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, 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

 

Corporate Office Properties Trust

(Exact name of registrant as specified in its charter)

 

Maryland		23-2947217
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes   ý No

 

On November 2, 2005, 39,590,253 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, 2005 (unaudited) and December 31, 2004 (unaudited)	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4:	Controls and Procedures	42
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	43
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3:	Defaults Upon Senior Securities	43
Item 4:	Submission of Matters to a Vote of Security Holders	43
Item 5:	Other Information	44
Item 6:	Exhibits	44
SIGNATURES		45

 

2

 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)

 

		September 30,			December 31,
		2005			2004
Assets
Investment in real estate:
Operating properties, net		$	1,421,128		$	1,407,148
Projects under construction or development		274,269			136,152
Total commercial real estate properties, net		1,695,397			1,543,300
Investments in and advances to unconsolidated real estate joint ventures		1,208			1,201
Investment in real estate, net		1,696,605			1,544,501
Cash and cash equivalents		17,348			13,821
Restricted cash		15,083			12,617
Accounts receivable, net		12,537			16,771
Investment in other unconsolidated entity		1,621			1,621
Deferred rent receivable		30,222			26,282
Intangible assets on real estate acquisitions, net		67,686			67,560
Deferred charges, net		31,420			27,642
Prepaid and other assets		25,465			18,646
Furniture, fixtures and equipment, net		3,709			2,565
Total assets		$	1,901,696		$	1,732,026
Liabilities and shareholders’ equity
Liabilities:
Mortgage and other loans payable		$	1,124,299		$	1,022,688
Accounts payable and accrued expenses		38,795			46,307
Rents received in advance and security deposits		14,191			12,781
Dividends and distributions payable		16,665			14,713
Deferred revenue associated with acquired operating leases		8,045			7,247
Distributions in excess of investment in unconsolidated real estate joint venture		2,519			—
Fair value of derivatives		1,516			—
Other liabilities		4,619			7,488
Total liabilities		1,210,649			1,111,224
Minority interests:
Common units in the Operating Partnership		98,433			88,355
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		1,297			1,723
Total minority interests		108,530			98,878
Commitments and contingencies (Note 20)
Shareholders’ equity:
Preferred Shares of beneficial interest ($0.01 par value; 15,000,000 shares authorized) (Note 14)		67			67
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued of 39,558,398 at September 30, 2005 and 36,842,108 at December 31, 2004)		396			368
Additional paid-in capital		654,024			578,228
Cumulative distributions in excess of net income		(63,256		)	(51,358		)
Value of unearned restricted common share grants		(7,318		)	(5,381		)
Accumulated other comprehensive loss		(1,396		)	—
Total shareholders’ equity		582,517			521,924
Total liabilities and shareholders’ equity		$	1,901,696		$	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 Ended September 30,						For the Nine Months Ended September 30,
		2005			2004			2005			2004
Revenues
Rental revenue		$	54,978		$	46,781		$	161,009		$	137,606
Tenant recoveries and other real estate operations revenue		8,018			5,495			21,878			15,917
Construction contract revenues		28,476			6,766			61,649			18,136
Other service operations revenues		1,308			700			3,696			3,052
Total revenues		92,780			59,742			248,232			174,711
Expenses
Property operating		19,032			15,789			55,171			44,862
Depreciation and other amortization associated with real estate operations		18,004			11,619			47,459			37,512
Construction contract expenses		28,073			6,483			60,193			17,280
Other service operations expenses		1,253			495			3,499			2,440
General and administrative expenses		3,318			2,698			9,760			7,471
Total operating expenses		69,680			37,084			176,082			109,565
Operating income		23,100			22,658			72,150			65,146
Interest expense		(14,370		)	(10,668		)	(41,281		)	(31,117		)
Amortization of deferred financing costs		(641		)	(577		)	(1,508		)	(1,936		)
Income from continuing operations before gain (loss) on sales of real estate, equity in loss of unconsolidated entities, income taxes and minority interests		8,089			11,413			29,361			32,093
Gain (loss) on sales of real estate		105			24			339			(174		)
Equity in loss of unconsolidated entities		—			—			—			(88		)
Income tax expense		(294		)	(145		)	(964		)	(375		)
Income from continuing operations before minority interests		7,900			11,292			28,736			31,456
Minority interests in income from continuing operations Common units in the Operating Partnership		(821		)	(1,583		)	(3,413		)	(4,154		)
Preferred units in the Operating Partnership		(165		)	(14		)	(495		)	(14		)
Other consolidated entities		19			8			58			—
Income from continuing operations		6,933			9,703			24,886			27,288
Income from discontinued operations, net of minority interests		3,656			47			3,863			298
Net income		10,589			9,750			28,749			27,586
Preferred share dividends		(3,653		)	(3,784		)	(10,961		)	(12,675		)
Issuance costs associated with redeemed preferred shares		—			(1,813		)	—			(1,813		)
Net income available to common shareholders		$	6,936		$	4,153		$	17,788		$	13,098
Basic earnings per common share
Income from continuing operations		$	0.09		$	0.12		$	0.38		$	0.40
Discontinued operations		0.10			—			0.10			0.01
Net income		$	0.19		$	0.12		$	0.48		$	0.41
Diluted earnings per common share
Income from continuing operations		$	0.09		$	0.12		$	0.36		$	0.38
Discontinued operations		0.09			—			0.10			0.01
Net income		$	0.18		$	0.12		$	0.46		$	0.39

