, N.A. and using cash reserves for the balance. The construction loan payable bears interest at a rate equal to the yield on 5-year Treasury securities plus 2.0%. The loan provides for monthly payments of interest only through August 2000 and equal monthly payments of principal and interest based on a 30-year amortization period commencing September 2000. The loan matures on August 1, 2005. STATEMENT OF CASH FLOWS We generated net cash flow from operating activities of $15.9 million for the six months ended June 30, 1999, an increase of $11.2 million from the six months ended June 30, 1998. Our increase in cash flows from operating activities is due mostly to income generated from our newly acquired properties. Our net cash flow used in investing activities for the six months ended June 30, 1999 decreased $66.7 million from the six months ended June 30, 1998 due mostly to the $38.5 million decrease in cash outlays associated with purchases of and 24 improvements to real estate properties during the period and $30.0 million in proceeds generated from sales of our operating properties. Our net cash flow provided by financing activities for the six months ended June 30, 1999 decreased $75.4 million from the six months ended June 30, 1998 due primarily to $72.7 million from the issuance of Common Shares in the prior period, $42.1 million in additional repayments of mortgage loans payable and $6.6 million in additional divided and distribution payments, offset by $45.7 million in additional proceeds from mortgage loans payable. FUNDS FROM OPERATIONS We consider Funds from Operations ("FFO") to be meaningful to investors as a measure of the financial performance of an equity REIT when considered with the financial data presented under generally accepted accounting principles ("GAAP"). Under the National Association of Real Estate Investment Trusts' ("NAREIT") definition, FFO means net income (loss) computed using generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Further, if the conversion of securities into common shares is dilutive, we exclude any GAAP income allocated to these securities in computing FFO. The FFO we present may not be comparable to the FFO of other REITs since they may interpret the current NAREIT definition of FFO differently or they may not use the current NAREIT definition of FFO. FFO is not the same as cash generated from operating activities or net income determined in accordance with GAAP. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing when evaluating our liquidity or ability to make cash distributions or pay debt service. Our FFO for the six months ended June 30, 1999 and 1998 are summarized in the following table: 25
(Dollars and shares for this table are in thousands) ---------------------------------------------------- For the three months For the six months ended June 30, ended June 30, -------------------- ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Income before minority interests $ 5,225 $ 2,058 $ 10,813 $ 2,548 Add: Nonrecurring charges - Reformation costs -- -- -- 637 Add: Real estate related depreciation and amortization 2,872 1,270 5,646 2,241 Less: Preferred Unit distributions (853) (853) (1,706) (1,706) Less: Preferred Share dividends (338) -- (676) -- Less: Gain on sales of rental properties (154) -- (1,140) -- -------- -------- -------- -------- Funds from operations 6,752 2,475 12,937 3,720 Add: Preferred Unit distributions 853 853 1,706 1,706 Add: Preferred Share dividends 338 -- 676 -- -------- -------- -------- -------- Funds from operations assuming conversion of Preferred Units and Preferred Shares 7,943 3,328 15,319 5,426 Less: Straight line rent adjustments (825) (384) (1,500) (743) Less: Recurring capital improvements (478) -- (1,147) -- -------- -------- -------- -------- Adjusted funds from operations assuming conversion of Preferred Units and Preferred Shares $ 6,640 $ 2,944 $ 12,672 $ 4,683 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average Common Shares 16,802 7,628 16,802 4,964 Conversion of Common Units 3,203 2,582 2,982 2,582 -------- -------- -------- -------- Weighted average Common Shares/Units 20,005 10,210 19,784 7,546 Assumed conversion of share options 9 21 9 21 Conversion of Preferred Shares 1,845 -- 1,845 -- Conversion of Preferred Units 7,500 7,500 7,500 7,500 -------- -------- -------- -------- Weighted average Common Shares/Units assuming conversion of Preferred Units and Preferred Shares 29,359 17,731 29,138 15,067 -------- -------- -------- -------- -------- -------- -------- --------
