UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark one)

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

 

For the quarterly period ended September 30, 2004

 

or

 

o 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 1-14023

 

Corporate Office Properties Trust

(Exact name of registrant as specified in its charter)

 

Maryland

 

23-2947217

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

8815 Centre Park Drive, Suite 400, Columbia MD

 

21045

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s 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 Exchange Act).  ý Yes  o No

 

On November 2, 2004, 36,687,271 shares of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued.

 

 



 

TABLE OF CONTENTS

 

FORM 10-Q

 

 

PAGE

PART I: FINANCIAL INFORMATION

 

 

 

Item 1:

Financial Statements:

 

 

Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003

3

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited)

4

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)

5

 

Notes to Consolidated Financial Statements

6

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4:

Controls and Procedures

49

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

Item 1:

Legal Proceedings

49

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3:

Defaults Upon Senior Securities

50

Item 4:

Submission of Matters to a Vote of Security Holders

50

Item 5:

Other Information

50

Item 6:

Exhibits

50

 

 

 

 

 

 

SIGNATURES

51

 

2



 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Investment in real estate:

 

 

 

 

 

Operating properties, net

 

$

1,360,697

 

$

1,116,847

 

Projects under construction or development

 

125,296

 

67,149

 

Total commercial real estate properties, net

 

1,485,993

 

1,183,996

 

Investments in and advances to unconsolidated real estate joint ventures

 

1,094

 

5,262

 

Investment in real estate, net

 

1,487,087

 

1,189,258

 

Cash and cash equivalents

 

6,812

 

9,481

 

Restricted cash

 

10,760

 

11,030

 

Accounts receivable, net

 

10,278

 

13,047

 

Investments in and advances to other unconsolidated entities

 

1,621

 

1,621

 

Deferred rent receivable

 

23,383

 

17,903

 

Intangible assets on real estate acquisitions, net

 

67,083

 

55,692

 

Deferred charges, net

 

26,407

 

17,723

 

Prepaid and other assets

 

14,703

 

14,311

 

Furniture, fixtures and equipment, net

 

2,579

 

2,010

 

Total assets

 

$

1,650,713

 

$

1,332,076

 

Liabilities and shareholders’ equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage and other loans payable

 

$

947,332

 

$

738,698

 

Accounts payable and accrued expenses

 

41,155

 

23,126

 

Rents received in advance and security deposits

 

11,519

 

10,112

 

Dividends and distributions payable

 

14,533

 

12,098

 

Deferred revenue associated with acquired operating leases

 

7,670

 

9,630

 

Fair value of derivatives

 

45

 

467

 

Other liabilities

 

7,115

 

7,768

 

Total liabilities

 

1,029,369

 

801,899

 

Minority interests:

 

 

 

 

 

Common units in the Operating Partnership

 

90,029

 

79,796

 

Preferred units in the Operating Partnership

 

8,800

 

 

Other consolidated real estate joint ventures

 

1,594

 

 

Total minority interests

 

100,423

 

79,796

 

Commitments and contingencies (Note 16)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred Shares of beneficial interest ($0.01 par value; 15,000,000 shares authorized) (Note 10)

 

67

 

85

 

Common Shares of beneficial interest ($0.01 par value; 45,000,000 shares authorized, shares issued of 36,801,533 at September 30, 2004 and 29,563,867 at December 31, 2003)

 

368

 

296

 

Additional paid-in capital

 

575,180

 

494,299

 

Cumulative distributions in excess of net income

 

(47,862

)

(38,483

)

Value of unearned restricted common share grants

 

(5,381

)

(4,107

)

Treasury shares, at cost (166,600 shares)

 

(1,415

)

(1,415

)

Accumulated other comprehensive income (loss)

 

(36

)

(294

)

Total shareholders’ equity

 

520,921

 

450,381

 

Total liabilities and shareholders’ equity

 

$

1,650,713

 

$

1,332,076

 

 

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)

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

47,491

 

$

40,210

 

$

139,723

 

$

112,921

 

Tenant recoveries and other real estate operations revenue

 

5,606

 

5,238

 

16,237

 

14,923

 

Construction contract revenues

 

6,766

 

19,008

 

18,136

 

24,222

 

Other service operations revenues

 

959

 

795

 

3,806

 

2,241

 

Total revenues

 

60,822

 

65,251

 

177,902

 

154,307

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating

 

16,197

 

13,075

 

45,883

 

37,830

 

Depreciation and other amortization associated with real estate operations

 

11,802

 

9,462

 

38,045

 

26,735

 

Construction contract expenses

 

6,483

 

18,035

 

17,280

 

23,099

 

Other service operations expenses

 

754

 

1,026

 

3,194

 

2,784

 

General and administrative expenses

 

2,698

 

1,937

 

7,471

 

