UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
(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 March 31, 2005
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
(Exact name of registrant as specified in its charter)
Maryland |
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23-2947217 |
(State or other jurisdiction of |
|
(IRS Employer |
incorporation or organization) |
|
Identification No.) |
|
|
|
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 Exchange Act). ýYes o No
On April 30, 2005, 37,066,915 shares of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued.
TABLE OF CONTENTS
FORM 10-Q
2
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
|
|
March 31, |
|
December 31, |
|
||
|
|
2005 |
|
2004 |
|
||
|
|
(unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Investment in real estate: |
|
|
|
|
|
||
Operating properties, net |
|
$ |
1,409,637 |
|
$ |
1,407,148 |
|
Projects under construction or development |
|
206,430 |
|
136,152 |
|
||
Total commercial real estate properties, net |
|
1,616,067 |
|
1,543,300 |
|
||
Investments in and advances to unconsolidated real estate joint ventures |
|
1,209 |
|
1,201 |
|
||
Investment in real estate, net |
|
1,617,276 |
|
1,544,501 |
|
||
Cash and cash equivalents |
|
6,212 |
|
13,821 |
|
||
Restricted cash |
|
13,830 |
|
12,617 |
|
||
Accounts receivable, net |
|
17,529 |
|
16,771 |
|
||
Investment in other unconsolidated entity |
|
1,621 |
|
1,621 |
|
||
Deferred rent receivable |
|
27,890 |
|
26,282 |
|
||
Intangible assets on real estate acquisitions, net |
|
64,965 |
|
67,560 |
|
||
Deferred charges, net |
|
27,168 |
|
27,642 |
|
||
Prepaid and other assets |
|
19,658 |
|
18,646 |
|
||
Furniture, fixtures and equipment, net |
|
2,771 |
|
2,565 |
|
||
Total assets |
|
$ |
1,798,920 |
|
$ |
1,732,026 |
|
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
||
Mortgage and other loans payable |
|
$ |
1,091,688 |
|
$ |
1,022,688 |
|
Accounts payable and accrued expenses |
|
46,400 |
|
46,307 |
|
||
Rents received in advance and security deposits |
|
13,298 |
|
12,781 |
|
||
Dividends and distributions payable |
|
14,766 |
|
14,713 |
|
||
Deferred revenue associated with acquired operating leases |
|
6,612 |
|
7,247 |
|
||
Other liabilities |
|
7,661 |
|
7,488 |
|
||
Total liabilities |
|
1,180,425 |
|
1,111,224 |
|
||
Minority interests: |
|
|
|
|
|
||
Common units in the Operating Partnership |
|
87,539 |
|
88,355 |
|
||
Preferred units in the Operating Partnership |
|
8,800 |
|
8,800 |
|
||
Other consolidated real estate joint ventures |
|
1,699 |
|
1,723 |
|
||
Total minority interests |
|
98,038 |
|
98,878 |
|
||
Commitments and contingencies (Note 18) |
|
|
|
|
|
||
Shareholders equity: |
|
|
|
|
|
||
Preferred Shares of beneficial interest ($0.01 par value; 15,000,000 shares authorized) (Note 13) |
|
67 |
|
67 |
|
||
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued of 37,043,386 at March 31, 2005 and 36,842,108 at December 31, 2004) |
|
370 |
|
368 |
|
||
Additional paid-in capital |
|
582,805 |
|
578,228 |
|
||
Cumulative distributions in excess of net income |
|
(55,312 |
) |
(51,358 |
) |
||
Value of unearned restricted common share grants |
|
(7,473 |
) |
(5,381 |
) |
||
Total shareholders equity |
|
520,457 |
|
521,924 |
|
||
Total liabilities and shareholders equity |
|
$ |
1,798,920 |
|
$ |
1,732,026 |
|
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 |
|
||||
|
|
2005 |
|
2004 |
|
||
Revenues |
|
|
|
|
|
||
Rental revenue |
|
$ |
53,263 |
|
$ |
43,194 |
|
Tenant recoveries and other real estate operations revenue |
|
7,364 |
|
5,777 |
|
||
Construction contract revenues |
|
15,728 |
|
6,137 |
|
||
Other service operations revenues |
|
1,369 |
|
1,515 |
|
||
Total revenues |
|
77,724 |
|
56,623 |
|
||
Expenses |
|
|
|
|
|
||
Property operating |
|
18,918 |
|
15,039 |
|
||
Depreciation and other amortization associated with real estate operations |
|
14,666 |
|
10,359 |
|
||
Construction contract expenses |
|
14,897 |
|
5,818 |
|
||
Other service operations expenses |
|
1,291 |
|
1,092 |
|
||
General and administrative expenses |
|
3,276 |
|
2,286 |
|
||
Total operating expenses |
|
53,048 |
|
34,594 |
|
||
Operating income |
|
24,676 |
|
22,029 |
|
||
Interest expense |
|
(13,358 |
) |
(10,262 |
) |
||
Amortization of deferred financing costs |
|
(396 |
) |
(859 |
) |
||
Income from continuing operations before gain (loss) on sales of real estate, equity in loss of unconsolidated entities, income taxes and minority interests |
|
10,922 |
|
10,908 |
|
||
Gain (loss) on sales of real estate |
|
24 |
|
(222 |
) |
||
Equity in loss of unconsolidated entities |
|
|
|
(88 |
) |
||
Income tax expense |
|
(457 |
) |
(200 |
) |
||
Income from continuing operations before minority interests |
|
10,489 |
|
10,398 |
|
||
Minority interests in income from continuing operations |
|
|
|
|
|
||
Common units in the Operating Partnership |
|
(1,308 |
) |
(1,405 |
) |
||
Preferred units in the Operating Partnership |
|
(165 |
) |
|
|
||
Other consolidated entities |
|
24 |
|
|
|
||
Net income |
|
9,040 |
|
8,993 |
|
||
Preferred share dividends |
|
(3,654 |
) |
(4,456 |
) |
||
Net income available to common shareholders |
|
$ |
5,386 |
|
$ |
4,537 |
|
Basic earnings per common share |
|
$ |
0.15 |
|
$ |
0.15 |
|
Diluted earnings per common share |
|
$ |
0.14 |
|
$ |
0.14 |
|
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 Three Months Ended |
|
||||
|
|
2005 |
|
2004 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
9,040 |
|
$ |
8,993 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Minority interests |
|
1,449 |
|
1,405 |
|
||
Depreciation and other amortization |
|
14,666 |
|
10,359 |
|
||
Amortization of deferred financing costs |
|
396 |
|
859 |
|
||
Amortization of deferred market rental revenue |
|
(70 |
) |
(309 |
) |
||
Equity in loss of unconsolidated entities |
|
|
|
88 |
|
||
(Gain) loss on sales of real estate |
|
(24 |
) |
222 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Increase in deferred rent receivable |
|
(1,608 |
) |
(763 |
) |
||
(Increase) decrease in accounts receivable, restricted cash and prepaid and other assets |
|
(2,678 |
) |
685 |
|
||
Increase (decrease) in accounts payable, accrued expenses, rents received in advance and security deposits |
|
1,898 |
|
(5,408 |
) |
||
Other |
|
1,843 |
|
1,317 |
|
||
Net cash provided by operating activities |
|
24,912 |
|
17,448 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Purchases of and additions to commercial real estate properties |
|
(84,955 |
) |
(60,024 |
) |
||
Investments in and advances to unconsolidated entities |
|
(8 |
) |
(4 |
) |
||
Leasing costs paid |
|
(1,675 |
) |
(552 |
) |
||
Increase in advances to certain real estate joint ventures |
|
|
|
(515 |
) |
||
Other |
|
(49 |
) |
(3,298 |
) |
||
Net cash used in investing activities |
|
(86,687 |
) |
(64,393 |
) |
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from mortgage and other loans payable |
|
93,458 |
|
189,125 |
|
||
Repayments of mortgage and other loans payable |
|
(24,365 |
) |
(129,549 |
) |
||
Deferred financing costs paid |
|
(235 |
) |
(1,948 |
) |
||
Net proceeds from issuance of common shares |
|
593 |
|
2,189 |
|
||
Dividends paid |
|
(12,941 |
) |
(10,732 |
) |
||
Distributions paid |
|
(2,344 |
) |
(2,085 |
) |
||
Net cash provided by financing activities |
|
54,166 |
|
47,000 |
|
||
Net (decrease) increase in cash and cash equivalents |
|
(7,609 |
) |
55 |
|
||
Cash and cash equivalents |
|
|
|
|
|
||
