UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one) |
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ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2003 |
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or |
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-14023 |
(Exact name of registrant as specified in its charter)
Maryland |
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23-2947217 |
(State or other jurisdiction of |
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(IRS Employer |
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8815 Centre Park Drive, Suite 400, Columbia MD |
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21045 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (410) 730-9092
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ýYes o No
On November 7, 2003, 29,550,631 shares of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued.
TABLE OF CONTENTS
FORM 10-Q
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Page |
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Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002 |
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3 |
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4 |
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5 |
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6 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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25 |
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39 |
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40 |
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40 |
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40 |
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41 |
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41 |
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41 |
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41 |
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44 |
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2
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
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September 30, |
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December 31, |
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(unaudited) |
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Assets |
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Investment in real estate: |
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Operating properties, net |
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$ |
1,127,960 |
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$ |
1,008,178 |
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Property held for sale, net |
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16,792 |
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Projects under construction or development |
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52,956 |
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34,567 |
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Total commercial real estate properties, net |
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1,180,916 |
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1,059,537 |
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Investments in and advances to unconsolidated real estate joint ventures |
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9,576 |
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7,999 |
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Investment in real estate, net |
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1,190,492 |
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1,067,536 |
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Cash and cash equivalents |
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13,372 |
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5,991 |
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Restricted cash |
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7,878 |
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9,739 |
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Accounts receivable, net |
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7,049 |
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3,509 |
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Investments in and advances to other unconsolidated entities |
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1,621 |
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1,621 |
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Deferred rent receivable |
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16,728 |
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13,698 |
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Deferred charges, net |
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39,595 |
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23,199 |
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Prepaid and other assets |
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21,237 |
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11,260 |
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Furniture, fixtures and equipment, net |
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2,006 |
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1,676 |
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Total assets |
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$ |
1,299,978 |
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$ |
1,138,229 |
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Liabilities and shareholders equity |
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Liabilities: |
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Mortgage and other loans payable |
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$ |
759,298 |
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$ |
705,056 |
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Accounts payable and accrued expenses |
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15,450 |
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11,670 |
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Rents received in advance and security deposits |
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11,503 |
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8,253 |
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Dividends and distributions payable |
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11,637 |
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9,794 |
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Deferred revenue associated with acquired operating leases |
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9,799 |
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11,758 |
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Fair value of derivatives |
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726 |
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494 |
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Other liabilities |
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7,114 |
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1,821 |
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Total liabilities |
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815,527 |
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748,846 |
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Minority interests: |
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Preferred units in the Operating Partnership |
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24,367 |
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Common units in the Operating Partnership |
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80,411 |
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76,519 |
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Total minority interests |
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80,411 |
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100,886 |
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Commitments and contingencies (Note 16) |
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Shareholders equity: |
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Preferred Shares of beneficial interest ($0.01 par value; 15,000,000 shares authorized) |
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1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (1,250,000 shares issued with an aggregate liquidation preference of $31,250 at September 30, 2003 and December 31, 2002) |
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13 |
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13 |
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544,000 designated as Series D Cumulative Convertible Redeemable Preferred Shares of beneficial interest (544,000 shares issued with an aggregate liquidation preference of $13,600 at September 30, 2003 and December 31, 2002) |
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5 |
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5 |
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1,265,000 designated as Series E Cumulative Redeemable Preferred Shares of beneficial interest (1,150,000 shares issued with an aggregate liquidation preference of $28,750 at September 30, 2003 and December 31, 2002) |
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11 |
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11 |
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1,425,000 designated as Series F Cumulative Redeemable Preferred Shares of beneficial interest (1,425,000 shares issued with an aggregate liquidation preference of $35,625 at September 30, 2003 and December 31, 2002) |
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14 |
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14 |
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2,200,000 designated as Series G Cumulative Redeemable Preferred Shares of beneficial interest (2,200,000 shares issued with an aggregate liquidation preference of $35,625 at September 30, 2003 and December 31, 2002) |
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22 |
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Common Shares of beneficial interest ($0.01 par value; 45,000,000 shares authorized, shares issued of 29,527,436 at September 30, 2003 and 23,772,732 at December 31, 2002) |
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296 |
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238 |
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Additional paid-in capital |
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445,717 |
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313,786 |
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Cumulative distributions in excess of net income |
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(35,968 |
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(21,067 |
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Value of unearned restricted common share grants |
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(4,107 |
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(2,739 |
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Treasury shares, at cost (166,600 shares) |
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(1,415 |
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(1,415 |
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Accumulated other comprehensive loss |
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(548 |
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(349 |
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Total shareholders equity |
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404,040 |
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288,497 |
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Total liabilities and shareholders equity |
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$ |
1,299,978 |
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$ |
1,138,229 |
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See accompanying notes to consolidated financial statements.
3
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
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For the three months ended |
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For the nine months ended |
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2003 |
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2002 |
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2003 |
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2002 |
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Real Estate Operations: |
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Revenues |
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Rental revenue |
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$ |
40,210 |
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$ |
33,769 |
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$ |
112,921 |
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$ |
97,328 |
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Tenant recoveries and other revenue |
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5,238 |
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4,296 |
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14,923 |
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11,634 |
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Revenue from real estate operations |
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45,448 |
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38,065 |
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127,844 |
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108,962 |
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Expenses |
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Property operating |
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13,075 |
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11,994 |
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37,830 |
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31,896 |
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Interest |
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10,436 |
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10,489 |
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30,608 |
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28,072 |
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Amortization of deferred financing costs |
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773 |
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559 |
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1,957 |
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1,793 |
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Depreciation and other amortization |
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9,462 |
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7,357 |
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26,735 |
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21,941 |
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Expenses from real estate operations |
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33,746 |
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30,399 |
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97,130 |
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83,702 |
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Earnings from real estate operations before equity in income (loss) of unconsolidated real estate joint ventures |
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11,702 |
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7,666 |
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30,714 |
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25,260 |
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Equity in income (loss) of unconsolidated real estate joint ventures |
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95 |
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138 |
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(91 |
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134 |
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Earnings from real estate operations |
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11,797 |
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7,804 |
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30,623 |
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25,394 |
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Service operations: |
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Revenues |
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1,769 |
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1,107 |
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3,364 |
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3,194 |
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Expenses |
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(1,027 |
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(1,077 |
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(2,784 |
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(3,353 |
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Equity in loss of unconsolidated Service Companies |
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(15 |
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(20 |
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Income (loss) from service operations |
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742 |
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15 |
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580 |
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(179 |
) |
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General and administrative expenses |
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(1,937 |
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(815 |
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(5,651 |
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(4,925 |
) |
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Income before gain on sales of real estate, minority interests, income taxes and discontinued operations |
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10,602 |
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7,004 |
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25,552 |
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20,290 |
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Gain on sales of real estate |
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23 |
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796 |
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448 |
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1,742 |
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Income before minority interests, income taxes and discontinued operations |
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10,625 |
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7,800 |
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26,000 |
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22,032 |
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Minority interests |
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Common units in the Operating Partnership |
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(1,833 |
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(1,429 |
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(4,386 |
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(3,946 |
) |
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Preferred units in the Operating Partnership |
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(572 |
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(1,049 |
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(1,716 |
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Other consolidated entities |
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104 |
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59 |
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Income before income taxes and discontinued operations |
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8,792 |
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5,903 |
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20,565 |
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16,429 |
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Income tax (expense) benefit, net of minority interests |
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(221 |
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(9 |
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(181 |
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43 |
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Income before discontinued operations |
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8,571 |
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5,894 |
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20,384 |
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16,472 |
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Income from discontinued operations, net of minority interests |
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11 |
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268 |
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2,423 |
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869 |
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Net income |
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8,582 |
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6,162 |
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22,807 |
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17,341 |
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Preferred share dividends |
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(3,157 |
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(2,533 |
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(8,224 |
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(7,600 |
) |
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Repurchase of preferred units in excess of recorded book value |
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(11,224 |
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Net income available to common shareholders |
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$ |
5,425 |
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$ |
3,629 |
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$ |
3,359 |
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$ |
9,741 |
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Basic earnings per common share |
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Income before discontinued operations |
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$ |
0.19 |
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$ |
0.15 |
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$ |
0.04 |
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$ |
0.40 |
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Discontinued operations |
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0.01 |
|
0.09 |
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0.04 |
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Net income |
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$ |
0.19 |
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$ |
0.16 |
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$ |
0.13 |
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$ |
0.44 |
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Diluted earnings per common share |
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Income before discontinued operations |
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$ |
0.18 |
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$ |
0.14 |
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$ |
0.03 |
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$ |
0.38 |
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Discontinued operations |
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|
0.01 |
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0.09 |
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0.04 |
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Net income |
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$ |
0.18 |
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$ |
0.15 |
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$ |
0.12 |
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$ |
0.42 |
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See accompanying notes to consolidated financial statements.
