Exhibit 99.1

 

Supplemental Information

(Unaudited)

 

 

June 30, 2005

 

 

 

 

Corporate Office Properties Trust

Index to Supplemental Information (Unaudited)

June 30, 2005

 

Highlights and Discussion
Reporting Period Highlights – Second Quarter 2005	1
Forward-Looking Statements	3
Financial Statements
Quarterly Selected Financial Summary Data	5
Quarterly Consolidated Balance Sheets	6
Quarterly Consolidated Statements of Operations	7
Quarterly Consolidated Reconciliations of Funds From Operations (FFO), Adjusted Funds From Operations (AFFO) and Earnings per diluted share, as adjusted	8
Quarterly Consolidated Reconciliations of Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA), Combined Net Operating Income (NOI), Discontinued Operations and Gains on Sales of Real Estate	9
Selected Financial Analyses
Quarterly Equity Analysis	10
Quarterly Debt Analysis	11
Quarterly Operating Ratios	12
Quarterly Dividend Analysis	13
Investor Composition and Analyst Coverage	14
Debt Maturity Schedule – June 30, 2005	15
Portfolio Summary
Property Summary by Region – June 30, 2005	16
Property Occupancy Rates by Region by Quarter	20
Top Twenty Office Tenants as of June 30, 2005	21
Combined Real Estate Revenue and Combined Net Operating Income by Geographic Region by Quarter	22
Same Office Property Cash and GAAP Net Operating Income by Quarter	23
Average Occupancy Rates by Region for Same Office Properties	24
Office Lease Expiration Analysis by Year	25
Office Renewal Analysis as of June 30, 2005	26
Year to Date Acquisition Summary as of June 30, 2005	27
Development Summary as of June 30, 2005	28
Land Inventory as of June 30, 2005	29
Joint Venture Summary as of June 30, 2005	30
Reconciliations of Non GAAP Measurements	31

 

 

To Members of the Investment Community:

 

We prepared this supplemental information package to provide you with additional detail on our properties and operations.  The information in this package is unaudited, furnished to the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our quarterly and annual reports.  If you have any questions or comments, please contact Ms. Mary Ellen Fowler, Vice President, Finance and Investor Relations at (410) 992-7324 or maryellen.fowler@copt.com.  Reconciliations between GAAP and non-GAAP measurements have been provided on page 31.  Refer to our Form 8-K for definitions of certain terms used herein.

 

Reporting Period Highlights – Second Quarter 2005

 

Financial Results

 

•      Reported Net Income Available to Common Shareholders of $5,466,000 or $.14 per diluted share for the second quarter of 2005 as compared to $4,408,000 or $.13 per diluted share for the comparable 2004 period, representing an increase of 7.7% per share.

 

•      Reported FFO – diluted of $21,834,000 or $.47 per share/unit for the second quarter of 2005 as compared to $21,410,000 or $.50 per share/unit for the comparable 2004 period, representing a decrease of (6.0%) per share/unit.  During the second quarter 2004, we realized an approximate $4 million lease termination fee or $.09 per share for a partial termination of VeriSign space at our 13200 Woodland Park Road building in Northern Virginia.

 

•      Reported AFFO – diluted of $16,981,000 for the second quarter of 2005 as compared to $13,956,000 for the comparable 2004 period, representing an increase of 21.7%. 

 

•      Our FFO payout ratio was 53.1% for the second quarter of 2005 as compared to 46.4% for the comparable 2004 period.  Our AFFO payout ratio was 68.2% for the second quarter of 2005 as compared to 71.2% for the comparable 2004 period. 

 

Financing Activity and Capital Transactions

 

•      On June 24, 2005, we raised our borrowing capacity in our unsecured line of credit from $300 million to $400 million, with a right to further increase to $600 million.  Additionally, the maturity date was extended to March 9, 2008, with the right to extend for an additional one year period, subject to certain conditions.

 

•      We closed on a $44.0 million credit facility to fund the construction of two buildings in our National Business Park.  We have borrowed $12.6 million as of June 30, 2005.

 

•      We executed a $73.4 million notional amount forward swap at a fixed rate of 5.0244%, which commences in July 2005 and expires in July 2015.

 

•      As of June 30, 2005, our debt to market capitalization was 43.5% and our debt to undepreciated book value of real estate assets was 61.3%.  We achieved an EBITDA interest coverage ratio of 2.91x and an EBITDA fixed charge coverage ratio of 2.28x for this quarter.