 

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,
		2005			2004
Cash flows from operating activities
Net income		$	28,749		$	27,586
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests		4,806			4,255
Depreciation and other amortization		47,951			38,045
Amortization of deferred financing costs		1,508			1,936
Amortization of deferred market rental revenue		(32		)	(806		)
Equity in loss of unconsolidated entities		—			88
(Gain) loss on sales of real estate		(4,674		)	174
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(4,570		)	(5,473		)
Increase in accounts receivable, restricted cash and prepaid and other assets		(3,504		)	(1,239		)
Increase in accounts payable, accrued expenses, rents received in advance and security deposits		4,322			1,890
Other		1,666			1,608
Net cash provided by operating activities		76,222			68,064
Cash flows from investing activities
Purchases of and additions to commercial real estate properties		(279,082		)	(205,991		)
Proceeds from sales of properties		29,470			—
Proceeds from contribution of assets to unconsolidated real estate joint venture		68,646			—
Investments in and advances from (to) unconsolidated entities		36			(39		)
Leasing costs paid		(6,582		)	(7,877		)
Advances to certain real estate joint ventures		—			(515		)
Other		(2,719		)	168
Net cash used in investing activities		(190,231		)	(214,254		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		423,699			476,667
Repayments of mortgage and other loans payable		(334,890		)	(378,412		)
Deferred financing costs paid		(2,752		)	(3,371		)
Increase in other liabilities associated with financing activities		—			4,000
Acquisition of partner interest in consolidated joint venture		(1,208		)	(4,928		)
Net proceeds from issuance of common shares		78,260			121,604
Redemption of preferred shares		—			(31,250		)
Dividends paid		(38,968		)	(34,661		)
Distributions paid		(7,060		)	(6,224		)
Other		455			96
Net cash provided by financing activities		117,536			143,521
Net increase (decrease) in cash and cash equivalents		3,527			(2,669		)
Cash and cash equivalents
Beginning of period		13,821			9,481
End of period		$	17,348		$	6,812

 

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)

 

1.             Organization

 

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses on the ownership, management, leasing, acquisition and development of suburban office properties primarily in select submarkets within the Mid-Atlantic region of the United States.  We have implemented a core customer expansion strategy that is built around meeting, through acquisitions and development, the multi-location requirements of our existing strategic tenants. Our strategy is to operate in select, demographically strong submarkets where we can achieve critical mass, operating synergies and key competitive advantages, including attracting high quality tenants and securing acquisition and development opportunities.  As of September 30, 2005, our portfolio included 136 wholly owned operating office properties and 18 operating office properties that we 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, 2005 follows:

 

		% Owned by COPT
Common Units		81	%
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”).  As of September 30, 2005, COMI owned 100% of the consolidated subsidiaries that 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

 

Most of the services that CRM and CDS provide are for us.

 

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 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

 

3.             Earnings Per Share (“EPS”)

 