Beginning of period |
|
13,821 |
|
9,481 |
|
||
End of period |
|
$ |
6,212 |
|
$ |
9,536 |
|
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)
(unaudited)
Corporate Office Properties Trust (COPT) and subsidiaries (collectively, the Company) is a fully-integrated and self-managed real estate investment trust (REIT). We focus on the ownership, management, leasing, acquisition and development of suburban office properties. We typically focus our operations geographically in select submarkets that are attractive to our tenant base and in which we believe we can establish a critical mass of square footage. At March 31, 2005, all of our operating properties were located in the Mid-Atlantic region of the United States, although in accordance with our strategy of focusing on submarkets that are attractive to our tenants, we may from time to time seek to expand our operations outside of this region. 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 March 31, 2005, our portfolio included 145 office properties in operations, 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 Partnerships forms of ownership and the percentage of those ownership forms owned by COPT as of March 31, 2005 follows:
|
|
% Owned |
|
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 |
% |
The Operating Partnership also owns 100% of Corporate Office Management, Inc. (COMI) (collectively 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 |
COMI owns 100% of these entities. Most of the services that CRM and CDS provide are for us.
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 2004 Annual Report on Form 10-K. The interim financial statements on the previous pages reflect all adjustments that we believe are necessary for the fair statement 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.
6
A summary of the numerator and denominator for purposes of our basic and diluted EPS calculations is set forth below (dollars and shares in thousands, except per share data):
|
|
For the three months ended |
|
||||
|
|
2005 |
|
2004 |
|
||
Numerator: |
|
|
|
|
|
||
Numerator for basic EPS on net income available to common shareholders |
|
$ |
5,386 |
|
$ |
4,537 |
|
Add: Convertible preferred share dividends |
|
|
|
21 |
|
||
Numerator for diluted EPS on net income available to common shareholders |
|
$ |
5,386 |
|
$ |
4,558 |
|
Denominator (all weighted averages): |
|
|
|
|
|
||
Denominator for basic EPS (common shares) |
|
36,555 |
|
29,814 |
|
||
Assumed conversion of share options |
|
1,537 |
|
1,749 |
|
||
Assumed conversion of convertible preferred shares |
|
|
|
539 |
|
||
Denominator for diluted EPS |
|
38,092 |
|
32,102 |
|
||
|
|
|
|
|
|
||
Basic EPS |
|
$ |
0.15 |
|
$ |
0.15 |
|
Diluted EPS |
|
$ |
0.14 |
|
$ |
0.14 |
|
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 March 31, |
|
||
|
|
2005 |
|
2004 |
|
Conversion of weighted average common units |
|
8,544 |
|
8,863 |
|
Conversion of weighted average convertible preferred units |
|
176 |
|
|
|
Restricted common shares |
|
143 |
|
149 |
|
Conversion of share options |
|
|
|
5 |
|
Expenses from share-based compensation are reflected in our Consolidated Statements of Operations as follows:
|
|
For the three months |
|
||||
|
|
2005 |
|
2004 |
|
||
Increase in general and administrative expenses |
|
$ |
413 |
|
$ |
359 |
|
Increase in construction contract and other service operations expenses |
|
46 |
|
139 |
|
||
The following table summarizes our operating results as if we elected to account for our share-based compensation under the fair value provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation:
7
|
|
For the three months |
|
||||
|
|
ended March 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
Net income, as reported |
|
$ |
9,040 |
|
$ |
8,993 |
|
Add: Share-based compensation expense, net of related tax effects and minority interests, included in the determination of net income |
|
354 |
|
337 |
|
||
Less: Share-based compensation expense determined under the fair value based method, net of related tax effects and minority interests |
|
(339 |
) |
(279 |
) |
||
Net income, pro forma |
|
$ |
9,055 |
|
$ |
9,051 |
|
Basic EPS on net income available to common shareholders, as reported |
|
$ |
0.15 |
|
$ |
0.15 |
|
Basic EPS on net income available to common shareholders, pro forma |
|
$ |
0.15 |
|
$ |
0.15 |
|
Diluted EPS on net income available to common shareholders, as reported |
|
$ |
0.14 |
|
$ |
0.14 |
|
Diluted EPS on net income available to common shareholders, pro forma |
|
$ |
0.14 |
|
$ |
0.14 |
|
The share-based compensation expense under the fair value method, as reported in the above table, was computed using the Black-Scholes option-pricing model.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). The Accounting Principles Boards Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29) is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. However, the guidance in APB 29 included certain exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 will be effective for us for nonmonetary asset exchanges occurring after December 31, 2005. We are reviewing the provisions of SFAS 153 and assessing the impact it will have on us upon adoption.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to an unconditional obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional upon future events that may or may not be within the entitys control. The fair value of liabilities related to such obligations should be recognized when incurred and reasonably estimable. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005. We are reviewing the provisions of FIN 47 and assessing the impact it will have on us upon adoption.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)). The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The statement will require us to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the grant date; such cost will be recognized over the period during which the employee is required to provide service in exchange for the award (generally the vesting period). No compensation
8
cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123(R) was to be effective for us in June 2005 for applicability to all awards granted, modified, repurchased or cancelled after July 1, 2005; the statement also was to require that we recognize compensation cost on or after July 1, 2005 for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the fair value of those awards on the date of grant. In April 2005, the Securities and Exchange Commission (the SEC) extended the effective date of SFAS 123(R) to the beginning of our next fiscal year (January 1, 2006). The SECs new rule does not change the accounting required by SFAS 123(R); it changes only the dates for compliance with the standard. We are reviewing the provisions of SFAS 123(R) and assessing the impact it will have on us upon adoption.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 expresses the SEC staffs views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staffs views regarding the valuation of share-based payment arrangements for public companies. In particular, it provides guidance in a number of areas, including share-based payment transactions with nonemployees, valuation methods, the classification of compensation expense, non-GAAP measures, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and certain disclosure requirements. We are reviewing the provisions of SAB 107 and assessing the impact it will have on us upon our adoption of SFAS 123(R).