4
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
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For the nine months ended |
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2003 |
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2002 |
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Cash flows from operating activities |
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Net income |
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$ |
22,807 |
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$ |
17,341 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Minority interests |
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6,383 |
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6,024 |
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Depreciation and other amortization |
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26,754 |
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22,402 |
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Amortization of deferred financing costs |
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1,957 |
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1,793 |
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Amortization of value of acquired operating leases |
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(1,465 |
) |
(1,916 |
) |
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Equity in (income) loss of unconsolidated entities |
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91 |
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(114 |
) |
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Gain on sales of real estate, including amounts in discontinued operations |
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(3,443 |
) |
(1,742 |
) |
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Changes in operating assets and liabilities: |
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Increase in deferred rent receivable |
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(3,629 |
) |
(2,024 |
) |
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Increase in accounts receivable, restricted cash and prepaid and other assets |
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(5,677 |
) |
(2,536 |
) |
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Increase in accounts payable, accrued expenses, rents received in advance and security deposits |
|
8,889 |
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1,671 |
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Other |
|
790 |
|
932 |
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Net cash provided by operating activities |
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53,457 |
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41,831 |
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Cash flows from investing activities |
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Purchases of and additions to commercial real estate properties |
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(183,697 |
) |
(129,013 |
) |
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Proceeds from sales of properties |
|
36,904 |
|
8,611 |
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Investments in and advances to unconsolidated real estate joint ventures |
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(735 |
) |
1,779 |
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Leasing commissions paid |
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(2,061 |
) |
(5,109 |
) |
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(Increase) decrease in advances to certain real estate joint ventures |
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(4,134 |
) |
2,583 |
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Other |
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(1,680 |
) |
(521 |
) |
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Net cash used in investing activities |
|
(155,403 |
) |
(121,670 |
) |
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Cash flows from financing activities |
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|
|
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Proceeds from mortgage and other loans payable |
|
206,057 |
|
254,217 |
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Repayments of mortgage and other loans payable |
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(169,055 |
) |
(153,551 |
) |
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Deferred financing costs paid |
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(1,277 |
) |
(1,852 |
) |
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Increase (decrease) in other liabilities |
|
4,000 |
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(11,336 |
) |
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Net proceeds from issuance of common shares |
|
81,388 |
|
25,364 |
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Net proceeds from issuance of preferred shares |
|
53,240 |
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Repurchase of preferred units |
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(35,591 |
) |
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Dividends paid |
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(24,595 |
) |
(21,354 |
) |
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Distributions paid |
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(7,126 |
) |
(7,716 |
) |
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Other |
|
2,286 |
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(2,909 |
) |
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Net cash provided by financing activities |
|
109,327 |
|
80,863 |
|
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Net increase in cash and cash equivalents |
|
7,381 |
|
1,024 |
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Cash and cash equivalents |
|
|
|
|
|
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Beginning of year |
|
5,991 |
|
6,640 |
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End of period |
|
$ |
13,372 |
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$ |
7,664 |
|
See accompanying notes to consolidated financial statements.
5
Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
Corporate Office Properties Trust (COPT) and subsidiaries (collectively, the Company) is a fully- integrated and self-managed real estate investment trust (REIT). We focus principally on the ownership, management, leasing, acquisition and development of suburban office properties located in select submarkets in the Mid-Atlantic region of the United States. COPT is qualified as a REIT as defined in the Internal Revenue Code and is the successor to a corporation organized in 1988. As of September 30, 2003, our portfolio included 118 operating properties, including three properties owned through joint ventures.
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the Operating Partnership), for which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (LLCs). A summary of our Operating Partnerships forms of ownership and the percentage of those ownership forms owned by COPT as of September 30, 2003 follows:
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% Owned |
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Common Units |
|
75 |
% |
Series B Preferred Units |
|
100 |
% |
Series D Preferred Units |
|
100 |
% |
Series E Preferred Units |
|
100 |
% |
Series F Preferred Units |
|
100 |
% |
Series G Preferred Units |
|
100 |
% |
The Operating Partnership also owns 100% of Corporate Office Management, Inc. (COMI) (together with its subsidiaries defined as the Service Companies). COMIs consolidated subsidiaries are set forth below:
Entity Name |
|
Type of Service Business |
|
Corporate Realty Management, LLC (CRM) |
|
Real Estate Management |
|
Corporate Development Services, LLC (CDS) |
|
Construction and Development |
|
Corporate Cooling and Controls, LLC (CC&C) |
|
Heating and Air Conditioning |
|
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete Consolidated Financial Statements are not included herein. These interim financial statements should be read together with the financial statements and notes thereto included in our 2002 Annual Report on 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 four different accounting methods to report our investments in entities: the consolidation method, the equity method, the cost method and the financing method.
Consolidation Method
We use the consolidation method when we own all or 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:
6
COPT;
the Operating Partnership and its subsidiary partnerships and LLCs;
the Service Companies; and
Corporate Office Properties Holdings, Inc. (of which we own 100%).
See the section in Note 3 entitled Recent Accounting Pronouncements for a description of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 affects our determination of when to use the consolidation method of accounting.
Equity Method
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entitys operations but cannot control the entitys operations. Under the equity method, we report:
our ownership interest in the entitys capital as an investment on our Consolidated Balance Sheets; and
our percentage share of the earnings or losses from the entity in our Consolidated Statements of Operations.
See the section in Note 3 entitled Recent Accounting Pronouncements for a description of FIN 46. FIN 46 affects our determination of when to use the equity method of accounting.
Cost Method
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over the entitys operations. Under the cost method, we report:
the cost of our investment in the entity as an investment on our Consolidated Balance Sheets; and
distributions to us of the entitys earnings in our Consolidated Statements of Operations.