 

Acquisitions / Dispositions

 

•      On April 7, 2005 we acquired, for $43.3 million, two office buildings containing 221,702 square feet and an adjacent 9.7 acres of land for future development that will support 215,000 square feet in Rockville, Maryland.  We funded this purchase with proceeds from a $55.0 million bridge loan, subsequently increased to $77.0 million, and then repaid on June 24, 2005 when we amended our unsecured line of credit.

 

1

 

•      On April 18, 2005, we reacquired our membership interest in 6711 Gateway, LLC and Airport Square XXII in exchange for 142,776 common units valued at $3.7 million.

 

•      On June 14, 2005, we acquired 27 acres of land for $5.9 million, which can accommodate 350,000 developable square feet.  This land parcel is located in San Antonio, Texas, adjacent to our existing portfolio.

 

•      We executed a contract to sell three properties within our New Jersey portfolio for $22.8 million and anticipate closing to occur in the third quarter of 2005.  The operations from these properties have been classified as discontinued operations.

 

Development /Joint Venture

 

•      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 (known as Arundel Preserve) located in Hanover, Maryland, in the Baltimore/Washington Corridor. Under the contribution agreement, we agreed to fund up to $2.2 million in pre-construction costs associated with the property.  We will have a 50% interest in the joint venture relationship.

 

•      On June 9, 2005, we acquired the remaining 20% interest in the Gateway 70 joint venture for $1.2 million.  Gateway 70 includes an 85,106 rentable square foot building under construction in Columbia Gateway Business Park and an adjacent land parcel.  On June 10, 2005, we sold the adjacent land parcel for $2.6 million and realized a gain of $186,000.

 

Operations

 

•      Overall occupancy was 92.92%, up from 92.44% at March 31, 2005, and our portfolio was 93.75% leased as of June 30, 2005.

 

•      Our same property cash NOI decreased by (6.1%) or $2.2 million as compared to the quarter ended June 30, 2004.  The primary driver of the decrease in cash NOI for our same office portfolio as compared to second quarter of 2004, among other effects, was a drop of $5.0 million in lease termination fees offset by an increase of $3.1 million in rental revenues.  In our Northern Virginia same office portfolio, we realized a drop of $4.2 million in lease termination fees associated with a partial lease buyout in our 13200 Woodland Park Road property, which was partially offset by increased rental revenues for that property of $1.4 million, as compared to the second quarter of 2004.  Our same property portfolio consists of 128 properties and represents 85.7% of our total square feet owned as of June 30, 2005.  (Note: For purposes of this bullet only, the term “revenues” excludes those items deducted from GAAP NOI to compute cash NOI.)

 

•      Weighted average lease term of our office portfolio is 4.8 years as of June 30, 2005, with an average contractual rental rate (including tenant reimbursements of operating costs) of $20.61 per square foot.

 

•      We renewed 208,400 square feet, or 64.0%, of our expiring office leases (based upon square footage) with an average committed cost of $4.44 per square foot during the second quarter.  For our renewed and retenanted space of approximately 320,311 square feet, we realized an increase in total rent of 5.5%, as measured from the GAAP straight-line rent in effect preceding the renewal date and a decrease of (0.3%) in total cash rent.  We incurred an average committed cost of $9.28 per square foot for our renewed and retenanted space in the second quarter.

 

2

 

Subsequent Events:

 

•      On July 8, 2005, we paid $7.6 million in cash and issued 89,879 common units valued at $2.4 million in exchange for 63.9 acres of land held for development and a 50,000 square foot build-to-suit opportunity located on 4.9 acres of the land.  The 59 acre parcel can support 650,000 square feet of development and the build-to-suit is 100% leased. This purchase marks our entry into the East submarket of Colorado Springs, Colorado, which supports Peterson Air Force Base.  This acquisition represents our second expansion city announced this year.

 

•      On July 11, 2005, we closed a $36.0 million bridge loan, which matures in October 2005, unless extended to January 2006.

 

•      On July 21, 2005, we executed a ten year lease for 61,038 square feet with Applied Signal Technology, Inc. at our development property located at 306 Carina Road (known as 306 NBP).

 

Forward-Looking Statements

 

This supplemental information contains “forward-looking” statements, as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on our current expectations, estimates and projections about future events and financial trends affecting us.  Forward-looking statements can be identified by the use of words such as “may”, “will”, “should”, “expect”, “estimate” or other comparable terminology.  Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate.  Accordingly, 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;

 

•      risk of real estate acquisition and development, 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 or 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

 

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•      environmental requirements.