5,651

 

Total operating expenses

 

37,934

 

43,535

 

111,873

 

96,099

 

Operating income

 

22,888

 

21,716

 

66,029

 

58,208

 

Interest expense

 

(10,839

)

(10,436

)

(31,615

)

(30,608

)

Amortization of deferred financing costs

 

(577

)

(773

)

(1,936

)

(1,957

)

Income from continuing operations before gain on sales of real estate, equity in gain (loss) of unconsolidated real estate joint ventures, income taxes and minority interests

 

11,472

 

10,507

 

32,478

 

25,643

 

Gain (loss) on sales of real estate, excluding discontinued operations

 

24

 

23

 

(174

)

448

 

Equity in income (loss) of unconsolidated real estate joint ventures

 

 

95

 

(88

)

(91

)

Income tax expense

 

(145

)

(297

)

(375

)

(238

)

Income from continuing operations before minority interests

 

11,351

 

10,328

 

31,841

 

25,762

 

Minority interests in income from continuing operations

 

 

 

 

 

 

 

 

 

Common units in the Operating Partnership

 

(1,595

)

(1,757

)

(4,241

)

(4,329

)

Preferred units in the Operating Partnership

 

(14

)

 

(14

)

(1,049

)

Other consolidated entities

 

8

 

 

 

 

Income from continuing operations

 

9,750

 

8,571

 

27,586

 

20,384

 

Income from discontinued operations, net of minority interests

 

 

11

 

 

2,423

 

Net income

 

9,750

 

8,582

 

27,586

 

22,807

 

Preferred share dividends

 

(3,784

)

(3,157

)

(12,675

)

(8,224

)

Repurchase of preferred units in excess of recorded book value

 

 

 

 

(11,224

)

Issuance costs associated with redeemed preferred shares

 

(1,813

)

 

(1,813

)

 

Net income available to common shareholders

 

$

4,153

 

$

5,425

 

$

13,098

 

$

3,359

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

Income before discontinued operations

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.04

 

Discontinued operations

 

 

 

 

0.09

 

Net income

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.13

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

Income before discontinued operations

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.03

 

Discontinued operations

 

 

 

 

0.09

 

Net income

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.12

 

 

See accompanying notes to consolidated financial statements.

 

4



 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

 

 

For the nine months ended
September 30,

 

 

 

2004

 

2003

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

27,586

 

$

22,807

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Minority interests

 

4,255

 

6,383

 

Depreciation and other amortization

 

38,045

 

26,754

 

Amortization of deferred financing costs

 

1,936

 

1,957

 

Amortization of value of acquired operating leases to rental revenue

 

(806

)

(1,465

)

Equity in loss of unconsolidated real estate joint ventures

 

88

 

91

 

Loss (gain) on sales of real estate, including amounts in discontinued operations

 

174

 

(3,443

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in deferred rent receivable

 

(5,473

)

(3,629

)

Increase in accounts receivable, restricted cash and prepaid and other assets

 

(1,239

)

(5,677

)

Increase in accounts payable, accrued expenses, rents received in advance and security deposits

 

1,890

 

8,889

 

Other

 

1,608

 

790

 

Net cash provided by operating activities

 

68,064

 

53,457

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to commercial real estate properties

 

(205,991

)

(183,697

)

Proceeds from sales of properties

 

 

36,904

 

Investments in and advances to unconsolidated real estate joint ventures

 

(39

)

(735

)

Leasing costs paid

 

(7,877

)

(2,061

)

Advances to certain real estate joint ventures

 

(515

)

(4,134

)

Other

 

168

 

(1,680

)

Net cash used in investing activities

 

(214,254

)

(155,403

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from mortgage and other loans payable

 

476,667

 

206,057

 

Repayments of mortgage and other loans payable

 

(378,412

)

(169,055

)

Deferred financing costs paid

 

(3,371

)

(1,277

)

Increase in other liabilities associated with financing activities

 

4,000

 

4,000

 

Acquire partner interest in consolidated joint venture

 

(4,928

)

 

Net proceeds from issuance of common shares

 

121,604

 

81,388

 

Net proceeds from issuance of preferred shares

 

 

53,240

 

Repurchase of preferred units

 

 

(35,591

)

Redemption of preferred shares

 

(31,250

)

 

Dividends paid

 

(34,661

)

(24,595

)

Distributions paid

 

(6,224

)

(7,126

)

Other

 

96

 

2,286

 

Net cash provided by financing activities

 

143,521

 

109,327

 

Net (decrease) increase in cash and cash equivalents

 

(2,669

)

7,381

 

Cash and cash equivalents

 

 

 

 

 

Beginning of year

 

9,481

 

5,991

 

End of period

 

$

6,812

 

$

13,372

 

 

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)

 

1.                                      Organization

 

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 of 1986 and is the successor to a corporation organized in 1988.  As of September 30, 2004, our portfolio included 136 office properties, including two 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 Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of September 30, 2004 follows:

 

 

 

% Owned
by COPT

 

Common Units

 

80

%

Series E Preferred Units

 

100

%

Series F Preferred Units

 

100

%

Series G Preferred Units

 

100

%

Series H Preferred Units

 

100

%

Series I Preferred Units

 

0

%

 

Please refer to Note 3 below for a description of the Series I Preferred Units.