Financing Method
We use the financing method of accounting for certain real estate joint ventures. We use this method when we contribute a parcel of land into a real estate joint venture and have an option to acquire our partners joint venture interest for a pre-determined purchase price. Details of the financing method of accounting are described below:
the costs associated with a land parcel at the time of its contribution into a joint venture are reported as commercial real estate properties on our Consolidated Balance Sheets;
the cash received from a joint venture in connection with our land contribution is reported as other liabilities on our Consolidated Balance Sheets. The liability is accreted towards the pre-determined purchase price over the life of our option to acquire our partners interest in the joint venture. We also report interest expense in connection with the accretion of the liability;
as construction of a building on the land parcel is completed and operations of the building commence, we report 100% of the revenues and expenses associated with the property on our Consolidated Statements of Operations; and
construction costs and debt activity for the real estate project relating to periods after the land contribution are not reported by us.
At the time we exercise the option to acquire our partners joint venture interest, we begin consolidating the accounts of the entity with our accounts. See the section in Note 3 entitled Recent Accounting Pronouncements for a description of FIN 46. FIN 46 affects our determination of when to use the financing method of accounting.
Reclassification
We reclassified certain amounts from the prior period to conform to the current period presentation of our Consolidated Financial Statements. These reclassifications did not affect consolidated net income or shareholders equity. See the section in Note 3 entitled Recent Accounting Pronouncements for a description of (1) our reclassification in connection with our accounting under Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and (2) our reclassification of 2002 losses on early retirement of debt in connection with our adoption of Statement of Financial Accounting Standards No. 145, Rescission of FASB
7
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections (SFAS No. 145) on January 1, 2003.
Use of Estimates in the Preparation of Financial Statements
We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (GAAP). These estimates and assumptions affect various matters, including:
the reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements;
the disclosure of contingent assets and liabilities at the dates of the financial statements; and
the reported amounts of revenues and expenses in our Consolidated Statements of Operations during the reporting periods.
These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are often beyond managements control. As a result, actual amounts could differ from these estimates.
As discussed previously, we consolidate the accounts of our Operating Partnership and its subsidiaries into our financial statements. However, we do not own 100% of the Operating Partnership. Our Operating Partnership also did not own 11% of one of its subsidiary partnerships until September 11, 2002, when it acquired that remaining interest. In addition, COMI did not own 20% of one of its subsidiaries, CC&C, until May 31, 2002, when it acquired that remaining interest. The amounts reported for minority interests on our Consolidated Balance Sheets represent the portion of these consolidated entities equity that we do not own. The amounts reported for minority interests on our Consolidated Statements of Operations represent the portion of these consolidated entities net income not allocated to us.
Common units of the Operating Partnership (common units) are substantially similar to our common shares of beneficial interest (common shares). Common units are also exchangeable into our common shares, subject to certain conditions.
The only preferred units in the Operating Partnership not owned by us during the reporting periods were 1,016,662 Series C Preferred Units. These units were convertible, subject to certain conditions, into common units on the basis of 2.381 common units for each Series C Preferred Unit. These units were repurchased by the Operating Partnership on June 16, 2003 for $36,068 (including $477 for accrued and unpaid distributions), or $14.90 per common share on an as-converted basis. As a result of the repurchase, we recognized an $11,224 reduction to net income available to common shareholders associated with the excess of the repurchase price over the sum of the recorded book value of the units and the accrued and unpaid return to the unitholder.
Earnings Per Share (EPS)
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Our computation of diluted EPS is similar except that:
the denominator is increased to include the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into our common shares were converted; and
the numerator is adjusted to add back any convertible preferred dividends and any other changes in income or loss that would result from the assumed conversion into common shares.
Our computation of diluted EPS does not assume conversion of securities into our common shares if conversion of those securities would increase our diluted EPS in a given period. A summary of the numerator and denominator for purposes of basic and diluted EPS calculations is set forth below (dollars and shares in thousands, except per share data):
8
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
||||
Numerator for basic EPS on net income available to common shareholders |
|
$ |
5,425 |
|
$ |
3,629 |
|
$ |
3,359 |
|
$ |
9,741 |
|
Subtract: Income from discontinued operations, net |
|
(11 |
) |
(268 |
) |
(2,423 |
) |
(869 |
) |
||||
Numerator for basic EPS before discontinued operations |
|
5,414 |
|
3,361 |
|
936 |
|
8,872 |
|
||||
Add: Series D Preferred Share dividends |
|
136 |
|
136 |
|
|
|
408 |
|
||||
Subtract: Income on dilutive options |
|
|
|
(6 |
) |
|
|
|
|
||||
Numerator for diluted EPS before discontinued operations |
|
5,550 |
|
3,491 |
|
936 |
|
9,280 |
|
||||
Add: Income from discontinued operations, net |
|
11 |
|
268 |
|
2,423 |
|
869 |
|
||||
Numerator for diluted EPS on net income available to common shareholders |
|
$ |
5,561 |
|
$ |
3,759 |
|
$ |
3,359 |
|
$ |
10,149 |
|
Denominator (all weighted averages): |
|
|
|
|
|
|
|
|
|
||||
Denominator for basic EPS (common shares) |
|
28,832 |
|
23,029 |
|
25,886 |
|
22,215 |
|
||||
Assumed conversion of share options |
|
1,480 |
|
923 |
|
1,257 |
|
873 |
|
||||
Assumed conversion of Series D Preferred Shares |
|
1,197 |
|
1,197 |
|
|
|
1,197 |
|
||||
Denominator for diluted EPS |
|
31,509 |
|
25,149 |
|
27,143 |
|
24,285 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
||||
Income before discontinued operations |
|
$ |
0.19 |
|
$ |
0.15 |
|
$ |
0.04 |
|
$ |
0.40 |
|
Income from discontinued operations |
|
$ |
|
|
$ |
0.01 |
|
$ |
0.09 |
|
$ |
0.04 |
|
Net income available to common shareholders |
|
$ |
0.19 |
|
$ |
0.16 |
|
$ |
0.13 |
|
$ |
0.44 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
||||
Income before discontinued operations |
|
$ |
0.18 |
|
$ |
0.14 |
|
$ |
0.03 |
|
$ |
0.38 |
|
Income from discontinued operations |
|
$ |
|
|
$ |
0.01 |
|
$ |
0.09 |
|
$ |
0.04 |
|
Net income available to common shareholders |
|
$ |
0.18 |
|
$ |
0.15 |
|
$ |
0.12 |
|
$ |
0.42 |
|
Our diluted EPS computations above do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods:
|
|
Weighted average shares in denominator |
|
||||||
|
|
For the three months |
|
For the nine months |
|
||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
Conversion of share options |
|
6 |
|
55 |
|
50 |
|
67 |
|
Conversion of weighted average common units |
|
8,909 |
|
9,149 |
|
8,954 |
|
9,381 |
|
Conversion of weighted average preferred units |
|
|
|
2,421 |
|
1,472 |
|
2,421 |
|
Conversion of weighted average preferred shares |
|
|
|
|
|
1,197 |
|
|
|
Restricted common shares |
|
161 |
|
317 |
|
132 |
|
317 |
|
We and the Service Companies recognize expense from share options issued to employees using the intrinsic value method. As a result, we do not record compensation expense for share option grants except as set forth below:
When the exercise price of a share option grant is less than the market price of our common shares on the option grant date, we recognize compensation expense equal to the difference between the exercise price and the grant-date market price; this compensation expense is recognized over the service period to which the options relate.