INFLATION We have not been significantly impacted by inflation during the periods presented in this report. This is mostly because of the relatively low inflation rates in our markets. Most of our tenants are contractually obligated to pay their share of operating expenses, thereby reducing exposure to increases in such costs resulting from inflation. IMPACT OF THE YEAR 2000 ISSUE Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead. If not corrected, this could result in a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions, prepare financial statements, send invoices or engage in similar normal business activity. Our accounting software system was certified as Year 2000 compliant by its manufacturer. Accordingly, we do not anticipate problems in processing the billing and collection of revenue, paying of expenditures, recording of financial transactions, preparing financial statements and maintaining and generating system driven managerial information. Our information technology and accounting groups are conducting internal tests to ensure compliance. This testing process was originally scheduled to be completed in the second quarter of 1999. However, due to an upgrade of the software package and the addition of new modules in July 1999, the testing process was extended and is now estimated to be completed in August 1999. Our accounting department has 26 developed a plan that will enable a certain amount of manual processing to take place in the unlikely event that problems arise with our accounting software. Our property management team has been continually evaluating the impact of the Year 2000 Issue on the various facets of property operating systems since the beginning of 1998, including the telecommunication, security, energy management, sprinkler and elevator systems. This evaluation process was completed in the second quarter of 1999. Based on the results of this evaluation process, we do not anticipate any material adverse consequences on property operations. Our property management team has alternative plans in place to address unexpected problems that may arise with the property operating systems. Additional property management staff will also be on-call to respond to any such problems beginning January 1, 2000. We rely on third party suppliers for a number of key services. Interruption of supplier operations due to the Year 2000 Issue could affect our operations. After contacting our significant suppliers regarding their Year 2000 readiness, our property management team does not anticipate any material adverse consequences relating to these suppliers abilities to support our properties. Our property management team plans to continue its efforts to obtain additional written assurance from material suppliers to support representations provided regarding their Year 2000 readiness. Our team will also document in the third quarter of 1999 our contingency plans in the unlikely event that certain suppliers are adversely impacted by the Year 2000 Issue. We are dependent upon our tenants for revenue and cash flow. Interruptions in tenant operations due to the Year 2000 Issue could result in reduced revenue, increased receivable levels and cash flow reductions. To address this concern, our property management team solicited responses from certain of our significant tenants regarding their Year 2000 readiness. We also reviewed Year 2000 disclosures provided by certain of our significant tenants required to report to the Securities and Exchange Commission. All tenants responding to our solicitation were in the advanced stages of addressing the Year 2000 Issue; this was also the case with all of the tenants included in our review of Year 2000 disclosures reported in filings by such tenants to the Securities and Exchange Commission. The tenants included in our analysis represent 56% of our monthly contractual base rents as of June 30, 1999 multiplied by 12 plus estimated annualized expense reimbursements. Despite our efforts described above, given the nature of the Year 2000 Issue, there can be no assurance that we will be able to identify and correct all possible aspects. However, based on all information available to us, we believe that we have addressed all areas where the Year 2000 Issue could materially impact our Company's business. Based on information currently available from our internal assessment, we do not expect significant incremental costs associated with our Year 2000 activities during 1999. We will also evaluate Year 2000 issues for all future property acquisitions and development. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks associated with our financial instruments, the most predominant of which is changes in interest rates. Increases in interest rates can result in increased interest expense under our revolving credit facility and our other mortgage loans payable carrying variable interest rate terms. Increases in interest rates can also result in increased interest expense when our mortgage loans payable carrying fixed interest rate terms mature and need to be refinanced. 27 The following table sets forth our long-term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV") at June 30, 1999 (dollars in thousands):