 

We undertake no obligation to update or supplement any forward-looking statements.  For further information, please refer to our filings with the Securities and Exchange Commission, particularly the section entitled “Risk Factors” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2004.

 

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Quarterly Selected Financial Summary Data

(Dollars in thousands)

 

		2005						2004
		June 30			March 31			December 31			September 30			June 30
Revenues from Real Estate Operations		$	60,186		$	59,705		$	57,776		$	52,276		$	53,091
Total Revenues		78,650			76,802			65,491			59,742			59,161
Combined Net Operating Income		43,133			41,709			41,444			36,900			39,245
EBITDA		40,463			39,366			38,439			34,713			37,020
Net Income		9,120			9,040			9,446			9,750			8,843
Preferred Share dividends		(3,654		)	(3,654		)	(3,654		)	(3,784		)	(4,435		)
Issuance costs associated with redeemed preferred shares		—			—			—			(1,813		)	—
Net Income Available to Common Shareholders		$	5,466		$	5,386		$	5,792		$	4,153		$	4,408
Earnings per diluted share		$	0.14		$	0.14		$	0.15		$	0.12		$	0.13
Earnings per diluted share, as adjusted for issuance costs associated with redeemed preferred shares		$	0.14		$	0.14		$	0.15		$	0.17		$	0.13
Funds From Operations (FFO) - Diluted		$	21,834		$	21,143		$	20,879		$	17,368		$	21,410
FFO per diluted share		$	0.47		$	0.45		$	0.45		$	0.39		$	0.50
FFO per diluted share, as adjusted for issuance costs associated with redeemed preferred shares		$	0.47		$	0.45		$	0.45		$	0.43		$	0.50
Adjusted FFO - Diluted		$	16,981		$	14,756		$	13,164		$	11,759		$	13,956
Payout Ratios:
Earnings Payout		171.6		%	173.4		%	160.4		%	222.4		%	178.7		%
FFO - Diluted		53.1		%	54.5		%	55.4		%	65.9		%	46.4		%
AFFO - Diluted		68.2		%	78.1		%	87.9		%	97.3		%	71.2		%
Total Dividends/Distributions		$	15,405		$	15,337		$	15,286		$	15,235		$	14,370

 

Note:  The above presentation does not separately report discontinued operations.

 

5

 

Quarterly Consolidated Balance Sheets

(Dollars in thousands except per share data)

 