In 1999, we reduced the exercise price of 360,500 share options from $9.25 to $8.00. We recognize compensation expense on the share price appreciation and future vesting associated with the re-priced share options. As of September 30, 2003, 7,700 of these shares options were outstanding.
9
We recognize compensation expense on share options granted to employees of CRM and CC&C prior to January 1, 2001 equal to the difference between the exercise price of such share options and the market price of our common shares on January 1, 2001, to the extent such amount relates to service periods remaining after January 1, 2001.
We grant common shares subject to forfeiture restrictions to certain employees. We recognize compensation expense for such grants over the service periods to which the grants relate. We compute compensation expense for common share grants based on the value of such grants, as determined by the value of our common shares on the applicable measurement date, as defined below:
When forfeiture restrictions on grants only require the recipient to remain employed by us over defined periods of time for such restrictions to lapse, the measurement date is the date the shares are granted.
When forfeiture restrictions on grants require (1) that the recipient remain employed by us over defined periods of time and (2) that the Company meet certain performance criteria for such restrictions to lapse, the measurement date is the date that the performance criteria are deemed to be met.
Expenses from stock-based compensation are reflected in our Consolidated Statements of Operations as follows:
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Increase (decrease) in general and administrative expenses |
|
$ |
269 |
|
$ |
(464 |
) |
$ |
753 |
|
$ |
312 |
|
Decrease (increase) in income from service operations |
|
98 |
|
(404 |
) |
289 |
|
(23 |
) |
||||
The following table summarizes our operating results as if we elected to account for our stock-based compensation under the fair value provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation:
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Net income available to common shareholders, as reported |
|
$ |
5,425 |
|
$ |
3,629 |
|
$ |
3,359 |
|
$ |
9,741 |
|
Stock-based compensation expense (revenue), net of related tax |
|
247 |
|
(496 |
) |
676 |
|
186 |
|
||||
Stock-based compensation expense determined under the fair |
|
(222 |
) |
(125 |
) |
(618 |
) |
(702 |
) |
||||
Net income available to common shareholders, pro forma |
|
$ |
5,450 |
|
$ |
3,008 |
|
$ |
3,417 |
|
$ |
9,225 |
|
Basic earnings per share on net income available to |
|
$ |
0.19 |
|
$ |
0.16 |
|
$ |
0.13 |
|
$ |
0.44 |
|
Basic earnings per share on net income available to |
|
$ |
0.19 |
|
$ |
0.13 |
|
$ |
0.13 |
|
$ |
0.42 |
|
Diluted earnings per share on net income available to |
|
$ |
0.18 |
|
$ |
0.15 |
|
$ |
0.12 |
|
$ |
0.42 |
|
Diluted earnings per share on net income available to |
|
$ |
0.18 |
|
$ |
0.12 |
|
$ |
0.13 |
|
$ |
0.40 |
|
The stock-based compensation expense under the fair value method, as reported in the above table, was computed using the Black-Scholes option-pricing model.
Recent Accounting Pronouncements
On July 1, 2001, we adopted SFAS 141. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also requires upon the acquisition of
10
operating real estate that value be assigned to in-place operating leases. The effect of SFAS 141 on the Companys accounting for in-place operating leases is as follows:
Value is assigned to in-place operating leases to the extent that the future cash flows under the contractual lease terms are above or below market at the time of acquisition (the lease to market value). For example, if we acquire a property and the leases in place for that property carry rents below the market rent for such leases at the time of acquisition, we classify the amount equal to the difference as deferred revenue and increase the amount of the acquisition classified as investment in real estate. Conversely, if the leases in place for that property carry rents above the market rent, we classify the amount equal to the difference as a deferred asset, and decrease the amount of the acquisition classified as investment in real estate. Deferred revenue or deferred assets recorded in connection with in-place operating leases of acquired properties are amortized into rental revenue over the lives of the leases.
Value is assigned to the deemed cost avoidance of acquiring in-place operating leases. For example, when a new lease is entered into, the lessor typically incurs a number of origination costs in connection with the leases; such costs include tenant improvements and leasing costs. When a property is acquired with in-place leases, the origination costs for such leases were already incurred by the prior owner. Therefore, to recognize the value of these costs in recording a property acquisition, we assign value to the tenant improvements and leasing costs associated with the remaining term of in-place operating leases. The value assigned reduces the amount of the acquisition attributable to the base buildings acquisition cost. The value assigned to the tenant improvements and leasing costs is depreciated or amortized over the lives of the leases. Since the depreciation period for tenant improvements and amortization period for leasing costs is less than the depreciation period attributable to a base buildings acquisition cost, the effect of SFAS 141 is to increase depreciation and amortization expense until the tenant improvements and leasing costs have been fully depreciated or amortized, and to decrease depreciation and amortization expense afterwards.
In recognition of what we believe to be the positions of the Securities and Exchange Commission with respect to SFAS 141, value is also assigned to other intangible assets for acquisitions of operating real estate occurring subsequent to March 31, 2003. These other intangible assets are computed by valuing the property on an as if vacant basis and subtracting from the total acquisition cost the sum of the (1) as if vacant value, (2) lease to market value and (3) value assigned to tenant improvements and leasing costs described above. The other intangible assets are amortized over the estimated useful lives of the assets; the useful lives of these assets are shorter than the depreciation periods of the base buildings.
We reclassified certain items in connection with our accounting under SFAS 141 in the quarter ended March 31, 2003. The primary effects of the reclassification to our Consolidated Financial Statements were as follows:
since the in-place operating leases of properties acquired since July 1, 2001 were on average at below market rents, the application of SFAS 141 resulted in our recording of net deferred revenue; and
we recognized additional rental revenue in 2002 associated with the amortization of the deferred revenue described above and recognized offsetting depreciation and amortization expense on tenant improvements and leasing costs associated with in-place operating leases.
We changed our presentation of the effects of SFAS 141 on the results of operations from the presentation included in our 2002 Annual Report on Form 10-K by reclassifying the depreciation of tenant improvements and amortization of leasing costs associated with in-place operating leases of acquired properties from rental revenue to depreciation and amortization expense. We believe that the revised presentation of the results of operations more closely reflects the economic substance of an acquisition transaction. This change in classification increases rental revenues for the periods reported, with an offsetting increase to depreciation and amortization expense. The reclassification described above changes certain financial statements line items in the Consolidated Financial Statements, as well as certain presentations of operating results and measures of performance that include rental revenue but exclude depreciation and amortization expense, that appear in our previous filings pertaining to 2002. However, such changes do not affect net income, EPS or net cash flows. The table below sets forth the additional revenue recognized pursuant to these reclassifications under SFAS 141:
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Additional revenue recognized under SFAS 141 |
|
$ |
347 |
|
$ |
366 |
|
$ |
1,465 |
|
$ |
1,916 |
|
11
On January 1, 2003, we adopted SFAS 145. SFAS 145 generally eliminates the requirement that gains and losses from the retirement of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. SFAS 145 also eliminates previously existing inconsistencies between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects similar to those of sale-leaseback transactions. Certain aspects of the standard were effective for certain types of transactions occurring after May 15, 2002, although we had no such transactions. Upon adoption, we reclassified all prior period losses on early retirement of debt from the line on the Consolidated Statements of Operations entitled extraordinary item to the line entitled amortization of deferred financing costs. These reclassifications did not result in changes to net income available to common shareholders or basic and diluted EPS on net income available to common shareholders. Losses from retirement of debt reclassified totaled $2 for the three months ended September 30, 2002 and $201 for the nine months ended September 30, 2002.