Operating properties consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2005 |
|
2004 |
|
||
Land |
|
$ |
268,307 |
|
$ |
268,327 |
|
Buildings and improvements |
|
1,294,457 |
|
1,280,537 |
|
||
|
|
1,562,764 |
|
1,548,864 |
|
||
Less: accumulated depreciation |
|
(153,127 |
) |
(141,716 |
) |
||
|
|
$ |
1,409,637 |
|
$ |
1,407,148 |
|
Projects we had under construction or pre-construction consisted of the following:
|
|
March 31, |
|
December 31, |
|
|||
|
|
2005 |
|
2004 |
|
|||
Land |
|
$ |
97,085 |
|
$ |
74,190 |
|
|
Construction in progress |
|
109,345 |
|
61,962 |
|
|||
|
|
$ |
206,430 |
|
$ |
136,152 |
|
|
2005 Acquisitions
On March 30, 2005, we acquired for $30,674 two office properties containing an aggregate of 468,994 rentable square feet that are located in San Antonio, Texas. These buildings are initially undergoing redevelopment that is expected to be completed by the fourth quarter of 2005. The table below sets forth the allocation of the acquisition cost of these properties:
Land |
|
$ |
10,945 |
|
Construction in progress |
|
19,729 |
|
|
Total acquisition costs |
|
$ |
30,674 |
(1) |
(1) Classified in projects under construction or development on the March 31, 2005 consolidated balance sheet due to the property undergoing redevelopment.
We also acquired the following during the three months ended March 31, 2005:
9
a 19 acre parcel of land located in Chantilly, Virginia that is adjacent to an office park we own for $7,141 on January 27, 2005 (Chantilly, Virginia is located in the Northern Virginia region). We expect to develop this land parcel in the future;
a 39 acre parcel of land located in Dahlgren, Virginia that is adjacent to one of our office properties for $1,212 on March 16, 2005 (Dahlgren, Virginia is located in the St. Marys and King George Counties region). We expect to develop this land parcel in the future; and
a 15.7 acre parcel of land adjacent to the two office properties we acquired in San Antonio, Texas for $3,418 on March 30, 2005. We expect to operate this land parcel as part of the campus that includes the two acquired office properties.
2005 Construction and Pre-Construction Activities
As of March 31, 2005, we had construction underway on seven new buildings in the Baltimore/Washington Corridor, one in Northern Virginia and one in St. Marys County, Maryland. We also had pre-construction activities underway on two new buildings located in the Baltimore/Washington Corridor and redevelopment underway on two existing buildings in San Antonio, Texas.
7. 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 |
|
||||||
|
|
March 31, |
|
December 31, |
|
Date |
|
|
|
Nature of |
|
Assets at |
|
Exposure |
|
||||
|
|
2005 |
|
2004 |
|
Acquired |
|
Ownership |
|
Activity |
|
3/31/05 |
|
to Loss (1) |
|
||||
Route 46 Partners, LLC |
|
$ |
1,209 |
|
$ |
1,201 |
|
3/14/03 |
|
20 |
% |
Operating building (2) |
|
$ |
22,911 |
|
$ |
1,623 |
|
(1) Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our ownership percentage.
(2) This joint ventures property is located in Fairfield, NJ.
The following table sets forth a condensed balance sheet for Route 46 Partners, LLC as of March 31, 2005:
Commercial real estate property |
|
$ |
21,450 |
|
Other assets |
|
1,461 |
|
|
Total assets |
|
$ |
22,911 |
|
|
|
|
|
|
Liabilities |
|
$ |
14,752 |
|
Owners equity |
|
8,159 |
|
|
Total liabilities and owners equity |
|
$ |
22,911 |
|
Our investments in consolidated real estate joint ventures included the following:
|
|
|
|
Ownership |
|
|
|
Total |
|
Collateralized |
|
||
|
|
Date |
|
% at |
|
Nature of |
|
Assets at |
|
Assets at |
|
||
|
|
Acquired |
|
3/31/05 |
|
Activity |
|
3/31/2005 |
|
3/31/2005 |
|
||
MOR Forbes 2 LLC |
|
12/24/02 |
|
50 |
% |
Operating building (1) |
|
$ |
4,642 |
|
$ |
4,101 |
|
Gateway 70 LLC |
|
4/5/01 |
|
80 |
% |
Constructing/developing two buildings (2) |
|
5,687 |
|
|
|
||
MOR Montpelier 3 LLC |
|
2/21/02 |
|
50 |
% |
Developing land parcel (3) |
|
950 |
|
|
|
||
|
|
|
|
|
|
|
|
$ |
11,279 |
|
$ |
4,101 |
|
(1) This joint ventures property is located in Lanham, Maryland (located in the Suburban Maryland region).
(2) This joint ventures property is located in Columbia, Maryland (located in the Baltimore/Washington Corridor).
(3) This joint ventures property is located in Laurel, Maryland (located in the Suburban Maryland region).
10
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 18.
Our investment in an unconsolidated non-real estate entity is set forth below:
|
|
|
|
|
|
|
|
Ownership |
|
Investment |
|
||
|
|
March 31, |
|
December 31, |
|
Date |
|
% at |
|
Accounting |
|
||
|
|
2005 |
|
2004 |
|
Acquired |
|
3/31/05 |
|
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.
