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 March 31, 2006 |
|
or |
|
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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For the transition period from to |
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) |
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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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý |
|
Accelerated filer o |
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Non-accelerated filer o |
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 May 2, 2006, 42,265,475 shares of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued.
TABLE OF CONTENTS
FORM 10-Q
2
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
(unaudited)
|
|
March 31, |
|
December 31, |
|
||
Assets |
|
|
|
|
|
||
Investment in real estate: |
|
|
|
|
|
||
Operating properties, net |
|
$ |
1,632,056 |
|
$ |
1,631,038 |
|
Projects under construction or development |
|
267,345 |
|
255,617 |
|
||
Total commercial real estate properties, net |
|
1,899,401 |
|
1,886,655 |
|
||
Investments in and advances to
unconsolidated |
|
1,439 |
|
1,451 |
|
||
Investment in real estate, net |
|
1,900,840 |
|
1,888,106 |
|
||
Cash and cash equivalents |
|
20,169 |
|
10,784 |
|
||
Restricted cash |
|
23,793 |
|
21,476 |
|
||
Accounts receivable, net |
|
16,729 |
|
15,606 |
|
||
Investment in other unconsolidated entity |
|
1,621 |
|
1,621 |
|
||
Deferred rent receivable |
|
34,247 |
|
32,579 |
|
||
Intangible assets on real estate acquisitions, net |
|
85,699 |
|
90,984 |
|
||
Deferred charges, net |
|
33,731 |
|
35,046 |
|
||
Prepaid and other assets |
|
21,722 |
|
29,255 |
|
||
Furniture, fixtures and equipment, net |
|
4,214 |
|
4,302 |
|
||
Fair value of derivatives |
|
110 |
|
|
|
||
Total assets |
|
$ |
2,142,875 |
|
$ |
2,129,759 |
|
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
||
Mortgage and other loans payable |
|
$ |
1,360,638 |
|
$ |
1,348,351 |
|
Accounts payable and accrued expenses |
|
42,792 |
|
41,693 |
|
||
Rents received in advance and security deposits |
|
16,394 |
|
14,774 |
|
||
Dividends and distributions payable |
|
16,878 |
|
16,703 |
|
||
Deferred revenue associated with acquired operating leases |
|
11,721 |
|
12,707 |
|
||
Distributions in excess of investment in
unconsolidated real |
|
3,010 |
|
3,081 |
|
||
Other liabilities |
|
5,314 |
|
4,727 |
|
||
Total liabilities |
|
1,456,747 |
|
1,442,036 |
|
||
Minority interests: |
|
|
|
|
|
||
Common units in the Operating Partnership |
|
92,903 |
|
95,014 |
|
||
Preferred units in the Operating Partnership |
|
8,800 |
|
8,800 |
|
||
Other consolidated real estate joint ventures |
|
1,190 |
|
1,396 |
|
||
Total minority interests |
|
102,893 |
|
105,210 |
|
||
Commitments and contingencies (Note 20) |
|
|
|
|
|
||
Shareholders equity: |
|
|
|
|
|
||
Preferred Shares of beneficial interest
($0.01 par value; shares authorized of |
|
67 |
|
67 |
|
||
Common Shares of beneficial interest ($0.01
par value; |
|
400 |
|
399 |
|
||
Additional paid-in capital |
|
655,818 |
|
657,339 |
|
||
Cumulative distributions in excess of net income |
|
(72,670 |
) |
(67,697 |
) |
||
Value of unearned restricted common share grants |
|
|
|
(7,113 |
) |
||
Accumulated other comprehensive loss |
|
(380 |
) |
(482 |
) |
||
Total shareholders equity |
|
583,235 |
|
582,513 |
|
||
Total liabilities and shareholders equity |
|
$ |
2,142,875 |
|
$ |
2,129,759 |
|
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 |
|
||||
|
|
2006 |
|
2005 |
|
||
Revenues |
|
|
|
|
|
||
Rental revenue |
|
$ |
62,662 |
|
$ |
51,701 |
|
Tenant recoveries and other |
|
9,038 |
|
7,227 |
|
||
Construction contract revenues |
|
14,544 |
|
15,728 |
|
||
Other service operations revenues |
|
1,765 |
|
1,369 |
|
||
Total revenues |
|
88,009 |
|
76,025 |
|
||
Expenses |
|
|
|
|
|
||
Property operating expenses |
|
21,885 |
|
18,169 |
|
||
Depreciation and other amortization |
|
19,313 |
|
14,169 |
|
||
Construction contract expenses |
|
14,026 |
|
14,897 |
|
||
Other service operations expenses |
|
1,678 |
|
1,291 |
|
||
General and administrative expenses |
|
3,963 |
|
3,276 |
|
||
Total operating expenses |
|
60,865 |
|
51,802 |
|
||
Operating income |
|
27,144 |
|
24,223 |
|
||
Interest expense |
|
(17,584 |
) |
(12,962 |
) |
||
Amortization of deferred financing costs |
|
(559 |
) |
(396 |
) |
||
Income from continuing operations before