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 September 30,						For the Nine Months Ended September 30,
		2005			2004			2005			2004
Numerator:
Income from continuing operations		$	6,933		$	9,703		$	24,886		$	27,288
Less: Preferred share dividends		(3,653		)	(3,784		)	(10,961		)	(12,675		)
Less: Issuance costs associated with redeemed preferred shares		—			(1,813		)	—			(1,813		)
Numerator for basic EPS from continuing operations		3,280			4,106			13,925			12,800
Add: Convertible preferred share dividends		—			—			—			21
Numerator for diluted EPS from continuing operations		3,280			4,106			13,925			12,821
Add: Income from discontinued operations, net		3,656			47			3,863			298
Less: Convertible preferred share dividends		—			—			—			(21		)
Numerator for basic EPS on net income available to common shareholders		6,936			4,153			17,788			13,098
Add: Convertible preferred share dividends		—			—			—			21
Numerator for diluted EPS on net income available to common shareholders		$	6,936		$	4,153		$	17,788		$	13,119
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		36,913			33,797			36,721			32,124
Assumed conversion of share options		1,667			1,655			1,595			1,680
Assumed conversion of convertible preferred shares		—			—			—			179
Denominator for diluted EPS		38,580			35,452			38,316			33,983
Basic EPS:
Income from continuing operations		$	0.09		$	0.12		$	0.38		$	0.40
Income from discontinued operations		0.10			—			0.10			0.01
Net income available to common shareholders		$	0.19		$	0.12		$	0.48		$	0.41
Diluted EPS
Income from continuing operations		$	0.09		$	0.12		$	0.36		$	0.38
Income from discontinued operations		0.09			—			0.10			0.01
Net income available to common shareholders		$	0.18		$	0.12		$	0.46		$	0.39

 

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				For the Nine Months
		Ended September 30,				Ended September 30,
		2005		2004		2005		2004
Conversion of weighted average common units		8,758		8,690		8,707		8,773
Restricted common shares		191		206		175		195
Conversion of weighted average convertible preferred units		176		15		176		5
Conversion of share options		—		5		—		5

 

7

 

4.             Share-Based Compensation

 

Expenses from share-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,
		2005			2004			2005			2004
Increase in general and administrative expenses		$	497		$	405		$	1,420		$	1,165
Increase in construction contract and other service operations expenses		80			146			203			430

 

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”:

 

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2005			2004			2005			2004
Net income, as reported		$	10,589		$	9,750		$	28,749		$	27,586
Add: Share-based compensation expense, net of related tax effects and minority interests, included in the determination of net income		437			388			1,239			1,106
Less: Share-based compensation expense determined under the fair value based method, net of related tax effects and minority interests		(432		)	(322		)	(1,200		)	(917		)
Net income, pro forma		$	10,594		$	9,816		$	28,788		$	27,775
Basic EPS on net income available to common shareholders, as reported		$	0.19		$	0.12		$	0.48		$	0.41
Basic EPS on net income available to common shareholders, pro forma		$	0.19		$	0.12		$	0.49		$	0.41
Diluted EPS on net income available to common shareholders, as reported		$	0.18		$	0.12		$	0.46		$	0.39
Diluted EPS on net income available to common shareholders, pro forma		$	0.18		$	0.12		$	0.47		$	0.39

 

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.

 

5.             Recent Accounting Pronouncements

 

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 Board’s 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

 

8

 

settlement are conditioned upon future events that may or may not be within the entity’s 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 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 SEC’s 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 staff’s views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s 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).

 

6.             Commercial Real Estate Properties

 

Operating properties consisted of the following:

 

		September 30,			December 31,
		2005			2004
Land		$	268,583		$	268,327
Buildings and improvements		1,315,969			1,280,537
		1,584,552			1,548,864
Less: accumulated depreciation		(163,424		)	(141,716		)
		$	1,421,128		$	1,407,148

 

9

 

Projects we had under construction or pre-construction consisted of the following:

 

		September 30,			December 31,
		2005			2004
Land		$	127,085		$	74,190
Construction in progress		147,184			61,962
		$	274,269		$	136,152

 

2005 Acquisitions

 

We acquired the following office properties during the nine months ended September 30, 2005:

 

								Total
				Date of		Number of		Rentable
Project Name		Location		Acquisition		Buildings		Square Feet		Initial Cost
8611 Military Drive (1)		San Antonio, TX		3/30/2005		2		468,994		$	30,845
Rockville Corporate Center		Rockville, MD (2)		4/7/2005		2		221,702		37,617
7175 Riverwood Drive		Columbia, MD (3)		7/27/2005		1		26,500		2,456
Gateway Crossing 95		Columbia, MD (3)		9/19/2005		5		188,819		26,060
Patriot Park I & II		Colorado Springs, CO		9/28/2005		2		135,907		18,010
1670 N. Newport Road		Colorado Springs, CO		9/30/2005		1		67,500		9,033
						13		1,109,422		$	124,021

 

(1)   The buildings in this project are initially undergoing redevelopment.

(2)   Located in the Suburban Maryland region.

(3)   Located in the Baltimore/Washington Corridor region.