 

The Operating Partnership also owns 100% of Corporate Office Management, Inc. (“COMI”) (together with its subsidiaries defined as the “Service Companies”).  COMI’s 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

 

COMI owns 100% of these entities.

 

2.             Basis of Presentation

 

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 2003 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.

 

6



 

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;

                  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. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”).  FIN 46R 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 entity’s operations but cannot control the entity’s operations.  Under the equity method, we report:

 

                  our ownership interest in the entity’s 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 46R.  FIN 46R 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 entity’s 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 entity’s 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 partner’s 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 partner’s 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 partner’s joint venture interest, we begin consolidating the accounts of the entity with our accounts.  See the section in Note 3 entitled “Recent Accounting Pronouncements”

 

7



 

for a description of FIN 46R.  FIN 46R affects our determination of when to use the financing method of accounting.

 

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 (“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 management’s control.  As a result, actual amounts could differ from these estimates.

 

Accounts Receivable

 

Our accounts receivable are reported net of an allowance for bad debts of $383 at September 30, 2004 and $548 at December 31, 2003.

 

Minority Interests

 

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.  We also do not own 100% of three consolidated real estate joint ventures.  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.

 

For a portion of 2003, the Operating Partnership had 1,016,662 Series C Preferred Units outstanding that we did not own.  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.

 

On September 23, 2004, we issued 352,000 Series I Preferred Units in the Operating Partnership to an unrelated party in connection with our acquisition of two office properties in Northern Virginia.  These units have a liquidation preference of $25.00 per unit, plus any accrued and unpaid distributions of return thereon (as described below), and may be redeemed for cash by the Operating Partnership at our option any time after September 22, 2019.  The owner of these units is entitled to a priority annual cumulative return equal to 7.5% of their liquidation preference through September 22, 2019; the annual cumulative preferred return increases for each subsequent five-year period, subject to certain maximum limits.  These units are convertible into common units on the basis of 0.5 common units for each Series I Preferred Unit; the resulting common units would then be exchangeable for common shares in accordance with the terms of the Operating Partnership’s agreement of limited partnership. 

 

8



 

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 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 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):

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Numerator:

 

 

 

 

 

 

 

 

 

Numerator for basic EPS on net income available to common shareholders

 

$

4,153

 

$

5,425

 

$

13,098

 

$

3,359

 

Subtract: Income from discontinued operations, net

 

 

(11

)

 

(2,423

)

Numerator for basic EPS before discontinued operations

 

4,153

 

5,414

 

13,098

 

936

 

Add: Series D Preferred Share dividends

 

 

136

 

21

 

 

Numerator for diluted EPS before discontinued operations

 

4,153

 

5,550

 

13,119

 

936

 

Add: Income from discontinued operations, net

 

 

11

 

 

2,423

 

Numerator for diluted EPS on net income available to common shareholders

 

$

4,153

 

$

5,561

 

$

13,119

 

$

3,359

 

Denominator (all weighted averages):

 

 

 

 

 

 

 

 

 

Denominator for basic EPS (common shares)

 

33,797

 

28,832

 

32,124

 

25,886

 

Assumed conversion of share options

 

1,655

 

1,480

 

1,680

 

1,257

 

Assumed conversion of Series D Preferred Shares

 

 

1,197

 

179

 

 

Denominator for diluted EPS

 

35,452

 

31,509

 

33,983

 

27,143

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Income before discontinued operations

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.04

 

Income from discontinued operations

 

 

 

 

0.09

 

Net income available to common shareholders

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.13

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Income before discontinued operations

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.03

 

Income from discontinued operations

 

 

 

 

0.09

 

Net income available to common shareholders

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.12

 

 

Our diluted EPS computations 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
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Conversion of weighted average common units

 

8,690

 

8,909

 

8,773

 

8,954

 

Restricted common shares

 

206

 

161

 

195

 

132

 

Conversion of share options

 

5

 

6

 

5

 

50

 

Conversion of weighted average preferred units

 

15

 

 

5

 

1,472

 

Conversion of weighted average preferred shares

 

 

 

 

1,197

 

 

9



 

Stock-Based Compensation

 

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, 2004, 4,400 of these share options were outstanding.