On January 1, 2003, we adopted FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) on a prospective basis for guarantees issued or modified after December 31, 2002. FIN 45 clarifies the requirements of Statements of Financial Accounting Standards No. 5, Accounting for Contingencies, relating to a guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. It requires that a guarantor recognize a liability for the fair value of the obligation it assumes under that guarantee. Since our adoption of FIN 45s provisions was prospective, we were not affected for our guarantees previously in place. However, since we expect to continue to enter into guarantee arrangements covered within the scope of FIN 45 as we have in the past, we expect to be affected in the future primarily by having to record liabilities associated with such arrangements.
In January 2003, the FASB issued FIN 46. FIN 46 provides guidance in identifying situations in which an entity is controlled by its owners without such owners owning most of the outstanding voting rights in the entity; it defines the entity in such situations as a variable interest entity (VIE). Situations identified by FIN 46 include when the equity owners do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 then provides guidance in determining when an owner of a VIE should use the consolidation method in accounting for its investment in the VIE. It also provides for additional disclosure requirements for certain owners of VIEs. We adopted FIN 46 immediately for all VIEs created subsequent to January 31, 2003. We expect to adopt FIN 46 for VIEs created prior to February 1, 2003 effective October 1, 2003, although we were required to adopt certain disclosure requirements for purposes of these Consolidated Financial Statements. While we are currently reviewing the provisions of FIN 46 and assessing the impact upon adoption for VIEs created prior to February 1, 2003, we currently believe that we will be required to use the consolidation method of accounting for our investments in the following unconsolidated real estate joint ventures: Gateway 67, LLC, Gateway 70 LLC and MOR Forbes 2 LLC. We also believe that we may be required to use the consolidation method of accounting for our investments in NBP 140, LLC and MOR Montpelier 3 LLC. See Note 5 for disclosures pertaining to our unconsolidated real estate joint ventures. In addition, we believe that we may be required to use the consolidation method of accounting for our investment in NBP 220, LLC, a real estate joint venture that we are currently accounting for using the financing method of accounting (see Notes 2 and 4). The following table sets forth condensed combined balance sheets as of September 30, 2003 for NBP 220 and the unconsolidated real estate joint ventures that we believe we will consolidate or may consolidate effective October 1, 2003:
Commercial real estate property |
|
$ |
42,009 |
|
Other assets |
|
1,852 |
|
|
Total assets |
|
$ |
43,861 |
|
|
|
|
|
|
Liabilities |
|
$ |
25,109 |
|
Owners equity |
|
18,752 |
|
|
Total liabilities and owners equity |
|
$ |
43,861 |
|
Most of the entities that we will consolidate or may consolidate effective October 1, 2003 own real estate under development or construction; as a result, these entities did not earn significant revenue or incur significant expenses during the nine months ended September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
12
liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003, except in the case of evaluating investments in certain finite life entities, in which case the effective date is to be determined. Our adoption of SFAS 150 on July 1, 2003 did not effect our consolidated financial statements. With regard to the effect of the adoption of SFAS 150 at a future date for investments in certain finite life entities, we will not know the effect upon adoption until pending amendments are finalized by the FASB.
4. Commercial Real Estate Properties
Operating properties consisted of the following:
|
|
September 30, |
|
December 31, |
|
|||
Land |
|
$ |
215,226 |
|
$ |
191,823 |
|
|
Buildings and improvements |
|
1,009,272 |
|
892,533 |
|
|||
|
|
1,224,498 |
|
1,084,356 |
|
|||
Less: accumulated depreciation |
|
(96,538 |
) |
(76,178 |
) |
|||
|
|
$ |
1,127,960 |
|
$ |
1,008,178 |
|
|
At December 31, 2002, we were negotiating the sale of our office property and adjacent undeveloped land parcels located in Oxon Hill, Maryland. As a result, these properties were classified as held for sale. The components associated with these properties at December 31, 2002 included the following:
|
|
December 31, |
|
||
Land - operational |
|
$ |
3,434 |
|
|
Land - development |
|
357 |
|
||
Buildings and improvements |
|
14,892 |
|
||
|
|
18,683 |
|
||
Less: accumulated depreciation |
|
(1,891 |
) |
||
|
|
$ |
16,792 |
|
|
We sold these properties on March 31, 2003.
Projects we had under construction or development consisted of the following:
|
|
September 30, |
|
December 31, |
|
||||
Land |
|
$ |
43,482 |
|
$ |
24,641 |
|
||
Construction in progress |
|
9,474 |
|
9,926 |
|
||||
|
|
$ |
52,956 |
|
$ |
34,567 |
|
||
2003 Acquisitions
We acquired the following office properties during the nine months ended September 30, 2003:
Project Name |
|
Location |
|
Date of |
|
Number of |
|
Total |
|
Initial Cost |
|
|
2500 Riva Road |
|
Annapolis, MD |
|
4/4/2003 |
|
1 |
|
155,000 |
|
$ |
18,038 |
|
13200 Woodland Park Drive |
|
Herndon, VA |
|
6/2/2003 |
|
1 |
|
404,665 |
|
71,436 |
|
|
Dulles Tech |
|
Herndon, VA |
|
7/25/2003 |
|
2 |
|
166,821 |
|
27,019 |
|
|
Ridgeview |
|
Chantilly, VA |
|
7/25/2003 |
|
3 |
|
266,993 |
|
48,508 |
|
|
13
On January 24, 2003, we completed the first phase of a $29.8 million, 108-acre land parcel acquisition from an affiliate of Constellation Real Estate, Inc. (Constellation). The land parcel is located adjacent to an office park that we own in Annapolis Junction, Maryland. The first phase was acquired for $21,339, of which $18,433 was financed by a seller-provided mortgage loan bearing interest at 3%. Since we considered the interest rate on this loan to be below the market rate for similar loans, we discounted the recorded amounts for the acquisition and mortgage loan by $1,516. Under an agreement that was terminated on March 5, 2002, Constellation nominated two members for election to our Board of Trustees; these members still served on our Board of Trustees as of September 30, 2003. The terms of the land parcel acquisition were determined as a result of arms-length negotiations. In managements opinion, the resulting terms reflected fair value for the property based on managements knowledge and experience in the real estate market.
2003 Construction/Development
During the nine months ended September 30, 2003, a 123,743 square foot building that was partially operational at December 31, 2002 became 100% operational. The building is located in Columbia, Maryland.
As of September 30, 2003, we had construction underway on two new buildings, one of which is located in Annapolis Junction, Maryland and the other in Chantilly, Virginia (excluding construction activities of real estate joint ventures accounted for using the equity method of accounting).
2003 Dispositions
On January 31, 2003, we contributed a developed land parcel into a real estate joint venture called NBP 220, LLC (NBP 220) and subsequently received a $4,000 distribution. Upon completion of this transaction, we owned a 20% interest in NBP 220. We have the option to acquire our joint venture partners interest between September 1, 2004 and February 28, 2005 or prior to that date if certain events defined in the agreement occur. The minimum purchase price would be $4,911. We account for our interest in this joint venture using the financing method of accounting, which is discussed in Note 2 above. Our commitments and contingencies pertaining to NBP 220 are included in Note 16. Our maximum exposure to loss in NBP 220 was $33,113 at September 30, 2003; this amount was derived from the sum of the investment balance, loan guarantees (based on maximum loan balance) and maximum additional unilateral capital contributions required from us (excludes additional amounts that we and our partner are obligated to fund as and when needed proportional to our ownership percentage).