equity in loss of |
|
9,001 |
|
10,865 |
|
||
Equity in loss of unconsolidated entities |
|
(23 |
) |
|
|
||
Income tax expense |
|
(215 |
) |
(457 |
) |
||
Income from continuing operations before minority interests |
|
8,763 |
|
10,408 |
|
||
Minority interests in income from continuing operations |
|
|
|
|
|
||
Common units in the Operating Partnership |
|
(909 |
) |
(1,292 |
) |
||
Preferred units in the Operating Partnership |
|
(165 |
) |
(165 |
) |
||
Other consolidated entities |
|
33 |
|
24 |
|
||
Income from continuing operations |
|
7,722 |
|
8,975 |
|
||
Income from discontinued operations, net of minority interests |
|
2,105 |
|
46 |
|
||
Income before gain on sales of real estate |
|
9,827 |
|
9,021 |
|
||
Gain on sales of real estate, net |
|
110 |
|
19 |
|
||
Net income |
|
9,937 |
|
9,040 |
|
||
Preferred share dividends |
|
(3,654 |
) |
(3,654 |
) |
||
Net income available to common shareholders |
|
$ |
6,283 |
|
$ |
5,386 |
|
Basic earnings per common share |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.11 |
|
$ |
0.15 |
|
Discontinued operations |
|
0.05 |
|
|
|
||
Net income |
|
$ |
0.16 |
|
$ |
0.15 |
|
Diluted earnings per common share |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.10 |
|
$ |
0.14 |
|
Discontinued operations |
|
0.05 |
|
|
|
||
Net income |
|
$ |
0.15 |
|
$ |
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 |
|
||||
|
|
2006 |
|
2005 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
9,937 |
|
$ |
9,040 |
|
Adjustments to reconcile net income to net
cash |
|
|
|
|
|
||
Minority interests |
|
1,538 |
|
1,449 |
|
||
Depreciation and other amortization |
|
19,337 |
|
14,666 |
|
||
Amortization of deferred financing costs |
|
559 |
|
396 |
|
||
Amortization of deferred market rental revenue |
|
(556 |
) |
(70 |
) |
||
Equity in loss of unconsolidated entities |
|
23 |
|
|
|
||
Gain on sales of real estate |
|
(2,571 |
) |
(24 |
) |
||
Excess income tax benefits from share-based compensation |
|
(258 |
) |
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Increase in deferred rent receivable |
|
(2,198 |
) |
(1,608 |
) |
||
Decrease (increase) in accounts receivable,
restricted cash |
|
4,029 |
|
(2,678 |
) |
||
(Decrease) increase in accounts payable,
accrued expenses, |
|
(1,017 |
) |
1,898 |
|
||
Other |
|
563 |
|
1,843 |
|
||
Net cash provided by operating activities |
|
29,386 |
|
24,912 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Purchases of and additions to commercial real estate properties |
|
(38,267 |
) |
(84,955 |
) |
||
Proceeds from sales of properties |
|
28,217 |
|
|
|
||
Investments in and advances to unconsolidated entities |
|
(190 |
) |
(8 |
) |
||
Distributions from unconsolidated entities |
|
113 |
|
|
|
||
Leasing costs paid |
|
(1,984 |
) |
(1,675 |
) |
||
Other |
|
43 |
|
(49 |
) |
||
Net cash used in investing activities |
|
(12,068 |
) |
(86,687 |
) |
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from mortgage and other loans payable |
|
47,905 |
|
93,458 |
|
||
Repayments of mortgage and other loans payable |
|
(36,559 |
) |
(24,365 |
) |
||
Deferred financing costs paid |
|
(49 |
) |
(235 |
) |
||
Acquisition of partner interests in consolidated joint ventures |
|
(3,016 |
) |
|
|
||
Distributions paid to partners in consolidated joint ventures |
|
(787 |
) |
|
|
||
Net proceeds from issuance of common shares |
|
1,581 |
|
593 |
|
||
Dividends paid |
|
(14,721 |
) |
(12,941 |
) |
||
Distributions paid |
|
(2,553 |
) |
(2,344 |
) |
||
Excess income tax benefits from share-based compensation |
|
258 |
|
|
|
||
Other |
|
8 |
|
|
|
||
Net cash (used) provided by financing activities |
|
(7,933 |
) |
54,166 |
|
||
Net increase (decrease) in cash and cash equivalents |
|
9,385 |
|
(7,609 |
) |
||
Cash and cash equivalents |
|
|
|
|
|
||
Beginning of period |
|
10,784 |
|
13,821 |
|
||
End of period |
|
$ |
20,169 |
|
$ |
6,212 |
|
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) that focuses on the acquisition, development, ownership, management and leasing of primarily Class A suburban office properties in the Greater Washington, D.C. region and other select submarkets. We have implemented a core customer expansion strategy that is built on meeting, through acquisitions and development, the multi-location requirements of our strategic tenants. As of March 31, 2006, our investments in real estate included the following:
163 wholly owned operating properties totaling 13.7 million square feet;