                  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
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Increase in general and administrative expenses

 

$

405

 

$

269

 

$

1,165

 

$

753

 

Increase in losses from service operations

 

146

 

98

 

430

 

289

 

 

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:”

 

10



 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income, as reported

 

$

9,750

 

$

8,582

 

$

27,586

 

$

22,807

 

Add:

Stock-based compensation expense, net of related tax effects and minority interests, included in the determination of net income

 

388

 

247

 

1,106

 

676

 

Less:

Stock-based compensation expense determined under the fair value based method, net of related tax effects and minority interests

 

(322

)

(222

)

(917

)

(618

)

Net income, pro forma

 

$

9,816

 

$

8,607

 

$

27,775

 

$

22,865

 

Basic earnings per share on net income available to common shareholders, as reported

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.13

 

Basic earnings per share on net income available to common shareholders, pro forma

 

$

0.12

 

$

0.19

 

$

0.41

 

$

0.13

 

Diluted earnings per share on net income available to common shareholders, as reported

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.12

 

Diluted earnings per share on net income available to common shareholders, pro forma

 

$

0.12

 

$

0.18

 

$

0.39

 

$

0.13

 

 

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

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”).  In December 2003, FASB issued FIN No. 46R which replaced FIN 46 and clarified Accounting Research Bulletin 51 (“ARB 51”).  FIN 46R 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 46R 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 46R 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 46R immediately for all VIEs created subsequent to January 31, 2003 and effective March 31, 2004 for VIEs created prior to February 1, 2003.  In connection with our adoption of FIN 46R, we began to use the consolidation method of accounting effective March 31, 2004 for our investments in the following joint ventures:  MOR Forbes 2 LLC, Gateway 70 LLC and MOR Montpelier 3 LLC, which were previously accounted for using the equity method of accounting, and NBP 220, LLC, which was previously accounted for using the financing method of accounting (see Note 2).  The effect of consolidating these joint ventures on our Consolidated Balance Sheet as of March 31, 2004 is set forth below.

 

11



 

Operating properties

 

$

2,176

 

Projects under construction or development

 

17,959

 

Investments in and advances to unconsolidated real estate joint ventures

 

(3,957

)

Restricted cash

 

10

 

Accounts receivable, net

 

145

 

Deferred rent receivable

 

7

 

Deferred charges, net

 

1,026

 

Prepaid and other assets

 

(3,263

)

Mortgage and other loans payable

 

(10,171

)

Accounts payable and accrued expenses

 

(2,737

)

Rents received in advance and security deposits

 

(347

)

Other liabilities

 

4,650

 

Minority interests-other consolidated real estate entities

 

(5,498

)

 

 

$

 

 

The consolidation of these joint ventures had no effect on our Consolidated Statements of Operations included herein for periods prior to April 1, 2004.  Additional information regarding our real estate joint ventures is available in Note 5 to the Consolidated Financial Statements.

 

4.             Commercial Real Estate Properties

 

Operating properties consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Land

 

$

260,197

 

$

216,703

 

Buildings and improvements

 

1,231,518

 

1,003,214

 

 

 

1,491,715

 

1,219,917

 

Less: accumulated depreciation

 

(131,018

)

(103,070

)

 

 

$

1,360,697

 

$

1,116,847

 

 

Projects we had under construction or development consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Land

 

$

75,925

 

$

53,356

 

Construction in progress

 

49,371

 

13,793

 

 

 

$

125,296

 

$

67,149

 

 

2004 Acquisitions

 

We acquired the following office properties during the nine months ended September 30, 2004:

 

12



 

Project Name

 

Location

 

Date of
Acquisition

 

Number of
Buildings

 

Total
Rentable
Square Feet

 

Initial Cost

 

400 Professional Drive

 

Gaithersburg, MD

 

3/5/2004

 

1

 

129,030

 

$

23,196

 

Wildewood and Exploration/

 

St. Mary’s County, MD

 

3/24/2004 &

 

 

 

 

 

 

 

Expedition Office Parks

 

 

 

5/5/2004

 

9

 

489,924

 

57,844

 

10150 York Road

 

Hunt Valley, MD

 

4/15/2004

 

1

 

178,764

 

15,372

 

Pinnacle Towers

 

Tysons Corner, VA

 

9/23/2004

 

2

 

440,102

 

106,445

 

Corporate Pointe III

 

Chantilly, VA

 

9/29/2004

 

1

 

114,126

 

22,903

 

 

 

 

 

 

 

 

 

1,351,946

 

$

225,760

 

 

The table below sets forth the allocation of the acquisition costs of these properties:

 

 

 

400
Professional
Drive

 

Wildewood and
Exploration/
Expedition

 

10150 York
Road

 

Pinnacle
Towers

 

Corporate
Pointe III

 

Total

 

Land

 

$

3,673

 

$

10,160

 

$

2,695

 

$

18,564

 