For the Year Ended December 31, ---------------------------------------------------- 1999 2000(2) 2001 2002 2003 Thereafter Total FMV -------- --------- -------- -------- ------- ---------- --------- --------- Long term debt: Fixed rate(1) $ 798 $ 131,998 $ 2,145 $ 2,302 $ 2,472 $ 86,374 $ 226,089 $ 221,205 Average interest rate 7.41% 7.13% 7.29% 7.30% 7.30% 7.68% 7.55% Variable rate $ 10,173 $ 57,199 $ 11,180 $ 11,797 $ 44 $ 1,697 $ 92,090 $ 92,090 Average interest rate 6.84% 6.88% 6.87% 7.67% 8.25% 8.25% 7.82%
(1) Includes $30.0 million balance governed by a swap agreement which fixes the LIBOR rate on the underlying loan to 5.085% (2) Includes $100.0 million maturity in October which may be extended for two one-year terms subject to certain conditions. Includes a $84.1 million maturity in May, which may be extended for a one-year period subject to certain conditions. Based on our variable rate debt balances during the six months ended June 30, 1999, our interest expense would have increased $340,000 if interest rates were 1% higher. On January 5, 1999, we entered into an interest rate swap agreement with Deutsche Banc Alex. Brown that fixes our one-month LIBOR base to 5.085% per annum on a notional amount of $30.0 million through May 2001. While this swap agreement reduces the impact of an increase in interest rates, the nonperformance of Deutsche Banc Alex. Brown in this swap agreement, while remote, could result in material losses. We expect to continue to use such swap agreements to reduce the impact of interest rate changes. PART II ITEM 1. LEGAL PROCEEDINGS We are not currently involved in any material litigation nor, to the best of our knowledge, is any material litigation currently threatened against us (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance). ITEM 2. CHANGES IN SECURITIES a. None b. None c. On April 16, 1999, we issued 326,768 Common Units in our Operating Partnership in connection with the acquisition of the Parkway Crossing Properties. The issuance of these Common Units is exempt from registration under Section 4 (2) of the Securities Act of 1933, as amended. These Common Units are exchangeable into our Common Shares, subject to certain conditions. On April 28, 1999, we issued seven Common Units in our Operating Partnership in connection with the acquisition of the Commons Corporate Portfolio. The issuance of these Common Units is exempt from registration under Section 4 (2) of the Securities Act of 1933, as amended. These Common Units are exchangeable into our Common Shares, subject to certain conditions. d. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Meeting type and date Annual Meeting of Shareholders held on May 19, 1999 (b) N/A (c) Description of each matter voted on at meeting Resolution to amend our 1998 Results of votes Long Term Incentive Plan to For 12,173,149.975 (i) increase the number of Against or withheld 980,507.910 issuable shares under the plan, Abstentions and (ii) increase the number of broker non-votes 45,685.000 shares issuable to one plan participant and (iii) permit the issuance of restricted shares
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 2.1 Agreement and Plan of Merger, dated January 31, 1998, among the Registrant, the Maryland Company and the Company (filed with the Trust's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 2.2 Assignment of Partnership Interests, dated April 30, 1998, between Airport Square Limited Partnership, Airport Square Corporation, Camp Meade Corporation and COPT Airport Square One LLC and COPT Airport Square Two LLC. (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference). 2.3 Assignment of Purchase and Sale Agreement, dated April 30, 1998, between Aetna Life Insurance Company and the Operating Partnership. (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference). 2.4 Assignment of Loan Purchase and Sale Agreement, dated April 30, 1998, between Constellation Real Estate, Inc. and the Operating Partnership. (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference). 2.5 Purchase and Sale Agreement, dated April 1, 1998, between Aetna Life Insurance Company and Airport Square Limited Partnership (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference). 2.6.1 Loan Purchase and Sale Agreement, dated March 13, 1998, between Aetna Life Insurance Company and Constellation Real Estate, Inc. (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference). 2.6.2 Amendment to Loan Purchase and Sale Agreement, dated April 16, 1998, between Aetna Life Insurance Company and Constellation Real Estate, Inc. (filed with the Company's Current Report on Form 8-K on May 14, 1998 and incorporated herein by reference).