13 wholly owned properties under construction or development that we estimate will total approximately 1.6 million square feet upon completion and two wholly owned office properties totaling approximately 115,000 square feet that were under redevelopment;
wholly owned land parcels totaling 352 acres that we believe are potentially developable into approximately 5.1 million square feet; and
partial ownership interests in a number of other real estate projects in operations or under development or redevelopment.
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 securities owned by COPT as of March 31, 2006 follows:
Common Units |
|
82 |
% |
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 |
% |
Two of our trustees controlled, either directly or through ownership by other entities or family members, an additional 15% of the Operating Partnerships common units.
In addition to owning interests in real estate, the Operating Partnership also owns 100% of Corporate Office Management, Inc. (COMI) and owns, either directly or through COMI, 100% of the consolidated subsidiaries that are set forth below (collectively defined as the Service Companies):
Entity Name |
|
Type of Service Business |
COPT Property Management Services, LLC (CPM) |
|
Real Estate Management |
COPT Development & Construction Services, LLC (CDC) |
|
Construction and Development |
Corporate Development Services, LLC (CDS) |
|
Construction and Development |
Corporate Cooling & Controls, LLC (CC&C) |
|
Heating and Air Conditioning |
Most of the services that CPM provides are for us. CDC, CDS and CC&C provide services to us and to third parties.
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
6
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 2005 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.
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Our computation of diluted EPS is similar except that:
the denominator is increased to include: (1) the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into our common shares were converted; and (2) the effect of dilutive potential common shares outstanding during the period attributable to share-based compensation using the treasury stock method; and
the numerator is adjusted to add back any convertible preferred dividends and any other changes in income or loss that would result from the assumed conversion into common shares.
Our computation of diluted EPS does not assume conversion of securities into our common shares if conversion of those securities would increase our diluted EPS in a given period. A summary of the numerator and denominator for purposes of basic and diluted EPS calculations is set forth below (dollars and shares in thousands, except per share data):
|
|
For the Three Months |
|
||||
|
|
2006 |
|
2005 |
|
||
Numerator: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
7,722 |
|
$ |
8,975 |
|
Add: Gain on sales of real estate, net |
|
110 |
|
19 |
|
||
Less: Preferred share dividends |
|
(3,654 |
) |
(3,654 |
) |
||
Numerator for basic and diluted EPS from
continuing operations |
|
4,178 |
|
5,340 |
|
||
Add: Income from discontinued operations, net |
|
2,105 |
|
46 |
|
||
Numerator for basic and diluted EPS on net
income available |
|
$ |
6,283 |
|
$ |
5,386 |
|
Denominator (all weighted averages): |
|
|
|
|
|
||
Denominator for basic EPS (common shares) |
|
39,668 |
|
36,555 |
|
||
Dilutive effect of share-based compensation awards |
|
1,842 |
|
1,537 |
|
||
Denominator for diluted EPS |
|
41,510 |
|
38,092 |
|
||
|
|
|
|
|
|
||
Basic EPS: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.11 |
|
$ |
0.15 |
|
Income from discontinued operations |
|
0.05 |
|
|
|
||
Net income available to common shareholders |
|
$ |
0.16 |
|
$ |
0.15 |
|
Diluted EPS: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.10 |
|
$ |
0.14 |
|
Income from discontinued operations |
|
0.05 |
|
|
|
||
Net income available to common shareholders |
|
$ |
0.15 |
|
$ |
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:
7
|
|
Weighted Average Shares in |
|
||
|
|
2006 |
|
2005 |
|
Conversion of weighted average common units |
|
8,520 |
|
8,544 |
|
Conversion of weighted average convertible preferred units |
|
176 |
|
176 |
|
Share-based compensation awards |
|
|
|
143 |
|
See Note 5 for disclosure associated with our implementation of recent accounting pronouncements relating to our accounting for share-based compensation.