On March 14, 2003, we contributed a 157,394 square foot office building located in Fairfield, New Jersey into a real estate joint venture called Route 46 Partners, LLC in exchange for $19,960 in cash and a 20% interest in the joint venture. Our joint venture partner has preference in receiving distributions of cash flows for a defined return; once our partner receives its defined return, we are entitled to receive distributions for a defined return and, once we receive that return, remaining distributions of cash flows are allocated based on percentages defined in the joint venture agreement. Due primarily to a $3,300 loan we made to an affiliate of our joint venture partner as part of the transaction (a loan that was subsequently repaid in October 2003), we deferred a gain of $1,370 on this transaction. See Notes 5 and 16 for further disclosures related to this joint venture.
On March 31, 2003, we sold an office property totaling 181,768 square feet and two adjacent land parcels located in Oxon Hill, Maryland, for a total sale price of $21,288. We recognized a total gain of $3,371 on this sale.
14
5. Investments in and Advances to Unconsolidated Real Estate Joint Ventures
Our investments in and advances to unconsolidated real estate joint ventures accounted for using the equity method of accounting included the following (excluding NBP 220, a real estate joint venture accounted for using the financing method of accounting):
|
|
September 30, |
|
December 31, |
|
Date |
|
Ownership |
|
Nature of |
|
Total |
|
Maximum |
|
||||
Gateway 67, LLC |
|
$ |
4,473 |
|
$ |
4,130 |
|
9/28/00 |
|
80 |
% |
Owns newly-constructed buildings (1) |
|
$ |
12,423 |
|
$ |
15,073 |
|
Gateway 70 LLC |
|
2,417 |
|
2,472 |
|
4/5/01 |
|
80 |
% |
Developing land parcel (1) |
|
3,484 |
|
2,417 |
|
||||
Route 46 Partners, LLC |
|
1,027 |
|
|
|
3/14/03 |
|
20 |
% |
Operating building (2) |
|
23,704 |
|
1,347 |
|
||||
MOR Forbes 2 LLC |
|
730 |
|
712 |
|
12/24/02 |
|
80 |
% |
Constructing building (3) |
|
3,404 |
|
5,437 |
|
||||
NBP 140, LLC |
|
474 |
|
230 |
|
12/27/01 |
|
10 |
% |
Constructing building (4) |
|
13,393 |
|
18,574 |
|
||||
MOR Montpelier 3 LLC |
|
455 |
|
455 |
|
2/21/02 |
|
50 |
% |
Developing land parcel (5) |
|
901 |
|
455 |
|
||||
|
|
$ |
9,576 |
|
$ |
7,999 |
|
|
|
|
|
|
|
$ |
57,309 |
|
$ |
43,303 |
|
(1) This joint ventures property is located in Columbia, Maryland.
(2) This joint ventures property is located in Fairfield, New Jersey.
(3) This joint ventures property is located in Lanham, Maryland.
(4) This joint ventures property is located in Annapolis Junction, Maryland.
(5) This joint ventures property is located in Laurel, Maryland.
(6) Derived from the sum of our investment balance, loan guarantees (based on maximum loan balance) and maximum additional unilateral capital contributions required from us. Not reported above are additional amounts that we and our partners are required to fund as and when needed by these joint ventures; these funding requirements are proportional to our ownership percentage, except in the case of NBP 140, LLC, in which we are required to fund 50% of additional fundings.
Our commitments and contingencies pertaining to our unconsolidated real estate joint ventures are disclosed in Note 16. The following table sets forth condensed combined balance sheets for these unconsolidated real estate joint ventures:
|
|
September 30, |
|
December 31, |
|
||
Commercial real estate property |
|
$ |
54,605 |
|
$ |
25,463 |
|
Other assets |
|
2,704 |
|
493 |
|
||
Total assets |
|
$ |
57,309 |
|
$ |
25,956 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
$ |
34,712 |
|
$ |
12,636 |
|
Owners equity |
|
22,597 |
|
13,320 |
|
||
Total liabilities and owners equity |
|
$ |
57,309 |
|
$ |
25,956 |
|
While we are currently reviewing the provisions of FIN 46 and assessing the impact upon adoption, we believe that we will be required to use the consolidation method of accounting for our investments in the following unconsolidated real estate joint ventures: Gateway 67, LLC, Gateway 70 LLC and MOR Forbes 2 LLC. We also concluded that we may be required to use the consolidation method of accounting for our investments in NBP 140, LLC and MOR Montpelier 3 LLC. See Note 3 for disclosures pertaining to the potential effect of adopting FIN 46 for these joint ventures.
6. Accounts Receivable
Our accounts receivable are reported net of an allowance for bad debts of $542 at September 30, 2003 and $767 at December 31, 2002.
15
Our investments in and advances to other unconsolidated entities include the following:
|
|
September 30, |
|
December 31, |
|
Date |
|
Ownership |
|
Investment |
|
||
TractManager, Inc. (1) |
|
$ |
1,621 |
|
$ |
1,621 |
|
Various 2000 |
|
5 |
% |
Cost |
|
(1) TractManager, Inc. has developed an Internet-based contract imaging and management system for sale to real estate owners and healthcare providers.
Deferred charges consisted of the following:
|
|
September 30, |
|
December 31, |
|
||
Deferred leasing costs |
|
$ |
24,917 |
|
$ |
22,180 |
|
Intangible assets recorded in connection with real estate acquisitions |
|
18,687 |
|
1,281 |
|
||
Deferred financing costs |
|
12,742 |
|
11,458 |
|
||
Goodwill |
|
1,880 |
|
1,880 |
|
||
Deferred other |
|
155 |
|
155 |
|
||
|
|
58,381 |
|
36,954 |
|
||
Accumulated amortization (1) |
|
(18,786 |
) |
(13,755 |
) |
||
Deferred charges, net |
|
$ |
39,595 |
|
$ |
23,199 |
|
(1) Includes accumulated amortization associated with goodwill of $151 at September 30, 2003 and December 31, 2002.
The following table sets forth our derivative contracts and their respective fair values:
Nature of Derivative |
|
Notional |
|
One-Month |
|
Effective |
|
Expiration |
|
Fair Value at |
|
Fair Value at |
|
|||||
Interest rate swap |
|
$ |
50.0 |
|
2.308 |
% |
1/2/2003 |
|
1/3/2005 |
|
$ |
(662 |
) |
$ |
(482 |
) |
||
Interest rate swap |
|
50.0 |
|
1.520 |
% |
1/7/2003 |
|
1/2/2004 |
|
(64 |
) |
|
|
|||||
Interest rate swap |
|
50.0 |
|
5.760 |
% |
1/2/2001 |
|
1/2/2003 |
|
|
|
(12 |
) |
|||||
Total |
|
|
|
|
|
|
|
|
|
$ |
(726 |
) |
$ |
(494 |
) |
|||
We have designated each of these derivatives as cash flow hedges. These derivatives hedge the risk of changes in interest rates on certain of our one-month LIBOR-based variable rate borrowings. At September 30, 2003, our outstanding interest rate swaps were considered highly effective cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
16
The table below sets forth our accounting application of changes in derivative fair values:
|
|
For the nine months ended |
|
||||
|
|
2003 |
|
2002 |
|
||
(Decrease) increase in fair value applied to AOCL (1) and minority interests |
|
$ |
(232 |
) |
$ |
2,738 |
|
Decrease in fair value recognized as loss (2) |
|
|
|
(1 |
) |
||
(1) AOCL is defined below.