		2005								2004
		June 30				March 31				December 31				September 30				June 30
Assets
Investment in real estate:
Land - operational		$		274,531		$		268,307		$		268,327		$		260,197		$		236,026
Land - development		108,320				97,085				74,190				75,925				70,407
Construction in progress		138,337				109,345				61,962				49,453				51,387
Buildings and improvements		1,333,526				1,294,457				1,280,537				1,231,518				1,091,865
Investment in and advances to unconsolidated real estate joint ventures		1,233				1,209				1,201				1,094				1,055
Less:  accumulated depreciation		(165,101			)	(153,127			)	(141,716			)	(131,018			)	(121,630			)
Net investment in real estate		1,690,846				1,617,276				1,544,501				1,487,169				1,329,110
Cash and cash equivalents		21,486				6,212				13,821				6,812				12,202
Restricted cash		15,982				13,830				12,617				10,760				12,137
Accounts receivable, net		13,613				17,529				16,771				10,209				16,002
Investment in and advances to other unconsolidated entities		1,621				1,621				1,621				1,621				1,621
Deferred rent receivable		29,291				27,890				26,282				23,383				20,857
Deferred charges, net		28,662				27,168				27,642				26,407				24,006
Intangible assets on real estate acquisitions, net		66,354				64,965				67,560				67,083				53,874
Prepaid and other assets		19,501				19,658				18,646				14,703				18,380
Furniture, fixtures and equipment, net		3,092				2,771				2,565				2,579				2,512
Total assets		$		1,890,448		$		1,798,920		$		1,732,026		$		1,650,726		$		1,490,701
Liabilities and shareholders’ equity
Liabilities:
Mortgage and other loans payable		$		1,177,779		$		1,091,688		$		1,022,688		$		947,332		$		820,344
Accounts payable and accrued expenses		53,984				46,400				46,307				41,168				37,535
Rents received in advance and security deposits		13,421				13,298				12,781				11,519				11,950
Deferred revenue associated with acquired operating leases		8,092				6,612				7,247				7,670				8,335
Dividends and distributions payable		14,834				14,766				14,713				14,533				13,668
Fair value of derivatives		4,188				—				—				45				106
Other liabilities		4,024				7,661				7,488				7,115				7,105
Total liabilities		1,276,322				1,180,425				1,111,224				1,029,382				899,043
Minority interests:
Preferred units in the Operating Partnership		8,800				8,800				8,800				8,800				—
Common units in the Operating Partnership		87,439				87,539				88,355				90,029				84,844
Other consolidated real estate joint ventures		861				1,699				1,723				1,594				5,602
Total minority interests		97,100				98,038				98,878				100,423				90,446
Commitments and contingencies		—				—				—				—				—
Shareholders’ equity:
Preferred Shares ($0.01 par value; 15,000,000 authorized);
1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (no shares issued as of June 30, 2005)		—				—				—				—				13
1,265,000 designated as Series E Cumulative Redeemable Preferred Shares of beneficial interest (1,150,000 shares issued as of June 30, 2005)		11				11				11				11				11
1,425,000 designated as Series F Cumulative Redeemable Preferred Shares of beneficial interest (1,425,000 shares issued as of June 30, 2005)		14				14				14				14				14
2,200,000 designated as Series G Cumulative Redeemable Preferred Shares of beneficial interest (2,200,000 shares issued as of June 30, 2005)		22				22				22				22				22
2,000,000 designated as Series H Cumulative Redeemable Preferred Shares of beneficial interest (2,000,000 shares issued as of June 30, 2005)		20				20				20				20				20
Common Shares of beneficial interest ($0.01 par value; 75,000,000 authorized, 37,191,370 shares issued as of June 30, 2005)		372				370				368				367				340
Additional paid-in capital		586,567				582,805				578,228				573,766				550,927
Cumulative distributions in excess of net income		(59,226			)	(55,312			)	(51,358			)	(47,862			)	(44,593			)
Value of unearned restricted common share grants		(7,396			)	(7,473			)	(5,381			)	(5,381			)	(5,459			)
Accumulated other comprehensive income/(loss)		(3,358			)	—				—				(36			)	(83			)
Total shareholders’ equity		517,026				520,457				521,924				520,921				501,212
Total shareholders’ equity and minority interests		614,126				618,495				620,802				621,344				591,658
Total liabilities and shareholders’ equity		$		1,890,448		$		1,798,920		$		1,732,026		$		1,650,726		$		1,490,701

 

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Quarterly Consolidated Statements of Operations

(Dollars and units in thousands)

 

		2005						2004
		June 30			March 31			December 31			September 30			June 30
Revenues
Rental revenue		$	53,601		$	52,430		$	51,902		$	46,781		$	48,339
Tenant recoveries and other real estate operations revenue		6,585			7,275			5,874			5,495			4,752
Construction contract revenues		17,445			15,728			6,882			6,766			5,233
Other service operations revenues		1,019			1,369			833			700			837
Total Revenues		78,650			76,802			65,491			59,742			59,161
Expenses
Property operating		17,574			18,565			16,876			15,789			14,365
Depreciation and amortization associated with real estate operations		15,068			14,387			13,668			11,619			15,705
Construction contract expenses		17,223			14,897			6,453			6,483			4,979
Other service operations expenses		955			1,291			823			495			853
General and administrative expenses		3,166			3,276			3,467			2,698			2,487
Total operating expenses		53,986			52,416			41,287			37,084			38,389
Operating Income		24,664			24,386			24,204			22,658			20,772
Interest expense		(13,728		)	(13,183		)	(12,483		)	(10,668		)	(10,346		)
Amortization of deferred financing costs		(471		)	(396		)	(495		)	(577		)	(500		)
Income from continuing operations before gain/(loss) on sales of real estate, income taxes and minority interests		10,465			10,807			11,226			11,413			9,926
Gain/(loss) on sales of real estate, excluding discontinued operations		210			24			24			24			24
Income tax (expense)		(213		)	(457		)	(420		)	(145		)	(30		)
Income from continuing operations before minority interests		10,462			10,374			10,830			11,292			9,920
Minority interest in income from continuing operations Common units in the Operating Partnership		(1,307		)	(1,285		)	(1,381		)	(1,583		)	(1,203		)
Preferred units in the Operating Partnership		(165		)	(165		)	(165		)	(14		)	—
Other consolidated entities		15			24			12			8			(8		)
Income from continuing operations		9,005			8,948			9,296			9,703			8,709
Income from discontinued operations, net of minority interests		115			92			150			47			134
Net Income		9,120			9,040			9,446			9,750			8,843
Preferred share dividends		(3,654		)	(3,654		)	(3,654		)	(3,784		)	(4,435		)
Issuance costs associated with redeemed preferred shares		—			—			—			(1,813		)	—
Net Income Available to Common Shareholders		$	5,466		$	5,386		$	5,792		$	4,153		$	4,408
For EPS Computations:
Numerator for Dilutive EPS		$	5,466		$	5,386		$	5,792		$	4,153		$	4,408
Denominator:
Weighted Average Common Shares - Basic		36,692			36,555			36,296			33,797			32,743
Dilutive options		1,528			1,537			1,638			1,655			1,639
Weighted Average Common Shares - Diluted		38,220			38,092			37,934			35,452			34,382
Earnings per diluted share		$	0.14		$	0.14		$	0.15		$	0.12		$	0.13