Intangible assets on real estate acquisitions consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2005 |
|
2004 |
|
||
Lease-up value |
|
$ |
65,638 |
|
$ |
65,638 |
|
Lease to market value |
|
9,595 |
|
9,595 |
|
||
Lease cost portion of deemed cost avoidance |
|
8,700 |
|
8,700 |
|
||
Market concentration premium |
|
1,333 |
|
1,333 |
|
||
Subtotal |
|
85,266 |
|
85,266 |
|
||
Accumulated amortization |
|
(20,301 |
) |
(17,706 |
) |
||
Intangible assets on real estate acquisitions, net |
|
$ |
64,965 |
|
$ |
67,560 |
|
Deferred charges consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2005 |
|
2004 |
|
||
Deferred leasing costs |
|
$ |
33,995 |
|
$ |
33,302 |
|
Deferred financing costs |
|
17,270 |
|
16,996 |
|
||
Goodwill |
|
1,853 |
|
1,853 |
|
||
Deferred other |
|
155 |
|
155 |
|
||
|
|
53,273 |
|
52,306 |
|
||
Accumulated amortization |
|
(26,105 |
) |
(24,664 |
) |
||
Deferred charges, net |
|
$ |
27,168 |
|
$ |
27,642 |
|
Our accounts receivable are reported net of an allowance for bad debts of $521 at March 31, 2005 and $490 at December 31, 2004.
11
The following table sets forth the one derivative contract that was in effect during part of the three months ended March 31, 2005 and its fair value:
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 |
|
$ |
|
|
$ |
|
|
We designated this derivative as a cash flow hedge. This derivative hedged the risk of changes in interest rates on certain of our one-month LIBOR-based variable rate borrowings. This derivative expired on January 3, 2005.
The table below sets forth our accounting application of changes in derivative fair values:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
(Decrease) in fair value applied to AOCL (1) and minority interests |
|
$ |
|
|
$ |
(39 |
) |
Increase in fair value recognized as gain (2) |
|
$ |
|
|
$ |
77 |
|
(1) AOCL is defined as accumulated other comprehensive loss.
(2) Represents hedge ineffectiveness and is included in interest expense on our Consolidated Statements of Operations.
Preferred Shares
Preferred shares of beneficial interest (preferred shares) consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
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) |
|
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) |
|
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) |
|
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) |
|
20 |
|
20 |
|
||
Total preferred shares |
|
$ |
67 |
|
$ |
67 |
|
Common Shares
During the three months ended March 31, 2005, we issued 130,975 common shares of beneficial interest (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 131,304 common shares previously issued to employees.
We issued 70,303 common shares upon the exercise of share options during the three months ended March 31, 2005.
12
Comprehensive Income
The table below sets forth our comprehensive income:
|
|
For the three months |
|
||||
|
|
2005 |
|
2004 |
|
||
Net income |
|
$ |
9,040 |
|
$ |
8,993 |
|
Unrealized loss on interest rate swaps, net of minority interests |
|
|
|
(34 |
) |
||
Total comprehensive income |
|
$ |
9,040 |
|
$ |
8,959 |
|
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2005:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
Total |
|
||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.6406 |
|
$ |
737 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.6406 |
|
$ |
737 |
|
|
|
|
|
|
|
|
|
|
|
||
Series F Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.6172 |
|
$ |
880 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.6172 |
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
|
||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
||
Series H Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.4688 |
|
$ |
938 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.4688 |
|
$ |
938 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.2550 |
|
$ |
9,288 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.2550 |
|
$ |
9,339 |
|
|
|
|
|
|
|
|
|
|
|
||
Series I Preferred Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.4688 |
|
$ |
165 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.4688 |
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2004 |
|
December 31, 2004 |
|
January 14, 2005 |
|
$ |
0.2550 |
|
$ |
2,179 |
|
First Quarter 2005 |
|
March 31, 2005 |
|
April 15, 2005 |
|
$ |
0.2550 |
|
$ |
2,179 |
|
13
|
|
For the Three Months |
|
||||
|
|
2005 |
|
2004 |
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Consolidation of real estate joint ventures in connection with adoption of FASB Interpretation FIN 46(R), Consolidation of Variable Interest Entities: |
|
|
|
|
|
||
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 |
|
$ |
|
|
$ |
21,218 |
|
(Decrease) increase in accrued capital improvements and leasing costs |
|
$ |
(1,091 |
) |
$ |
10,087 |
|
Amortization of discounts and premiums on mortgage loans to commercial real estate properties |
|
$ |
68 |
|
$ |
92 |
|
Accretion of other liability to commercial real estate properties |
|
$ |
|
|
$ |
147 |
|
Decrease in fair value of derivatives applied to AOCL and minority interests |
|
$ |
|
|
$ |
(39 |
) |
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT |
|
$ |
55 |
|
$ |
1,129 |
|
Dividends/distribution payable |
|
$ |
14,766 |
|
$ |
12,991 |
|
Decrease in minority interests and increase in shareholders equity in connection with the conversion of common units into common shares |
|
$ |
|
|
$ |
1,003 |
|
Conversion of preferred shares adjusted to common shares and paid in capital |
|
$ |
|
|
$ |
12 |
|
Issuance of restricted shares |
|
$ |
3,481 |
|
$ |
2,271 |
|
14
We have eight primary office property segments: Baltimore/Washington Corridor, Northern Virginia, Greater Philadelphia, St. Marys and King George Counties, Northern/Central New Jersey, Suburban Maryland, Greater Harrisburg and San Antonio, Texas.