$

3,511

 

$

38,603

 

Building and improvements

 

17,400

 

43,232

 

11,714

 

76,815

 

15,503

 

164,664

 

Intangible assets on real estate acquisitions

 

2,154

 

4,502

 

1,357

 

11,066

 

3,889

 

22,968

 

Total assets

 

23,227

 

57,894

 

15,766

 

106,445

 

22,903

 

226,235

 

Deferred revenue associated with acquired operating leases

 

(31

)

(50

)

(394

)

 

 

(475

)

Total acquisition cost

 

$

23,196

 

$

57,844

 

$

15,372

 

$

106,445

 

$

22,903

 

$

225,760

 

 

We also acquired the following during the nine months ended September 30, 2004:

 

      a parcel of land located in St. Mary’s County, Maryland for $1,905 on March 24, 2004 in connection with our acquisition of the Wildewood and Exploration/Expedition Office Parks;

      two adjacent parcels of land located in Chantilly, Virginia for $4,012 on April 14, 2004.  An operating building of ours is located on one of these parcels and a project we have under construction is located on the other parcel;

      a 5.3 acre parcel of land located in Herndon, Virginia that is adjacent to one of our office properties for $9,614 on April 29, 2004;

      a property located in Blue Bell, Pennsylvania that is adjacent to an office park we own for $401 on July 15, 2004;

      a 14.0 acre parcel of land located in Columbia, Maryland for $6,386 on September 20, 2004; and

      an 18.8 acre parcel of land located in South Brunswick, New Jersey that is adjacent to an office park we own for $511 on September 29, 2004.

 

2004 Construction/Development

 

During the nine months ended September 30, 2004, we fully placed into service a new building located in Annapolis Junction, Maryland and a new building located in Lanham, Maryland.

 

As of September 30, 2004, we had construction underway on three new buildings in Annapolis Junction, Maryland and two new buildings in Chantilly, Virginia.  We also had development underway on two new buildings located in Annapolis Junction, Maryland. 

 

2004 Dispositions

 

On April 26, 2004, we sold a land parcel in Columbia, Maryland and a land parcel in Linthicum, Maryland for $9,600.  We issued to the buyer a $5,600 mortgage loan bearing interest at 5.5% and a maturity date of July 2005; the balance of the acquisition was in the form of cash from the buyer.  Upon completion of the sale, we entered into an agreement with the buyer to lease the land parcels for an aggregate monthly payment of $10 beginning July 1, 2004 until April 30, 2005, at which time the rent reduces to $1 per month until 2079.  The buyer in this transaction has an option to contribute the two land parcels into our Operating Partnership between January 1, 2005 and

 

13



 

February 28, 2005 in exchange for extinguishment of the $5,600 mortgage loan with us and $4,000 in common units in our Operating Partnership; a unit price ranging from $24.45 to $25.90 will be used to determine the number of units in the Operating Partnership that the buyer would receive if the option were exercised.  If the buyer in this transaction does not exercise its option to contribute the two land parcels into our Operating Partnership, we have the option to re-acquire the properties anytime after March 15, 2005 for the same consideration described in the previous sentence.  We accounted for this transaction using the financing method of accounting; as a result, the transaction was not recorded as a sale and the $4,000 in net proceeds received from the buyer is included in other liabilities on our consolidated balance sheet as of September 30, 2004.

 

5.             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:

 

 

 

Balance at

 

 

 

 

 

 

 

Total

 

Maximum

 

 

 

September 30,
2004

 

December 31,
2003

 

Date
Acquired

 

Ownership

 

Nature of
Activity

 

Assets at
9/30/04

 

Exposure
to Loss (1)

 

Route 46 Partners, LLC

 

$

1,094

 

$

1,055

 

3/14/03

 

20%

 

Operating building (2)

 

$

23,074

 

$

1,664

 

Gateway 70 LLC

 

 

3,017

 

4/5/01

 

See Below

 

Developing land parcel (3)

 

N/A

 

N/A

 

MOR Forbes 2 LLC

 

 

735

 

12/24/02

 

See Below

 

Operating building (4)

 

N/A

 

N/A

 

MOR Montpelier 3 LLC

 

 

455

 

2/21/02

 

See Below

 

Developing land parcel (5)

 

N/A

 

N/A

 

 

 

$

1,094

 

$

5,262

 

 

 

 

 

 

 

$

23,074

 

$

1,664

 

 


(1)     Derived from the sum of our investment balance, loan guarantees (based on maximum loan balance) and maximum additional unilateral capital contributions and loans required from us.  Not reported above are additional amounts that we and our partners are required to fund when needed by these joint ventures; these funding requirements are proportional to our ownership percentage.

(2)     This joint venture’s property is located in Fairfield, New Jersey.

(3)     This joint venture’s property is located in Columbia, Maryland.