 

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Quarterly Consolidated Reconciliations of Funds From Operations (FFO), Adjusted Funds From

Operations (AFFO) and Earnings per diluted share, as adjusted

(Dollars and shares in thousands)

 

		2005						2004
		June 30			March 31			December 31			September 30			June 30
Net Income		$	9,120		$	9,040		$	9,446		$	9,750		$	8,843
Issuance costs associated with redeemed preferred shares		—			—			—			(1,813		)	—
Combined real estate related depreciation and other amortization		15,087			14,505			13,625			11,700			15,785
Depreciation and amortization allocable to minority interests in other consol. entities		(30		)	(32		)	(30		)	(56		)	—
Gain on sale of real estate properties, excluding development		(24		)	(24		)	(24		)	(24		)	(24		)
Funds From Operations (FFO)		24,153			23,489			23,017			19,557			24,604
Minority interest - common units, gross		1,335			1,308			1,418			1,595			1,241
Preferred share dividends		(3,654		)	(3,654		)	(3,654		)	(3,784		)	(4,435		)
Funds From Operations (FFO) - Basic		21,834			21,143			20,781			17,368			21,410
Restricted share dividends		—			—			98			—			—
Funds From Operations (FFO) - Diluted		$	21,834		$	21,143		$	20,879		$	17,368		$	21,410
Straight line rent adjustments		(1,369		)	(1,583		)	(2,895		)	(2,519		)	(2,184		)
Amortization of deferred market rental revenue		(191		)	(70		)	(125		)	(224		)	(273		)
Issuance costs associated with redeemed preferred shares		—			—			—			1,813			—
Recurring capital expenditures		(3,293		)	(4,734		)	(4,695		)	(4,679		)	(4,997		)
Adjusted Funds from Operations - Diluted		$	16,981		$	14,756		$	13,164		$	11,759		$	13,956
Preferred dividends - redeemable non-convertible (1)		3,654			3,654			3,654			3,784			4,435
Preferred distributions		165			165			165			14			—
Common distributions		2,205			2,179			2,179			2,202			2,057
Common dividends		9,381			9,339			9,288			9,235			7,878
Total Dividends/Distributions		$	15,405		$	15,337		$	15,286		$	15,235		$	14,370
Denominator for earnings per share - Diluted		38,220			38,092			37,934			35,452			34,382
Common units		8,676			8,544			8,588			8,690			8,765
Denominator for funds from operations per share - Diluted		46,896			46,636			46,522			44,142			43,147
Funds From Operations (FFO) - Diluted		$	21,834		$	21,143		$	20,879		$	17,368		$	21,410
Issuance costs associated with redeemed preferred shares (1)		n/a			n/a			n/a			1,813			n/a
FFO diluted, as adjusted for issuance costs associated with redeemed preferred shares		$	21,834		$	21,143		$	20,879		$	19,181		$	21,410
Numerator for Dilutive EPS Computation		$	5,466		$	5,386		$	5,792		$	4,153		$	4,408
Issuance costs associated with redeemed preferred shares (1)		n/a			n/a			n/a			1,813			n/a
Numerator for Dilutive EPS Computation, as adjusted		$	5,466		$	5,386		$	5,792		$	5,966		$	4,408
Earnings per diluted share, as adjusted for issuance costs associated with redeemed preferred shares		$	0.14		$	0.14		$	0.15		$	0.17		$	0.13

 

(1)  Earnings per diluted share and FFO per diluted share have been adjusted to exclude the issuance costs associated with our Series B redeemed preferred shares.

 

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