 

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

 

		8611 Military Drive			Rockville Corporate Center			7175 Riverwood Drive			Gateway Crossing 95			Patriot Park I & II			1670 N. Newport Road			Total
Land, operating properties		$	—		$	6,222		$	1,788		$	5,533		$	1,313		$	849		$	15,705
Land, construction or development		11,007			—			—			—			—			—			11,007
Building and improvements		—			28,925			763			17,582			14,371			6,968			68,609
Construction in progress		19,838			—			—			—			—			—			19,838
Intangible assets on real estate acquisitions		—			4,004			113			3,317			2,371			1,216			11,021
Total assets		30,845			39,151			2,664			26,432			18,055			9,033			126,180
Deferred revenue associated with acquired operating leases		—			(1,534		)	(208		)	(372		)	(45		)	—			(2,159		)
Total acquisition cost		$	30,845		$	37,617		$	2,456		$	26,060		$	18,010		$	9,033		$	124,021

 

We also acquired the following during the nine months ended September 30, 2005:

 

•      a 19-acre parcel of land located in Chantilly, Virginia that is adjacent to existing properties 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 32-acre parcel of land located in Dahlgren, Virginia that is adjacent to one of our office properties for $1,227 on March 16, 2005 (Dahlgren, Virginia is located in the St. Mary’s and King George Counties region).  We expect to develop this land parcel in the future;

•      a 16-acre parcel of land adjacent to 8611 Military Drive in San Antonio, Texas for $3,013 on March 30, 2005.  We expect to operate this land parcel as part of the campus that includes 8611 Military Drive;

•      a ten-acre parcel of land adjacent to the Rockville Corporate Center for $6,234 on April 7, 2005.  We expect to develop this land parcel in the future;

 

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•      a 27-acre parcel of land adjacent to 8611 Military Drive in San Antonio, Texas for $5,893 on June 14, 2005.  We expect to develop this land parcel in the future;

•      a two-acre parcel of land located in Linthicum, Maryland that is adjacent to one of our office properties for $735 on July 6, 2005;

•      a 64-acre land parcel located in Colorado Springs, Colorado, five acres of which is undergoing construction of a 50,000 square foot, fully-leased building, for a purchase price of $9,408 on July 8, 2005.  We expect to develop this land parcel in the future;

•      a four-acre parcel of land located in Columbia, Maryland that is adjacent to 7175 Riverwood Drive for $1,367 on July 27, 2005; and

•      a 50% undivided interest in a 132-acre land parcel, subject to a cotenancy agreement, in Colorado Springs, Colorado for $10,651 on September 28, 2005.

 

In 2004, we sold a land parcel in Columbia, Maryland and a land parcel in Linthicum, Maryland for an aggregate of $9,600.  We issued to the buyer a $5,600 mortgage loan; the balance of the acquisition was in the form of cash from the buyer.  The buyer in this transaction had an option to contribute the two land parcels into our Operating Partnership between January 1, 2005 and February 28, 2005 in exchange for extinguishment of the $5,600 mortgage loan with us and common units in our Operating Partnership; the buyer exercised its option in February 2005 and, as a result, on April 18, 2005, the debt from us was essentially extinguished and the buyer received 142,776 common units in the Operating Partnership valued at $3,697.  We accounted for the 2004 transaction using the financing method of accounting; as a result, the 2004 sale transaction was not recorded as a sale and the $4,000 in net proceeds received from the buyer was recorded as a liability prior to the contribution of the land parcels back into the Operating Partnership in April 2005.

 

2005 Construction and Pre-Construction Activities

 

In August 2005, we fully placed into service a newly constructed 103,683 square foot building located in the Baltimore/Washington Corridor.

 

As of September 30, 2005, we had construction underway on six new buildings in the Baltimore/Washington Corridor, one in Northern Virginia, one in St. Mary’s County, Maryland and one in Colorado Springs, Colorado.  We also had pre-construction activities underway on two new buildings located in the Baltimore/Washington Corridor and one new building in King George County and redevelopment underway on two existing buildings in San Antonio, Texas

 

2005 Dispositions

 

On June 10, 2005, we sold a four-acre parcel of land located in Columbia, Maryland for $2,571.  We recognized a gain of $186 on this sale.

 

On August 31, 2005, we sold a newly constructed property in Columbia, Maryland for $4,794.  We recognized a gain of $80 on this sale.

 

On September 8, 2005, we sold three office properties totaling 152,731 square feet located in the Northern Central New Jersey region for a total sale price of $22,458.  We recognized a total gain of $4,335 on this sale.