The table below reports segment financial information. Our segment entitled Other includes assets and operations not specifically associated with the other defined segments, including elimination entries required in consolidation. 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 |
|
St. Marys
& |
|
Northern/ |
|
Suburban |
|
Greater |
|
San Antonio |
|
Other |
|
Total |
|
||||||||||
Three Months Ended March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Revenues |
|
$ |
29,679 |
|
$ |
14,419 |
|
$ |
2,506 |
|
$ |
2,878 |
|
$ |
3,871 |
|
$ |
2,454 |
|
$ |
2,244 |
|
$ |
- |
|
$ |
2,576 |
|
$ |
60,627 |
|
Property operating expenses |
|
9,409 |
|
5,015 |
|
36 |
|
706 |
|
1,509 |
|
1,089 |
|
744 |
|
- |
|
410 |
|
$ |
18,918 |
|
|||||||||
NOI |
|
$ |
20,270 |
|
$ |
9,404 |
|
$ |
2,470 |
|
$ |
2,172 |
|
$ |
2,362 |
|
$ |
1,365 |
|
$ |
1,500 |
|
$ |
- |
|
$ |
2,166 |
|
$ |
41,709 |
|
Commercial real estate property expenditures |
|
$ |
23,049 |
|
$ |
22,393 |
|
$ |
207 |
|
$ |
2,745 |
|
$ |
141 |
|
$ |
343 |
|
$ |
109 |
|
$ |
34,092 |
|
$ |
1,100 |
|
$ |
84,179 |
|
Segment assets at March 31, 2005 |
|
$ |
793,325 |
|
$ |
439,147 |
|
$ |
100,636 |
|
$ |
98,299 |
|
$ |
82,719 |
|
$ |
69,419 |
|
$ |
67,631 |
|
$ |
34,092 |
|
$ |
113,652 |
|
$ |
1,798,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Three Months Ended March 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Revenues |
|
$ |
25,278 |
|
$ |
10,886 |
|
$ |
2,506 |
|
$ |
124 |
|
$ |
4,679 |
|
$ |
1,555 |
|
$ |
2,243 |
|
$ |
- |
|
$ |
1,700 |
|
$ |
48,971 |
|
Property operating expenses |
|
8,125 |
|
3,312 |
|
40 |
|
33 |
|
1,486 |
|
598 |
|
742 |
|
- |
|
703 |
|
$ |
15,039 |
|
|||||||||
NOI |
|
$ |
17,153 |
|
$ |
7,574 |
|
$ |
2,466 |
|
$ |
91 |
|
$ |
3,193 |
|
$ |
957 |
|
$ |
1,501 |
|
$ |
- |
|
$ |
997 |
|
$ |
33,932 |
|
Commercial real estate property expenditures |
|
$ |
29,761 |
|
$ |
3,064 |
|
$ |
179 |
|
$ |
48,531 |
|
$ |
233 |
|
$ |
26,489 |
|
$ |
195 |
|
$ |
- |
|
$ |
359 |
|
$ |
108,811 |
|
Segment assets at March 31, 2004 |
|
$ |
700,417 |
|
$ |
265,400 |
|
$ |
101,835 |
|
$ |
52,092 |
|
$ |
83,757 |
|
$ |
70,388 |
|
$ |
68,922 |
|
$ |
- |
|
$ |
89,199 |
|
$ |
1,432,010 |
|
15
The following table reconciles our segment revenues to total revenues as reported on our Consolidated Statements of Operations:
|
|
For the Three Months Ended |
|
||||
|
|
2005 |
|
2004 |
|
||
Segment revenues |
|
$ |
60,627 |
|
$ |
48,971 |
|
Construction contract revenues |
|
15,728 |
|
6,137 |
|
||
Other service operations revenues |
|
1,369 |
|
1,515 |
|
||
Total revenues |
|
$ |
77,724 |
|
$ |
56,623 |
|
The following table reconciles our NOI for reportable segments to income from continuing operations as reported on our Consolidated Statements of Operations:
|
|
For the Three Months Ended March 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
NOI for reportable segments |
|
$ |
41,709 |
|
$ |
33,932 |
|
Construction contract revenues |
|
15,728 |
|
6,137 |
|
||
Other service operations revenues |
|
1,369 |
|
1,515 |
|
||
Gain (loss) on sales of real estate |
|
24 |
|
(222 |
) |
||
Equity in loss of unconsolidated entities |
|
|
|
(88 |
) |
||
Income tax expense |
|
(457 |
) |
(200 |
) |
||
Less: |
|
|
|
|
|
||
Depreciation and other amortization associated with real estate operations |
|
(14,666 |
) |
(10,359 |
) |
||
Construction contract expenses |
|
(14,897 |
) |
(5,818 |
) |
||
Other service operations expenses |
|
(1,291 |
) |
(1,092 |
) |
||
General and administrative expenses |
|
(3,276 |
) |
(2,286 |
) |
||
Interest expense |
|
(13,358 |
) |
(10,262 |
) |
||
Amortization of deferred financing costs |
|
(396 |
) |
(859 |
) |
||
Minority interests |
|
(1,449 |
) |
(1,405 |
) |
||
Income from continuing operations |
|
$ |
9,040 |
|
$ |
8,993 |
|
The accounting policies of the segments are the same as those previously disclosed for Corporate Office Properties Trust and subsidiaries, where applicable. We did not allocate gain (loss) 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 construction contract revenues, other service operations revenues, construction contract expenses, other service operations expenses, equity in loss of unconsolidated entities, general and administrative expense, income taxes and minority interests because these items represent general corporate items not attributable to segments.
COMIs provision for income tax expense consisted of the following:
|
|
For the Three Months |
|
||||
|
|
2005 |
|
2004 |
|
||
Deferred |
|
|
|
|
|
||
Federal |
|
374 |
|
165 |
|
||
State |
|
83 |
|
35 |
|
||
Total |
|
$ |
457 |
|
$ |
200 |
|
16
Items contributing to temporary differences that lead to deferred taxes include net operating losses that are not deductible until future periods, depreciation and amortization, certain accrued compensation and compensation paid in the form of contributions to a deferred nonqualified compensation plan.
COMIs combined Federal and state effective tax rate was 39% for the three months ended March 31, 2005 and 40% for the three months ended March 31, 2004.
In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. Management does not anticipate that any liabilities that may result will have a materially adverse effect on our financial position, operations or liquidity. We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.
Acquisition
As of March 31, 2005, we were under contract to acquire a land parcel in Linthicum, Maryland for $841. We were also under contract to acquire two buildings and an adjacent land parcel in Rockville, Maryland for $43,300; we acquired these properties on April 7, 2005.
In addition, as of March 31, 2005, we were under contract to acquire a property in Washington County, Maryland for $9,000, subject to potential future reductions ranging from $750 to $4,000; the amount of such decrease will be determined based on defined levels of job creation resulting from the future development of the property taking place. Upon completion of this acquisition, we will be obligated to incur $7,500 in development and construction costs for the property over approximately five years.
Property Sales
As of March 31, 2005, we were under contract to sell two properties, each owned by consolidated real estate joint ventures, for an aggregate of approximately $7,500. These property sales will take place upon our completion of construction of new buildings on each of the properties.
Joint Ventures
We may be required to make additional unilateral capital contributions to Route 46 Partners, LLC of up to $320 to fund our partners preferred return. We may also be required to fund leasing commissions associated with leasing space in this joint ventures building to the extent such commissions exceed a defined amount; we do not expect that any such funding, if required, will be material to us. In addition, we agreed to unilaterally loan the joint venture an additional $100 in the event that funds are needed by the entity.