29
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 2.7.1 Purchase and Sale Agreement, dated March 4, 1998, between 695 Rt. 46 Realty, LLC, 710 Rt. 46 Realty, LLC and COPT Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on June 10, 1998 and incorporated herein by reference). 2.7.2 Letter Amendment to Purchase and Sale Agreement, dated March 26, 1998, between 695 Rt. 46 Realty, LLC, 710 Rt. 46 Realty, LLC and COPT Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on June 10, 1998 and incorporated herein by reference). 2.8.1 Contribution Agreement between the Company and the Operating Partnership and certain Constellation affiliates (filed as Exhibit A of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.8.2 First Amendment to Contribution Agreement, dated July 16, 1998, between Constellation Properties, Inc. and certain entities controlled by Constellation Properties, Inc. (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 2.8.3 Second Amendment to Contribution Agreement, dated September 28, 1998, between Constellation Properties, Inc. and certain entities controlled by Constellation Properties, Inc. (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 2.9 Service Company Asset Contribution Agreement between the Company and the Operating Partnership and certain Constellation affiliates (filed as Exhibit B of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.10.1 Option Agreement, dated May 14, 1998, between the Operating Partnership and NBP-III, LLC (a Constellation affiliate) (filed as Exhibit C of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.10.2 First Amendment to Option Agreement, dated June 22, 1998, between the Operating Partnership and NBP-III, LLC (a Constellation affiliate) (filed as Exhibit E of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.11.1 Option Agreement, dated May 14, 1998, between the Operating Partnership and Constellation Gatespring II, LLC (a Constellation affiliate) (filed as Exhibit D of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.11.2 First Amendment to Option Agreement, dated June 22, 1998, between the Operating Partnership and Constellation Gatespring II, LLC (a Constellation affiliate) (filed as Exhibit F of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.12 Option Agreement, dated September 28, 1998, between Jolly Acres Limited Partnership, Arbitrage Land Limited Partnership and the Operating Partnership (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference).
30
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 2.13 Right of First Refusal Agreement, dated September 28, 1998, between Constellation Properties, Inc. and the Operating Partnership (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 2.14 Right of First Refusal Agreement, dated September 28, 1998, between 257 Oxon, LLC and the Operating Partnership (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 2.15 Development Property Acquisition Agreement, dated May 14, 1998, between the Operating Partnership and CPI Piney Orchard Village Center, Inc. (a Constellation affiliate) (filed as Exhibit H of the Company's Schedule 14A Information on June 26, 1998 and incorporated herein by reference). 2.16 Contribution Agreement, dated September 30, 1998, between COPT Acquisitions, Inc. and M.O.R. XXIX Associates Limited Partnership (filed with the Company's Current Report on Form 8-K on October 28, 1998 and incorporated herein by reference). 2.17 Purchase and Sale Agreement, dated September 30, 1998, between New England Life Pension Properties II: A Real Estate Limited Partnership and COPT Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on October 28, 1998 and incorporated herein by reference). 2.18.1 Sale-Purchase Agreement, dated August 20, 1998 between South Middlesex Industrial Park Associates, L.P. and SM Monroe Associates and COPT Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on October 28, 1998 and incorporated herein by reference). 2.18.2 First Amendment to Sale-Purchase Agreement, dated October 30, 1998, between South Middlesex Industrial Park Associates, L.P. and SM Monroe Associates, L.P. and COPT Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on November 16, 1998 and incorporated herein by reference). 2.19 Contribution Agreement, dated December 31, 1998, between the Operating Partnership and M.O.R. 44 Gateway Associates L.P., RA & DM, Inc. and M.R.U. L.P. (filed with the Company's Current Report on Form 8-K on January 14, 1999 and incorporated herein by reference). 2.20.1 Purchase and Sale Agreement, dated December 31, 1998, between Metropolitan Life Insurance Company and Corporate Office Acquisitions, Inc. (filed with the Company's Current Report on Form 8-K on January 14, 1999 and incorporated herein by reference). 2.20.2 Amendment to Purchase and Sale Agreement, dated December 31, 1998, between Metropolitan Life Insurance Company, DPA/Gateway L.P., Corporate Office Acquisitions, Inc., COPT Gateway, LLC and the Operating Partnership (filed with the Company's Current Report on Form 8-K on January 14, 1999 and incorporated herein by reference). 2.21 Contribution Agreement, dated February 24, 1999, between the Operating Partnership and John Parsinen, John D. Parsinen, Jr., Enterprise Nautical, Inc. and Vernon Beck (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference).