(4)     This joint venture’s property is located in Lanham, Maryland.

(5)     This joint venture’s property is located in Laurel, Maryland.

 

As discussed in Note 3, we adopted FIN 46R effective March 31, 2004 for VIEs created prior to February 1, 2003.  Upon this adoption, we began using the consolidation method of accounting for the following joint ventures that had previously been accounted for using either the equity or financing methods of accounting:

 

 

 

Date
Acquired

 

Ownership
% at
9/30/04

 

Nature of
Activity

 

Total
Assets at
9/30/2004

 

Collateralized
Assets at
9/30/2004

 

NBP 220, LLC

 

1/31/03

 

100

%

Operating building (1)

 

$

34,894

 

$

33,162

 

MOR Forbes 2 LLC

 

12/24/02

 

50

%

Operating building (2)

 

4,614

 

4,195

 

Gateway 70 LLC

 

4/5/01

 

80

%

Developing land parcel (3)

 

3,782

 

 

MOR Montpelier 3 LLC

 

2/21/02

 

50

%

Developing land parcel (4)

 

946

 

 

 

 

 

 

 

 

 

 

$

44,236

 

$

37,357

 

 


(1)     This joint venture’s property is located in Annapolis Junction, Maryland.  Our ownership was 20% until we acquired the remaining interest on September 10, 2004.  The building was placed into service in September 2004.

(2)     This joint venture’s property is located in Lanham, Maryland.  The recently constructed building became 100% operational in August 2004.

(3)     This joint venture’s property is located in Columbia, Maryland.

(4)     This joint venture’s property is located in Laurel, Maryland.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.  The following table sets forth a condensed balance sheet for our one unconsolidated real estate joint venture as of September 30, 2004:

 

14



 

Commercial real estate property

 

$

21,595

 

Other assets

 

1,479

 

Total assets

 

$

23,074

 

 

 

 

 

Liabilities

 

$

14,745

 

Owners’ equity

 

8,329

 

Total liabilities and owners’ equity

 

$

23,074

 

 

6.             Investments in and Advances to Other Unconsolidated Entities

 

Our investments in and advances to other unconsolidated entities include the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Date
Acquired

 

Ownership
% at
9/30/04

 

Investment
Accounting
Method

 

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.

 

7.             Intangible Assets on Real Estate Acquisitions

 

Intangible assets on real estate acquisitions consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Tenant value

 

$

63,172

 

$

46,613

 

Lease to market value

 

9,485

 

7,819

 

Lease cost portion of deemed cost avoidance

 

8,407

 

5,294

 

Market concentration premium

 

1,334

 

1,333

 

Subtotal

 

82,398

 

61,059

 

Accumulated amortization

 

(15,315

)

(5,367

)

Intangible assets on real estate acquisitions, net

 

$

67,083

 

$

55,692

 

 

8.             Deferred Charges

 

Deferred charges consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

Deferred leasing costs

 

$

30,529

 

$

20,712

 

Deferred financing costs

 

16,813

 

13,263

 

Goodwill

 

1,880

 

1,880

 

Deferred other

 

155

 

155

 

 

 

49,377

 

36,010

 

Accumulated amortization

 

(22,970

)

(18,287

)

Deferred charges, net

 

$

26,407

 

$

17,723

 

 

15



 

9.             Derivatives

 

The following table sets forth our derivative contracts and their respective fair values:

 

Nature of Derivative

 

Notional
Amount in
(millions)

 

One-Month
LIBOR base

 

Effective
Date

 

Expiration
Date

 

Fair Value at
September 30,
2004

 

Fair Value at
December 31,
2003

 

Interest rate swap

 

$

50.0

 

2.308

%

1/2/2003

 

1/3/2005

 

$

(45

)

$

(467

)

Interest rate swap

 

50.0

 

1.520

%

1/7/2003

 

1/2/2004

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

(45

)

$

(467

)

 

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, 2004, our outstanding interest rate swap was considered a highly effective cash flow hedge under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

 

The table below sets forth our accounting application of changes in derivative fair values:

 

 

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

Increase (decrease) in fair value applied to AOCL (1)  and minority interests

 

$

345

 

$

(232

)

Increase in fair value recognized as gain (2)

 

77

 

 

 


(1)                                  AOCL is defined below.

(2)                                  Represents hedge ineffectiveness and is included in interest expense 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.