We may need to make our pro rata share of additional investments in our real estate joint ventures (generally based on our percentage ownership) in the event that additional funds are needed. In the event that the other members of these joint ventures do not pay their share of investments when additional funds are needed, we may then need to make even larger investments in these joint ventures.
In the three consolidated joint ventures that we owned as of March 31, 2005, we would be obligated to acquire the other members interest in each of the joint ventures (20% in the case of one and 50% each in the case of two) if defined events were to occur. The amount we would need to pay for those membership interests is computed based on the amount that the owners of those interests would receive under the joint venture agreements in the event that office properties owned by the respective joint ventures were sold for a
17
capitalized fair value (as defined in the agreements) on a defined date. We estimate the aggregate amount we would need to pay for our partners membership interests in these joint ventures to be $2,067; however, since the determination of this amount is dependent on the operations of the office properties and none of the properties are both completed and occupied, this estimate is preliminary and could be materially different from the actual obligation.
Operating Leases
We are obligated as lessee under five operating leases for office space. Future minimum rental payments due under the terms of these leases as of March 31, 2005 follow:
2005 |
|
$ |
464 |
|
2006 |
|
364 |
|
|
2007 |
|
80 |
|
|
2008 |
|
70 |
|
|
2009 |
|
11 |
|
|
|
|
$ |
989 |
|
Land Leases
At March 31, 2005, we were obligated under leases for two parcels of land, both of which are being held for future development. These leases provide for monthly rent through April 2079. Future minimum rental payments due under the terms of these leases as of March 31, 2005 follow:
2005 |
|
$ |
18 |
|
2006 |
|
12 |
|
|
2007 |
|
12 |
|
|
2008 |
|
12 |
|
|
2009 |
|
12 |
|
|
Thereafter |
|
832 |
|
|
|
|
$ |
898 |
|
The owners of these land parcels contributed them to the Operating Partnership in exchange for 142,776 common units in the Operating Partnership on April 18, 2005. The common units were valued at $3,698. At the time of the contribution, the leases were terminated.
Other Operating Leases
We are obligated under various leases for vehicles and office equipment. Future minimum rental payments due under the terms of these leases as of March 31, 2005 follow:
2005 |
|
$ |
259 |
|
2006 |
|
282 |
|
|
2007 |
|
181 |
|
|
2008 |
|
92 |
|
|
2009 |
|
9 |
|
|
Thereafter |
|
5 |
|
|
|
|
$ |
828 |
|
19. Pro Forma Financial Information
We accounted for our 2004 and 2005 acquisitions using the purchase method of accounting. We included the results of operations for the acquisitions in our Consolidated Statements of Operations from their respective purchase dates through March 31, 2005.
18
We prepared our pro forma condensed consolidated financial information presented below as if all of our 2004 and 2005 acquisitions and dispositions of operating properties had occurred at the beginning of the respective periods. The pro forma financial information is unaudited and is not necessarily indicative of the results that actually would have occurred if these acquisitions and dispositions had occurred at the beginning of the respective periods, nor does it intend to indicate our results of operations for future periods.
|
|
For the Three Months |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Pro forma total revenues |
|
$ |
77,724 |
|
$ |
63,982 |
|
Pro forma net income |
|
$ |
9,040 |
|
$ |
9,457 |
|
Pro forma net income available to common shareholders |
|
$ |
5,386 |
|
$ |
5,001 |
|
Pro forma earnings per common share on net income available to common shareholders |
|
|
|
|
|
||
Basic |
|
$ |
0.15 |
|
$ |
0.17 |
|
Diluted |
|
$ |
0.14 |
|
$ |
0.16 |
|
20. Subsequent Events
As previously discussed, on April 7, 2005, we acquired two buildings totaling 221,702 square feet and an adjacent 9.7 acre parcel of land located in Rockville, Maryland (Rockville, Maryland is part of the Suburban Maryland region). We acquired the properties for a contract price of $43,300.
On April 7, 2005, we entered into a forward starting swap at a fixed rate of 5.0244% on a notional amount of $73,400. We obtained this swap to lock in the 10-year LIBOR swap rate in contemplation of our obtaining a long-term, fixed rate financing later in 2005. The swap goes into effect in July 2005 and expires in July 2015. We expect to cash settle the swap at the time we lock the rate on a long-term, fixed rate financing. If the 10-year LIBOR swap rate is below 5.0244% at the time we cash settle the swap, we would be required to make a payment to the swap counter-party; if the 10-year LIBOR swap rate is above 5.0244% at the time we cash settle the swap, we would receive a payment from the swap counter-party. The amount that we either pay or receive would be equal to the present value of the basis point differential between 5.0244% and the 10-year LIBOR swap rate at the time we cash settle the swap. This swap is a highly effective cash flow hedge under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.
On April 11, 2005, we executed a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.8 million square feet of office space on 63 acres of land located in Hanover, Maryland (located in the Baltimore/Washington Corridor). Under the contribution agreement, we agreed to fund up to $2,200 in pre-construction costs associated with the property. As we and the joint venture partner agree to proceed with the construction of buildings in the future, we would make additional cash capital contributions into newly-formed entities and our joint venture partner would contribute land into such entities. We have a 50% interest in this joint venture relationship.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Corporate Office Properties Trust (COPT) and subsidiaries (collectively, the Company) is a real estate investment trust, or REIT, that focuses on the ownership, management, leasing, acquisition and development of suburban office properties. We typically focus our operations geographically in select submarkets that are attractive to our tenant base and in which we believe we can establish a critical mass of square footage. At March 31, 2005, all of our operating properties were located in the Mid-Atlantic region of the United States, although in accordance with our strategy of focusing on submarkets that are attractive to our tenants, we may from time to time seek to expand our operations outside of that region. We conduct our real estate ownership activity through our operating partnership, Corporate Office Properties, L.P. (the Operating Partnership), for which we are the sole general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies. The Operating Partnership also owns an entity through which we provide real estate-related services that include (1) property management, (2) construction and development management and (3) heating and air conditioning services and controls. The number of operating properties in our portfolio totaled 145 as of March 31, 2005 and December 31, 2004.
During the three months ended March 31, 2005, we:
experienced increased revenues, operating expenses and earnings from real estate operations due primarily to the addition of properties through acquisition and construction activities since January 1, 2004;
experienced increased revenue from Same-Office Properties of $1.1 million, or 2%, and increased operating expenses from those properties of $1.7 million, or 11%;
finished the period with occupancy for our portfolio of properties at 92.4%;
renewed 80.3% of the square footage under leases expiring during the period; and
entered the San Antonio, Texas market with our acquisition for $30.7 million of two buildings. These buildings are 100% leased but are initially undergoing redevelopment that is expected to be completed by the fourth quarter of 2005.