31
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 3.1 Amended and Restated Declaration of Trust of Registrant (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 3.2 Bylaws of Registrant (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 4.1 Form of certificate for the Registrant's Common Shares of Beneficial Interest, $0.01 par value per share (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 4.2 Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain shareholders of the Company (filed with the Company's Quarterly Report on Form 10-Q on August 12, 1998 and incorporated herein by reference). 4.3 Articles Supplementary of Corporate Office Properties Trust Series A Convertible Preferred Shares, dated September 28, 1998 (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 4.4.1 Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated March 16, 1998 (filed with the Company's Quarterly Report on Form 10-Q on August 12, 1998 and incorporated herein by reference). 4.4.2 First Amendment to Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated September 28, 1998 (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 4.4.3 Second Amendment to Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated October 13, 1998 (filed with the Company's Current Report on Form 8-K on October 28, 1998 and incorporated herein by reference). 4.4.4 Third Amendment to Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 31, 1998 (filed with the Company's Current Report on Form 8-K on January 14, 1999 and incorporated herein by reference). 4.5 Registration Rights Agreement, dated September 28, 1998, for the benefit of certain shareholders of the Company (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 4.6 Articles Supplementary of Corporate Office Properties Trust Series B Convertible Preferred Shares, dated July 2, 1999 (filed with the Company's Current Report on Form 8-K on July 7, 1999 and incorporated herein by reference). 10.1 Clay W. Hamlin III Employment Agreement, dated October 14, 1997, with the Operating Partnership (filed with the Company's Current Report on Form 8-K on October 29, 1997, and incorporated herein by reference). 10.2 Employment Agreement, dated October 20, 1997, between the Operating Partnership and Thomas D. Cassel (filed with the Company's Annual Report on Form 10-K on March 25, 1998 and incorporated herein by reference).
32
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 10.3 Employment Agreement, dated September 28, 1998, between Corporate Office Management, Inc. and Randall M. Griffin (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.4 Employment Agreement, dated September 28, 1998, between Corporate Office Management, Inc. and Roger A. Waesche, Jr. (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.5 Management Agreement between Registrant and Glacier Realty, LLC (filed with the Company's Current Report on Form 8-K on October 29, 1997, and incorporated herein by reference). 10.6 Senior Secured Credit Agreement, dated October 13, 1997, (filed with the Company's Current Report on Form 8-K on October 29, 1997, and incorporated herein by reference). 10.7.1 Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 10.7.2 Amendment No. 1 to Corporate Office Properties Trust 1998 Long Term Incentive Plan. 10.8 Stock Option Plan for Directors (filed with Royale Investments, Inc.'s Form 10-KSB for the year ended December 31, 1993 (Commission File No. 0-20047) and incorporated herein by reference). 10.9 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation dated March 12, 1997 with respect to lot A (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 10.10 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation, dated March 12, 1997, with respect to lot B (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 10.11 Lease Agreement between Blue Bell Investment Company, L.P. and Unisys Corporation, dated March 12, 1997, with respect to lot C (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). 10.12 Senior Secured Revolving Credit Agreement, dated May 28, 1998, between the Company, the Operating Partnership, Any Mortgaged Property Subsidiary and Bankers Trust Company (filed with the Company's Current Report on Form 8-K on June 10, 1998 and incorporated herein by reference). 10.13 Secured Promissory Note, dated April 29, 1997, between 710 Rt. 46 Realty, LLC and Life Investors Insurance Company of America (filed with the Company's Current Report on Form 8-K on June 10, 1998 and incorporated herein by reference). 10.14 Mortgage and Security Agreement, dated April 29, 1997, between 710 Rt. 46 Realty, LLC and Life Investors Insurance Company of America (filed with the Company's Current Report on Form 8-K on June 10, 1998 and incorporated herein by reference).