(2) Represents hedge ineffectiveness and is included in tenant recoveries and other revenue on our Consolidated Statements of Operations.
Over time, the unrealized losses associated with interest rate swaps that are held in the accumulated other comprehensive loss component of shareholders equity (AOCL) and minority interests will be reclassified to earnings as interest payments occur on our LIBOR-based borrowings.
Preferred Shares
On August 11, 2003, we completed the sale of 2,200,000 Series G Preferred Shares of beneficial interest (the Series G Preferred Shares) at a price of $25.00 per share for net proceeds of $53,240. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after August 11, 2008. 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 $2.00 per share, which is equal to 8% of the $25.00 per share redemption price. We contributed the net proceeds to our Operating Partnership in exchange for 2,200,000 Series G Preferred Units. The Series G Preferred Units carry terms that are substantially the same as the Series G Preferred Shares.
Common Shares
On May 27, 2003, we sold 5,290,000 common shares in an underwritten public offering at a net price of $15.03 per share. We contributed the net proceeds from the sale to our Operating Partnership in exchange for 5,290,000 common units.
During the nine months ended September 30, 2003, we issued 119,324 common shares to certain employees. All of these shares are subject to forfeiture restrictions that lapse annually throughout their respective terms provided that the employees remain employed by us.
During the nine months ended September 30, 2003, forfeiture restrictions lapsed on 49,073 common shares issued to officers.
We issued 225,847 common shares upon the exercise of share options during the nine months ended September 30, 2003.
During the nine months ended September 30, 2003, 119,533 common units in our Operating Partnership were converted into common shares, in accordance with our Operating Partnerships Second Amended and Restated Limited Partnership Agreement, on the basis of one common share for each common unit.
A summary of the activity in the AOCL component of shareholders equity for the nine months ended September 30, 2003 follows:
Beginning balance |
|
$ |
(349) |
|
Unrealized loss on interest rate swaps, net of minority interests |
|
(199) |
|
|
Ending balance |
|
$ |
(548) |
|
17
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the nine months ended September 30, 2003:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
Total |
|
||
Series B Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.6250 |
|
$ |
781 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.6250 |
|
$ |
781 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.6250 |
|
$ |
781 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.6250 |
|
$ |
781 |
|
|
|
|
|
|
|
|
|
|
|
||
Series D Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.2500 |
|
$ |
136 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.2500 |
|
$ |
136 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.2500 |
|
$ |
136 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.2500 |
|
$ |
136 |
|
|
|
|
|
|
|
|
|
|
|
||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.6406 |
|
$ |
737 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.6406 |
|
$ |
737 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.6406 |
|
$ |
737 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.6406 |
|
$ |
737 |
|
|
|
|
|
|
|
|
|
|
|
||
Series F Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.6172 |
|
$ |
880 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.6172 |
|
$ |
880 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.6172 |
|
$ |
880 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.6172 |
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
|
||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.3610 |
|
$ |
794 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.2200 |
|
$ |
5,114 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.2200 |
|
$ |
5,139 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.2200 |
|
$ |
6,322 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.2350 |
|
$ |
6,798 |
|
|
|
|
|
|
|
|
|
|
|
||
Series C Preferred Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 6, 2002 |
|
January 15, 2003 |
|
$ |
0.5625 |
|
$ |
572 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.5625 |
|
$ |
572 |
|
Second Quarter 2003 |
|
(1) |
|
(1) |
|
$ |
0.4698 |
|
$ |
477 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2002 |
|
December 31, 2002 |
|
January 15, 2003 |
|
$ |
0.2200 |
|
$ |
1,978 |
|
First Quarter 2003 |
|
March 31, 2003 |
|
April 15, 2003 |
|
$ |
0.2200 |
|
$ |
1,978 |
|
Second Quarter 2003 |
|
June 30, 2003 |
|
July 15, 2003 |
|
$ |
0.2200 |
|
$ |
1,968 |
|
Third Quarter 2003 |
|
September 30, 2003 |
|
October 15, 2003 |
|
$ |
0.2350 |
|
$ |
2,085 |
|
(1) Repurchase of units took place prior to distribution payment date. Accrued and unpaid return on units totaled $477 on the June 16, 2003 repurchase date. We paid this amount to the holder of the units at the time of purchase.
18
12. Supplemental Information to Statements of Cash Flows
|
|
For the
nine months |
|
||||
|
|
2003 |
|
2002 |
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||
Debt assumed in connection with acquisitions |
|
$ |
16,917 |
|
$ |
36,040 |
|
Notes receivable assumed upon sales of real estate |
|
$ |
3,300 |
|
$ |
2,326 |
|
Investment in real estate joint venture obtained with disposition of property |
|
$ |
2,300 |
|
$ |
|
|
Decrease in accrued capital improvements |
|
$ |
856 |
|
$ |
2,536 |
|
Amortization of discount on mortgage loan to commercial real estate properties |
|
$ |
323 |
|
$ |
|
|
Accretion of other liability to commercial real estate properties |
|
$ |
358 |
|
$ |
|
|
(Decrease) increase in fair value of derivatives applied to AOCL and minority interests |
|
$ |
(232 |
) |
$ |
2,738 |
|
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT |
|
$ |
6,688 |
|
$ |
5,694 |
|
Decrease in minority interests and increase in shareholders equity in connection with the conversion of common units into common shares |
|
$ |
2,066 |
|
$ |
8,623 |
|
Dividends/distribution payable |
|
$ |
11,637 |
|
$ |
9,789 |
|
19
13. Information by Business Segment
We have six primary office property segments: Baltimore/Washington Corridor, Northern Virginia, Greater Philadelphia, Northern/Central New Jersey, Greater Harrisburg and Suburban Maryland.
The table below reports segment financial information. Our segment entitled Other includes assets and operations not specifically associated with the other defined segments. We measure the performance of our segments based on total revenues less property operating expenses, a measure we define as net operating income (NOI). We believe that NOI is an important supplemental measure of operating performance for a REITs operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.