 

16



 

10.          Shareholders’ Equity

 

Preferred Shares

 

Preferred shares of beneficial interest (“preferred shares”) consisted of the following:

 

 

 

September 30,
2004

 

December 31,
2003

 

1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (no shares issued and outstanding at September 30, 2004 and 1,250,000 shares issued and outstanding with an aggregate liquidation preference of $31,250 at December 31, 2003)

 

$

 

$

13

 

544,000 designated as Series D Cumulative Convertible Redeemable Preferred Shares of beneficial interest (no shares issued and outstanding at September 30, 2004 and 544,000 shares issued and outstanding with an aggregate liquidation preference of $13,600 at December 31, 2003)

 

 

5

 

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, 2004 and December 31, 2003)

 

11

 

11

 

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, 2004 and December 31, 2003)

 

14

 

14

 

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 $55,000 at September 30, 2004 and December 31, 2003)

 

22

 

22

 

2,000,000 designated as Series H Cumulative Redeemable Preferred Shares of beneficial interest (2,000,000 shares issued with an aggregate liquidation preference of $50,000 at September 30, 2004 and December 31, 2003)

 

20

 

20

 

Total preferred shares

 

$

67

 

$

85

 

 

On February 11, 2004, the holder of the Series D Preferred Shares converted the shares into common shares on the basis of 2.2 common shares for each Series D Preferred Share, resulting in the issuance of 1,196,800 common shares.

 

On July 15, 2004, we redeemed the Series B Preferred Shares for a redemption price of $31,250.  At the completion of this transaction, we recognized a $1,813 decrease to net income available to common shareholders pertaining to the original issuance costs we incurred on the shares.

 

Common Shares

 

On April 23, 2004, we sold 2,750,000 common shares to an underwriter at a net price of $21.243 per share.  We contributed the net proceeds totaling approximately $58,200 to our Operating Partnership in exchange for 2,750,000 common units.

 

On September 28, 2004, we sold 2,283,600 common shares to underwriters at a net price of $25.10 per share.  We contributed the net proceeds totaling approximately $57,200 to our Operating Partnership in exchange for 2,283,600 common units.

 

During the nine months ended September 30, 2004, 236,108 common units in our Operating Partnership were converted into common shares on the basis of one common share for each common unit.

 

During the nine months ended September 30, 2004, we issued 99,935 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 same period, forfeiture restrictions lapsed on 113,478 common shares previously issued to employees.  We also issued 4,000 unrestricted common shares to employees during this period.

 

17



 

We issued 667,223 common shares upon the exercise of share options during the nine months ended September 30, 2004.

 

A summary of the activity in the AOCL component of shareholders’ equity for the nine months ended September 30, 2004 follows:

 

Beginning balance

 

$

(294

)

Unrealized gain on interest rate swaps, net of minority interests

 

258

 

Ending balance

 

$

(36

)

 

The table below sets forth our comprehensive income for the periods reported herein:

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income

 

$

9,750

 

$

8,582

 

$

27,586

 

$

22,807

 

Increase (decrease) in fair value of derivatives

 

47

 

144

 

258

 

(199

)

Total comprehensive income

 

$

9,797

 

$

8,726

 

$

27,844

 

$

22,608

 

 

18



 

11.          Dividends and Distributions

 

The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the nine months ended September 30, 2004:

 

 

 

Record Date

 

Payable Date

 

Dividend/
Distribution Per
Share/Unit

 

Total
Dividend/
Distribution

 

Series B Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.6250

 

$

781

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.6250

 

$

781

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.6250

 

$

781

 

 

 

 

 

 

 

 

 

 

 

Series D Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.2500

 

$

136

 

 

 

 

 

 

 

 

 

 

 

Series E Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.6406

 

$

737

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.6406

 

$

737

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.6406

 

$

737

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.6406

 

$

737

 

 

 

 

 

 

 

 

 

 

 

Series F Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.6172

 

$

880

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.6172

 

$

880

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.6172

 

$

880

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.6172

 

$

880

 

 

 

 

 

 

 

 

 

 

 

Series G Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.5000

 

$

1,100

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.5000

 

$

1,100

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.5000

 

$

1,100

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.5000

 

$

1,100

 

 

 

 

 

 

 

 

 

 

 

Series H Preferred Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.1458

 

$

292

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.4688

 

$

938

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.4688

 

$

938

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.4688

 

$

938

 

 

 

 

 

 

 

 

 

 

 

Common Shares:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.2350

 

$

6,806

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.2350

 

$

7,178

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.2350

 

$

7,878

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.2550

 

$

9,235

 

 

 

 

 

 

 

 

 

 

 

Common Units:

 

 

 

 

 

 

 

 

 

Fourth Quarter 2003

 

December 31, 2003

 

January 15, 2004

 

$

0.2350

 

$

2,085

 

First Quarter 2004

 

March 31, 2004

 

April 15, 2004

 

$

0.2350

 

$

2,074

 

Second Quarter 2004

 

June 30, 2004

 

July 15, 2004

 

$

0.2350

 

$

2,057

 

Third Quarter 2004

 

September 30, 2004

 

October 15, 2004

 

$

0.2550

 

$

2,201

 

 