33
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- 10.15 Amended and Restated Deed of Trust Note, dated October 6, 1995, between Cranberry-140 Limited Partnership and Security Life of Denver Insurance Company (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.16.1 Promissory Note, dated September 15, 1995, between Tred Lightly Limited Liability Company and Provident Bank of Maryland (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.16.2 Allonge to Promissory Note, dated September 28, 1998, between Tred Lightly Limited Liability Company and Provident Bank of Maryland (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.17.1 Third Loan Modification and Extension Agreement, dated November 12, 1997, between St. Barnabus Limited Partnership, Constellation Properties, Inc. and NationsBank, N.A. (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.17.2 Fourth Loan Modification Agreement, dated September 28, 1998, between St. Barnabus Limited Partnership, Constellation Properties, Inc. and NationsBank, N.A. (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.18.1 Deed of Trust Note, dated September 20, 1988, between Brown's Wharf Limited Partnership and Mercantile-Safe Deposit and Trust Company (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.18.2 Extension Agreement and Allonge to Deed of Trust Note, dated July 1, 1994, between Brown's Wharf Limited Partnership and Mercantile-Safe Deposit and Trust Company (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.19 Consulting Services Agreement, dated April 28, 1998, between the Company and Net Lease Finance Corp., doing business as Corporate Office Services (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.20 Project Consulting and Management Agreement, dated September 28, 1998, between Constellation Properties, Inc. and COMI (filed with the Company's Current Report on Form 8-K on October 13, 1998 and incorporated herein by reference). 10.21 Promissory Note, dated October 22, 1998, between Teachers Insurance and Annuity Association of America and the Operating Partnership (filed with the Company's Quarterly Report on Form 10-Q on November 13, 1998 and incorporated herein by reference). 10.22 Indemnity Deed of Trust, Assignment of Leases and Rents and Security Agreement, dated October 22, 1998, by affiliates of the Operating Partnership for the benefit of Teachers Insurance and Annuity Association of America (filed with the Company's Quarterly Report on Form 10-Q on November 13, 1998 and incorporated herein by reference). 10.23 Agreement for Services, dated September 28, 1998, between the Company and Corporate
34
EXHIBIT NO. DESCRIPTION ------- ---------------------------------------------------------------- Office Management, Inc. (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.24.1 Lease Agreement, dated September 28,1998, between St. Barnabus Limited Partnership and Constellation Properties, Inc. (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.24.2 First Amendment to Lease, dated December 31, 1998, between St. Barnabus, LLC and Constellation Properties, Inc. (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.25.1 Lease Agreement, dated August 3, 1998, between Constellation Real Estate, Inc. and Constellation Properties, Inc. (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.25.2 First Amendment to Lease, dated December 30, 1998, between Three Centre Park, LLC and Constellation Properties, Inc. (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.26.1 Lease Agreement, dated April 27, 1993, between Constellation Properties, Inc. and Baltimore Gas and Electric Company (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.26.2 First Amendment to Lease, dated December 9, 1998, between COPT Brandon, LLC and Baltimore Gas and Electric Company (filed with the Company's Quarterly Report on Form 10-Q on May 14, 1999 and incorporated herein by reference). 10.27 Underwriting Agreement, dated June 29, 1999, between Corporate Office Properties Trust and the underwriters of the Series B Preferred Shares (filed with the Company's Current Report on Form 8-K on July 7, 1999 and incorporated herein by reference). 10.28 Contribution Rights Agreement, dated June 23, 1999, between the Operating Partnership and United Properties Group, Incorporated. 27 Financial Data Schedule.
35 c. Reports on Form 8-K We filed the following Current Reports on Form 8-K in the three months ended June 30, 1999: Item 5 dated June 14, 1999 in connection with the acquisition of the Commons Corporate Portfolio and the probable transaction with United Properties Group, Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE OFFICE PROPERTIES TRUST Date: August 13, 1999 By: /s/ Randall M. Griffin --------------------------------------- Randall M. Griffin President and Chief Operating Officer Date: August 13, 1999 By: /s/ Roger A. Waesche, Jr. --------------------------------------- Roger A. Waesche, Jr. Senior Vice President and Chief Financial Officer 36