In this section, we discuss our financial condition and results of operations as of and for the three months ended March 31, 2005. This section includes discussions on, among other things:
our results of operations and why various components of our Consolidated Statements of Operations changed for the three months ended March 31, 2005 compared to the same period in 2004;
how we raised cash for acquisitions and other capital expenditures during the three months ended March 31, 2005;
our cash flows;
how we expect to generate cash for short and long-term capital needs;
our off-balance sheet arrangements in place that are reasonably likely to affect our financial condition, results of operations and liquidity;
our commitments and contingencies; and
the computation of our Funds from Operations for the three months ended March 31, 2005 and 2004.
You should refer to our Consolidated Financial Statements and Selected Financial Data table as you read this section.
This section contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as may, will, should, expect, estimate or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even
20
anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
our ability to borrow on favorable terms;
general economic and business conditions, which will, among other things, affect office property demand and rents, tenant creditworthiness, interest rates and financing availability;
adverse changes in the real estate markets, including, among other things, increased competition with other companies;
risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development and operating costs may be greater than anticipated;
risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
governmental actions and initiatives; and
environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
21
Corporate Office Properties Trust and Subsidiaries
Operating Data Variance Analysis
(Dollars for this table are in thousands, except per share data)
|
|
For the Three Months Ended March 31, |
|
|||||||||
|
|
2005 |
|
2004 |
|
Variance |
|
% Change |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|||
Rental revenue |
|
$ |
53,263 |
|
$ |
43,194 |
|
$ |
10,069 |
|
23 |
% |
Tenant recoveries and other real estate operations revenue |
|
7,364 |
|
5,777 |
|
1,587 |
|
27 |
% |
|||
Construction contract revenues |
|
15,728 |
|
6,137 |
|
9,591 |
|
156 |
% |
|||
Other service operations revenues |
|
1,369 |
|
1,515 |
|
(146 |
) |
(10 |
)% |
|||
Total revenues |
|
77,724 |
|
56,623 |
|
21,101 |
|
37 |
% |
|||
Expenses |
|
|
|
|
|
|
|
|
|
|||
Property operating |
|
18,918 |
|
15,039 |
|
3,879 |
|
26 |
% |
|||
Depreciation and other amortization associated with real estate operations |
|
14,666 |
|
10,359 |
|
4,307 |
|
42 |
% |
|||
Construction contract expenses |
|
14,897 |
|
5,818 |
|
9,079 |
|
156 |
% |
|||
Other service operations expenses |
|
1,291 |
|
1,092 |
|
199 |
|
18 |
% |
|||
General and administrative expense |
|
3,276 |
|
2,286 |
|
990 |
|
43 |
% |
|||
Total operating expenses |
|
53,048 |
|
34,594 |
|
18,454 |
|
53 |
% |
|||
Operating income |
|
24,676 |
|
22,029 |
|
2,647 |
|
12 |
% |
|||
Interest expense and amortization of deferred financing costs |
|
(13,754 |
) |
(11,121 |
) |
(2,633 |
) |
24 |
% |
|||
Gain (loss) on sales of real estate |
|
24 |
|
(222 |
) |
246 |
|
N/A |
|
|||
Equity in loss of unconsolidated entities |
|
|
|
(88 |
) |
88 |
|
(100 |
)% |
|||
Income tax expense |
|
(457 |
) |
(200 |
) |
(257 |
) |
129 |
% |
|||
Income from continuing operations before minority interests |
|
10,489 |
|
10,398 |
|
91 |
|
1 |
% |
|||
Minority interests |
|
(1,449 |
) |
(1,405 |
) |
(44 |
) |
3 |
% |
|||
Net income |
|
9,040 |
|
8,993 |
|
47 |
|
1 |
% |
|||
Preferred share dividends |
|
(3,654 |
) |
(4,456 |
) |
802 |
|
(18 |
)% |
|||
Net income available to common shareholders |
|
$ |
5,386 |
|
$ |
4,537 |
|
$ |
849 |
|
19 |
% |
Basic earnings per common share |
|
$ |
0.15 |
|
$ |
0.15 |
|
$ |
|
|
|
|
Diluted earnings per common share |
|
$ |
0.14 |
|
$ |
0.14 |
|
$ |
|
|
|
|
22
Results of Operations
While reviewing this section, you should refer to the Operating Data Variance Analysis table set forth on the preceding page, as it reflects the computation of the variances described in this section.
Occupancy and leasing
The table below sets forth certain occupancy and leasing information:
|
|
March 31, |
|
December 31, |
|
||
Total rentable square feet (in thousands) |
|
11,982 |
|
11,978 |
|
||
Occupancy for portfolio of properties |
|
92.4 |
% |
94.0 |
% |
||
Average contractual rental rate per square foot (1) |
|
$ |
20.68 |
|
$ |
20.32 |
|
Weighted average lease term (in years) |
|
4.9 |
|
4.9 |
|
||
(1) Includes estimated expense reimbursements.
The decrease in occupancy from December 31, 2004 to March 31, 2005 is attributable primarily to an early lease termination involving 143,000 square feet in one of our buildings that occurred during the period. We were able to renew 80.3% of the square footage under leases scheduled to expire in the three months ended March 31, 2005 (excluding the effect of early lease terminations).
23
Concentration of leases with certain tenants
The following schedule lists our 20 largest tenants based on percentage of portfolio annualized rental revenue:
|
|
Percentage of Portfolio |
|
||
Tenant |
|
March 31, |
|
December 31, |
|
|
|
|
|
|
|
United States of America |
|
13.3 |
% |
13.1 |
% |
Booz Allen Hamilton, Inc. |
|
5.0 |
% |
5.4 |
% |
Computer Sciences Corporation (1) |
|
5.0 |
% |
5.2 |
% |
General Dynamics Corporation |
|
3.9 |
% |
3.7 |
% |
Titan Corporation (1) |
|
3.7 |
% |
3.9 |
% |
Northrop Grumman Corporation |
|
3.6 |
% |
3.6 |
% |
Unisys (2) |
|
3.4 |
% |
3.4 |
% |
AT&T Corporation (1) |
|
3.0 |
% |
4.2 |
% |
The Aerospace Corporation |
|
2.5 |
% |
2.2 |
% |
Wachovia Bank |
|
2.3 |
% |
2.3 |
% |
VeriSign, Inc. |
|
2.0 |
% |
1.4 |
% |
The Boeing Company (1) |
|
1.8 |
% |
1.8 |
% |
Ciena Corporation |
|
1.4 |
% |
1.4 |
% |
Commonwealth of Pennsylvania (1) |
|
1.3 |
% |
1.3 |
% |
Magellan Health Services, Inc. |
|
1.2 |
% |
1.1 |
% |
PricewaterhouseCoopers LLP |
|
1.2 |
% |
1.3 |
% |
Johns Hopkins University (1) |
|
1.1 |
% |
1.1 |
% |
Merck & Co., Inc. (2) |
|
1.0 |
% |
1.0 |
% |
Carefirst, Inc. and Subsidiaries (1) |
|
1.0 |
% |
1.0 |
% |
BAE Systems |
|
1.0 |
% |
1.0 |
% |
Subtotal of 20 largest tenants |
|
58.7 |
% |
59.4 |
% |
All remaining tenants |
|
41.3 |
% |
40.6 |
% |
Total |
|
100.0 |
% |
100.0 |
% |
(1) Includes affiliated organizations and agencies.