|
|
Baltimore/ |
|
Northern |
|
Greater |
|
Northern/ |
|
Greater |
|
Suburban |
|
Other |
|
Total |
|
||||||||
Three months ended September 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Revenues |
|
$ |
24,670 |
|
$ |
9,010 |
|
$ |
2,507 |
|
$ |
3,685 |
|
$ |
2,372 |
|
$ |
1,481 |
|
$ |
1,725 |
|
$ |
45,450 |
|
Property operating expenses |
|
7,242 |
|
2,657 |
|
36 |
|
1,300 |
|
663 |
|
536 |
|
628 |
|
13,062 |
|
||||||||
NOI |
|
$ |
17,428 |
|
$ |
6,353 |
|
$ |
2,471 |
|
$ |
2,385 |
|
$ |
1,709 |
|
$ |
945 |
|
$ |
1,097 |
|
$ |
32,388 |
|
Commercial real estate property expenditures |
|
$ |
3,807 |
|
$ |
64,536 |
|
$ |
201 |
|
$ |
122 |
|
$ |
74 |
|
$ |
101 |
|
$ |
314 |
|
$ |
69,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Three months ended September 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Revenues |
|
$ |
21,151 |
|
$ |
3,777 |
|
$ |
2,507 |
|
$ |
5,176 |
|
$ |
2,407 |
|
$ |
2,339 |
|
$ |
1,678 |
|
$ |
39,035 |
|
Property operating expenses |
|
6,771 |
|
1,472 |
|
38 |
|
2,030 |
|
604 |
|
914 |
|
532 |
|
12,361 |
|
||||||||
NOI |
|
$ |
14,380 |
|
$ |
2,305 |
|
$ |
2,469 |
|
$ |
3,146 |
|
$ |
1,803 |
|
$ |
1,425 |
|
$ |
1,146 |
|
$ |
26,674 |
|
Commercial real estate property expenditures |
|
$ |
2,407 |
|
$ |
51,010 |
|
$ |
143 |
|
$ |
382 |
|
$ |
34 |
|
$ |
27,471 |
|
$ |
96 |
|
$ |
81,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Nine months ended September 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Revenues |
|
$ |
71,261 |
|
$ |
20,116 |
|
$ |
7,519 |
|
$ |
11,864 |
|
$ |
7,523 |
|
$ |
5,259 |
|
$ |
5,212 |
|
$ |
128,754 |
|
Property operating expenses |
|
21,599 |
|
6,191 |
|
106 |
|
4,193 |
|
2,093 |
|
2,150 |
|
1,857 |
|
38,189 |
|
||||||||
NOI |
|
$ |
49,662 |
|
$ |
13,925 |
|
$ |
7,413 |
|
$ |
7,671 |
|
$ |
5,430 |
|
$ |
3,109 |
|
$ |
3,355 |
|
$ |
90,565 |
|
Commercial real estate property expenditures |
|
$ |
47,431 |
|
$ |
130,441 |
|
$ |
510 |
|
$ |
351 |
|
$ |
241 |
|
$ |
506 |
|
$ |
1,064 |
|
$ |
180,544 |
|
Segment assets at September 30, 2003 |
|
$ |
641,310 |
|
$ |
263,428 |
|
$ |
102,631 |
|
$ |
84,844 |
|
$ |
69,724 |
|
$ |
41,767 |
|
$ |
96,274 |
|
$ |
1,299,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Nine months ended September 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Revenues |
|
$ |
62,856 |
|
$ |
9,286 |
|
$ |
7,519 |
|
$ |
14,701 |
|
$ |
7,204 |
|
$ |
5,408 |
|
$ |
4,949 |
|
$ |
111,923 |
|
Property operating expenses |
|
17,965 |
|
3,674 |
|
112 |
|
5,413 |
|
1,853 |
|
2,228 |
|
1,662 |
|
32,907 |
|
||||||||
NOI |
|
$ |
44,891 |
|
$ |
5,612 |
|
$ |
7,407 |
|
$ |
9,288 |
|
$ |
5,351 |
|
$ |
3,180 |
|
$ |
3,287 |
|
$ |
79,016 |
|
Commercial real estate property expenditures |
|
$ |
82,127 |
|
$ |
51,336 |
|
$ |
423 |
|
$ |
712 |
|
$ |
833 |
|
$ |
27,655 |
|
$ |
742 |
|
$ |
163,828 |
|
Segment assets at September 30, 2002 |
|
$ |
598,855 |
|
$ |
116,562 |
|
$ |
104,060 |
|
$ |
107,673 |
|
$ |
70,917 |
|
$ |
59,802 |
|
$ |
83,839 |
|
$ |
1,141,708 |
|
20
The following table reconciles our NOI for reportable segments to income before income taxes and discontinued operations as reported on our Consolidated Statements of Operations:
|
|
For the
three months ended |
|
For the
nine months ended |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
NOI for reportable segments |
|
$ |
32,388 |
|
$ |
26,674 |
|
$ |
90,565 |
|
$ |
79,016 |
|
Equity in income (loss) of unconsolidated real estate joint ventures |
|
95 |
|
138 |
|
(91 |
) |
134 |
|
||||
Income (loss) from service operations |
|
742 |
|
15 |
|
580 |
|
(179 |
) |
||||
Add: Gain on sales of real estate |
|
23 |
|
796 |
|
448 |
|
1,742 |
|
||||
Less: |
|
|
|
|
|
|
|
|
|
||||
Interest |
|
(10,436 |
) |
(10,489 |
) |
(30,608 |
) |
(28,072 |
) |
||||
Depreciation and other amortization |
|
(9,462 |
) |
(7,357 |
) |
(26,735 |
) |
(21,941 |
) |
||||
General and administrative |
|
(1,937 |
) |
(815 |
) |
(5,651 |
) |
(4,925 |
) |
||||
Amortization of deferred financing costs |
|
(773 |
) |
(559 |
) |
(1,957 |
) |
(1,793 |
) |
||||
Minority interests |
|
(1,833 |
) |
(1,897 |
) |
(5,435 |
) |
(5,603 |
) |
||||
NOI from discontinued operations |
|
(15 |
) |
(603 |
) |
(551 |
) |
(1,950 |
) |
||||
Income before income taxes and discontinued operations |
|
$ |
8,792 |
|
$ |
5,903 |
|
$ |
20,565 |
|
$ |
16,429 |
|
We did not allocate gain on sales of real estate, 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 (loss) of unconsolidated real estate joint ventures, income (loss) from service operations, general and administrative expense and minority interests because these items represent general corporate items not attributable to segments.
COMIs provision for income tax consists of the following:
|
|
For the
nine months |
|
||||
|
|
2003 |
|
2002 |
|
||
Current |
|
|
|
|
|
||
Federal |
|
$ |
(173 |
) |
$ |
53 |
|
State |
|
(37 |
) |
12 |
|
||
|
|
(210 |
) |
65 |
|
||
Deferred |
|
|
|
|
|
||
Federal |
|
(23 |
) |
|
|
||
State |
|
(5 |
) |
|
|
||
|
|
(28 |
) |
|
|
||
Total |
|
(238 |
) |
65 |
|
||
Less: minority interests |
|
57 |
|
(22 |
) |
||
Income tax (expense) benefit, net of minority interests |
|
$ |
(181 |
) |
$ |
43 |
|
Items contributing to temporary differences that lead to deferred taxes include depreciation and amortization, certain accrued compensation, compensation made in the form of contributions to a deferred nonqualified compensation plan and expenses associated with stock-based compensation.
COMIs combined Federal and state effective tax rate for the nine months ended September 30, 2003 and 2002 was approximately 40%.
21
The table below sets forth the components of income from discontinued operations:
|
|
For the
three months |
|
For the
nine months |
|
||||||||
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
Revenue from real estate operations |
|
$ |
2 |
|
$ |
970 |
|
$ |
910 |
|
$ |
2,961 |
|
Expenses from real estate operations: |
|
|
|
|
|
|
|
|
|
||||
Property operating expenses |
|
(13 |
) |
367 |
|
359 |
|
1,011 |
|
||||
Depreciation and amortization |
|
|
|
147 |
|
19 |
|
462 |
|
||||
Interest expense |
|
|
|
74 |
|
100 |
|
221 |
|
||||
Expenses from real estate operations |
|
(13 |
) |
588 |
|
478 |
|
1,694 |
|
||||
Earnings from real estate operations before gain on sale of real estate and minority interests |
|
15 |
|
382 |
|
432 |
|
1,267 |
|
||||
Gain on sale of real estate |
|
|