 

On September 29, 2005, we contributed our portfolio of properties in Harrisburg, Pennsylvania, consisting of 16 office properties, one unimproved land parcel and an option to acquire a land parcel, into a real estate joint venture at a value of $73,000.  In exchange for our contribution, we received $69,587 in cash (after closing costs and operating prorations) and a 20% interest in Harrisburg Corporate Gateway Partners, L.P.  As part of this transaction, we entered into an agreement to manage the operations of the joint venture’s properties for a five year term.  We did not recognize a gain on this transaction since we have certain contingent obligations that may exceed our proportionate interest remaining in effect as long as we continue to manage the properties; these contingent obligations are described below in Note 20.

 

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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
		September 30,			December 31,			Date				Nature of		Assets at			Exposure
		2005			2004			Acquired		Ownership		Activity		9/30/2005			to Loss (1)
Route 46 Partners		$	1,208		$	1,201		3/14/2003		20	%	Operates one building (2)		$	23,290		$	1,628
Harrisburg Corporate Gateway Partners, L.P.  (3)		(2,519		)	—			9/29/2005		20	%	Operates 16 buildings (4)		$	79,704		$	—

 

(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 respective ownership percentages.  Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that would be due if certain contingent events occurred.

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

(3)   Our balance sheet reflects distributions in excess of investment for this joint venture due to our not recognizing gain on our contribution of properties into the joint venture. We did not recognize a gain on the contribution since we have certain contingent obligations that may exceed our proportionate interest remaining in effect as long as we continue to manage the joint venture’s properties; these contingent obligations are described below in Note 20..

(4)   This joint venture’s properties are located in Greater Harrisburg, Pennsylvania.

 

The following table sets forth a condensed balance sheet for our unconsolidated joint ventures as of September 30, 2005:

 

Commercial real estate property		$	94,540
Other assets		8,454
Total assets		$	102,994
Liabilities		$	81,420
Owners’ equity		21,574
Total liabilities and owners’ equity		$	102,994

 

Our joint venture partner in Route 46 Partners has preference in receiving distributions of cash flows for a defined return.  Once our partner receives its defined return, we are entitled to receive distributions for a defined return.  We did not recognize income from our investment in Route 46 Partners in the nine months ended September 30, 2005 and 2004 since the income earned by the entity in those periods did not exceed our partner’s defined return.

 

Our investments in consolidated real estate joint ventures included the following:

 

				Ownership				Total			Collateralized
		Date		% at		Nature of		Assets at			Assets at
		Acquired		9/30/2005		Activity		9/30/2005			9/30/2005
MOR Forbes 2 LLC		12/24/2002		50	%	Operating building (1)		$	4,583		$	3,998
MOR Montpelier 3 LLC		2/21/2002		50	%	Developing land parcel (2)		1,958			—
								$	6,541		$	3,998

 

(1) This joint venture’s property is located in Lanham, Maryland (located in the Suburban Maryland region).

(2) This joint venture’s property is located in Laurel, Maryland (located in the Baltimore/Washington Corridor region).

 

From April 4, 2001 until June 9, 2005, we owned an 80% interest in Gateway 70 LLC, a consolidated joint venture developing two land parcels in Columbia, Maryland.  On June 9, 2005, we acquired the remaining 20% interest in Gateway 70 LLC not previously owned by us for $1,208.

 

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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 (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 will have a 50% interest in this joint venture relationship.

 

As described in Note 6, we acquired an interest in Harrisburg Corporate Gateway Partners, L.P. on September 29, 2005.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 20.

 

8.             Investment in Other Unconsolidated Entity

 

Our investment in an unconsolidated non-real estate entity is set forth below:

 

Ownership

Investment

September 30,

December 31,

Date

% at

Accounting

2005

2004

Acquired

9/30/2005

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.

 

9.             Intangible Assets on Real Estate Acquisitions

 

Intangible assets on real estate acquisitions consisted of the following:

 

		September 30,			December 31,
		2005			2004
Lease-up value		$	72,869		$	65,638
Lease to market value		8,869			9,595
Lease cost portion of deemed cost avoidance		9,554			8,700
Market concentration premium		1,333			1,333
Tenant relationship value		2,586			—
Subtotal		95,211			85,266
Accumulated amortization		(27,525		)	(17,706		)
Intangible assets on real estate acquisitions, net		$	67,686		$	67,560

 

10.          Deferred Charges

 

Deferred charges consisted of the following:

 

		September 30,			December 31,
		2005			2004
Deferred leasing costs		$	39,015		$	33,302
Deferred financing costs		19,945			16,996
Goodwill		1,853			1,853
Deferred other		155			155
		60,968			52,306
Accumulated amortization		(29,548		)	(24,664		)
Deferred charges, net		$	31,420		$	27,642

 

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