(2) Unisys subleases space to Merck and Co., Inc.; revenue from this subleased space is classified as Merck & Co., Inc. revenue.
Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio of properties as of a point in time. Portfolio annualized rental revenue is annualized rental revenue for our entire portfolio of properties as of a point in time, including both consolidated properties and properties owned through unconsolidated real estate joint ventures. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it does not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical revenue under generally accepted accounting principles (GAAP) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis.
Most of the leases with the United States Government provide for a series of one-year terms or provide for early termination rights. The government may terminate its leases if, among other reasons, the United States Congress fails to provide funding.
24
Revenues from real estate operations and property operating expenses
We view our changes in revenues from real estate operations and property operating expenses as comprising two main components:
Changes attributable to the operations of properties owned and 100% operational throughout the two periods being compared. We define these as changes from Same-Office Properties. For example, when comparing the first quarters of 2004 and 2005, Same-Office Properties would be properties owned and 100% operational from January 1, 2004 through March 31, 2005.
Changes attributable to operating properties acquired during or in between the two periods being compared and newly-constructed properties that were placed into service and not 100% operational throughout the two periods being compared. We define these as changes from Property Additions.
The table below sets forth the components of our changes in revenues from real estate operations and property operating expenses (dollars in thousands):
|
|
Property Additions |
|
Same-Office Properties |
|
Other |
|
Total |
|
||||||
|
|
Dollar |
|
Dollar |
|
Percentage |
|
Dollar |
|
Dollar |
|
||||
|
|
Change (1) |
|
Change |
|
Change |
|
Change (2) |
|
Change |
|
||||
Revenues from real estate operations |
|
|
|
|
|
|
|
|
|
|
|
||||
Rental revenue |
|
$ |
10,058 |
|
$ |
156 |
|
0 |
% |
$ |
(145 |
) |
$ |
10,069 |
|
Tenant recoveries and other real estate operations revenue |
|
644 |
|
934 |
|
16 |
% |
9 |
|
$ |
1,587 |
|
|||
Total |
|
$ |
10,702 |
|
$ |
1,090 |
|
2 |
% |
$ |
(136 |
) |
$ |
11,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property operating expenses |
|
$ |
3,074 |
|
$ |
1,660 |
|
11 |
% |
$ |
(855 |
) |
$ |
3,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Straight-line rental revenue adjustments included in rental revenue |
|
$ |
827 |
|
$ |
(17 |
) |
N/A |
|
$ |
2 |
|
$ |
812 |
|
Amortization of deferred market rental revenue |
|
$ |
(85 |
) |
$ |
(154 |
) |
N/A |
|
$ |
|
|
$ |
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of operating properties included in component category |
|
25 |
|
119 |
|
N/A |
|
N/A |
|
144 |
|
(1) Includes 22 acquired properties and three newly-constructed properties.
(2) Includes, among other things, the effects of amounts eliminated in consolidation. Certain amounts eliminated in consolidation are attributable to the Property Additions and Same-Office Properties.
As the table above indicates, our total increase in revenues from real estate operations and property operating expenses was attributable primarily to the Property Additions.
The increase in rental revenue from the Same-Office Properties includes a decrease of $1.3 million in net revenue from the early termination of leases, $1.5 million of which was attributable to one property. To explain further, when tenants terminate their lease obligations prior to the end of the agreed lease terms, they typically pay fees to break these obligations. We recognize such fees as revenue and write off against such revenue any (1) deferred rents receivable and (2) deferred revenue and deferred assets that are amortizable into rental revenue associated with the leases; the resulting net amount is the net revenue from the early termination of the leases. Rental revenue excluding net revenue from the early termination of leases increased $1.5 million, or 3.7%.
The increase in the Same-Office Properties property operating expenses included the following:
25
an increase of $1.0 million, or 43.3%, in utilities due primarily to (1) rate increases that we believe is the result of (a) increased oil prices and (b) energy deregulation in Maryland and (2) our assumption of responsibility for payment of utilities at certain properties due to changes in occupancy; and
an increase of $604,000, or 48.4%, in snow removal due to greater snow and ice precipitation in the current period.
Income from service operations
The table below sets forth changes in revenues and expenses from our service operations (dollars in thousands):
|
|
Changes between three months periods |
|
|||||||
|
|
Construction |
|
Other |
|
Total dollar |
|
|||
Service operations |
|
|
|
|
|
|
|
|||
Revenues |
|
$ |
9,591 |
|
$ |
(146 |
) |
$ |
9,445 |
|
Expenses |
|
9,079 |
|
199 |
|
9,278 |
|
|||
Income from service operations |
|
$ |
512 |
|
$ |
(345 |
) |
$ |
167 |
|
The increase in construction contract revenue and expenses was attributable primarily to a large volume of activity for certain existing contracts during the current period. We earned $831,000 in income from construction contracts (defined as construction contract revenues less construction contract expenses) in the current period; $543,000 of this income was attributable to three construction contracts.
Depreciation and amortization
Of the $4.3 million increase in our depreciation and other amortization expense, $2.6 million was attributable to the Property Additions and $1.6 million was attributable to the Same-Office Properties, a 16.0% increase for such properties. The increase attributable to the Same-Office Properties included, among other things, depreciation of additional capital improvements.
General and administrative expenses
General and administrative expenses increased $990,000, or 43%. Approximately $900,000 of this increase was due to increased compensation expenses; the increase in compensation expenses was attributable primarily to additional employee positions, increased salaries and bonus expense for existing employees and a $250,000 bonus paid to Clay W. Hamlin, III, our former Chief Executive Officer, in connection with his retirement.
Interest expense and amortization of deferred financing costs