19



 

12.          Supplemental Information to Statements of Cash Flows

 

 

 

For the nine months
ended September 30,

 

 

 

2004

 

2003

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Consolidation of real estate joint ventures in connection with adoption of FIN 46R:

 

 

 

 

 

Operating properties

 

$

2,176

 

$

 

Projects under construction or development

 

17,959

 

 

Investments in and advances to unconsolidated real estate joint ventures

 

(3,957

)

 

Restricted cash

 

10

 

 

Accounts receivable, net

 

145

 

 

Deferred rent receivable

 

7

 

 

Deferred charges, net

 

1,026

 

 

Prepaid and other assets

 

(3,263

)

 

Mortgage and other loans payable

 

(10,171

)

 

Accounts payable and accrued expenses

 

(2,737

)

 

Rents received in advance and security deposits

 

(347

)

 

Other liabilities

 

4,650

 

 

Minority interests-other consolidated real estate entities

 

(5,498

)

 

Net adjustment

 

$

 

$

 

Adjustment to purchase of commercial real estate properties by acquiring joint venture interests:

 

 

 

 

 

Operating properties

 

$

(83

)

$

 

Investments in and advances to unconsolidated real estate joint ventures

 

83

 

 

Net adjustment

 

$

 

$

 

Debt assumed in connection with acquisitions

 

$

99,756

 

$

16,917

 

Notes receivable assumed upon sales of real estate

 

$

 

$

3,300

 

Investment in real estate joint venture obtained with disposition of property

 

$

 

$

2,300

 

Increase (decrease) in accrued capital improvements and leasing costs

 

$

14,383

 

$

(856

)

Amortization of discounts and premiums on mortgage loans to commercial real estate properties

 

$

576

 

$

323

 

Accretion of other liability to commercial real estate properties

 

$

147

 

$

358

 

Increase (decrease) in fair value of derivatives applied to AOCL and minority interests

 

$

345

 

$

(232

)

Issuance of preferred units in the Operating Partnership

 

$

8,800

 

$

 

Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT

 

$

17,799

 

$

6,688

 

Dividends/distribution payable

 

$

14,533

 

$

11,637

 

Decrease in minority interests and increase in shareholders’ equity in connection with the conversion of common units into common shares

 

$

5,553

 

$

2,066

 

Conversion of preferred shares adjusted to common shares and paid in capital

 

$

12

 

$

 

Issuance of restricted shares

 

$

2,271

 

$

 

 

20



 

13.          Information by Business Segment

 

We have seven primary office property segments: Baltimore/Washington Corridor, Northern Virginia, Greater Philadelphia, Northern/Central New Jersey, Greater Harrisburg, Suburban Maryland and Southern Maryland.

 

The table below reports segment financial information.  The reportable segments include, when applicable, properties classified as discontinued operations because these properties are included in the measure of profit reviewed by management.  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 REIT’s 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/
Washington
Corridor

 

Northern
Virginia

 

Greater
Philadelphia

 

Northern/
Central New
Jersey

 

Greater
Harrisburg

 

Suburban
Maryland

 

Southern
Maryland

 

Other

 

Total

 

Three months ended September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

26,921

 

$

10,121

 

$

2,506

 

$

4,696

 

$

2,271

 

$

2,622

 

$

1,750

 

$

2,210

 

$

53,097

 

Property operating expenses

 

8,658

 

3,166

 

39

 

1,387

 

689

 

927

 

376

 

955

 

16,197

 

NOI

 

$

18,263

 

$

6,955

 

$

2,467

 

$

3,309

 

$

1,582

 

$

1,695

 

$

1,374

 

$

1,255

 

$

36,900

 

Commercial real estate property expenditures

 

$

43,159

 

$

121,415

 

$

593

 

$

901

 

$

65

 

$

88

 

$

26

 

$

1,100

 

$

167,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,741

 

$

61,663

 

$

201

 

$

122

 

$

74

 

$

101

 

$

 

$

381

 

$

66,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

77,220

 

$

34,296

 

$

7,519

 

$

14,036

 

$

6,682

 

$

6,535

 

$

3,536

 

$

6,136

 

$

155,960

 

Property operating expenses

 

24,394

 

9,552

 

118

 

4,114

 

2,190

 

2,310

 

768

 

2,437

 

45,883

 

NOI

 

$

52,826

 

$

24,744

 

$

7,401

 

$

9,922

 

$

4,492

 

$

4,225

 

$

2,768

 

$

3,699

 

$

110,077

 

Commercial real estate property expenditures

 

$

87,249

 

$

139,957

 

$

944

 

$

1,650

 

$

329

 

$

27,475

 

$

55,324

 

$

17,017

 

$

329,945

 

Segment assets at September 30, 2004

 

$

753,607

 

$

415,076

 

$

101,425