In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) regarding EITF 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. The conclusion provided a framework for addressing the question of when a general partner, as defined in EITF 04-05, should consolidate a limited partnership. Under the consensus, a general partner is presumed to control a limited partnership (or similar entity) and should consolidate that entity unless the limited partners possess kick-out rights or other substantive participating rights as described in EITF 96-16, Investors Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. This EITF is effective for all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified after June 29, 2005, and, as of January 1, 2006, for existing limited partnership agreements. The EITF did not impact us in 2005. The adoption of this EITF in 2006 for existing limited partnership agreements did not have a material effect on our financial position, results of operations or cash flows.
Share-based Compensation Plans
In 1993, we adopted a share option plan for our Trustees under which we have 75,000 common shares reserved for issuance. These options expire ten years after the date of grant and are all exercisable. Shares for this plan are issued under a registration statement on a Form S-8 that became effective upon filing with the Securities and Exchange Commission. As of March 31, 2006, there were no awards available for future grant under this plan.
In March 1998, we adopted a long-term incentive plan for our Trustees and employees. This plan provides for the award of options to acquire our common shares (share options), common shares subject to forfeiture restrictions (restricted shares) and dividend equivalents. We are authorized to issue awards under the plan amounting to no more than 13% of the total of (1) our common shares outstanding plus (2) the number of shares that would be outstanding upon redemption of all units of the Operating Partnership or other securities that are convertible into our common shares. Trustee options under this plan become exercisable beginning on the first anniversary of their grant. The vesting periods for employees options under this plan range from immediately to five years, although they generally, on average, are three years. Restricted shares generally vest annually in the following increments: 16% upon the first anniversary following the date of grant, 18% upon the second anniversary, 20% upon the third anniversary, 22% upon the fourth anniversary and 24% upon the fifth anniversary. Options expire ten years after the date of grant. Shares for this plan are issued under a registration statement filed on a Form S-8 that became effective upon filing with the Securities and Exchange Commission. As of March 31, 2006, we had 647,570 awards available for future grant under this plan.
The following table summarizes share option transactions under the plans described above for the three months ended March 31, 2006:
8
|
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
|
||
Outstanding at December 31, 2005 |
|
2,709,927 |
|
$ |
14.41 |
|
|
|
|
|
|
Granted |
|
188,089 |
|
$ |
41.15 |
|
|
|
|
|
|
Forfeited |
|
(13,183 |
) |
$ |
27.54 |
|
|
|
|
|
|
Exercised |
|
(151,448 |
) |
$ |
12.98 |
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
2,733,385 |
|
$ |
16.26 |
|
6 |
|
$ |
80,574 |
|
Exercisable at March 31, 2006 |
|
2,019,857 |
|
$ |
11.08 |
|
5 |
|
$ |
70,010 |
|
Options expected to vest |
|
677,852 |
|
$ |
30.94 |
|
9 |
|
$ |
10,035 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing stock price of our common shares on March 31, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had the holders of in-the-money options exercised their options on March 31, 2006. This amount changes based on the fair market value of our common shares. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $4,428.
We received $1,966 in proceeds from the exercise of share options during the three months ended March 31, 2006.
The following table summarizes restricted share transactions under the plans described above for the three months ended March 31, 2006:
|
|
Shares |
|
Weighted |
|
|
Unvested at December 31, 2005 |
|
395,609 |
|
$ |
19.88 |
|
Granted |
|
133,420 |
|
$ |
42.06 |
|
Forfeited |
|
(7,685 |
) |
$ |
20.12 |
|
Vested |
|
(119,237 |
) |
$ |
17.20 |
|
Unvested at March 31, 2006 |
|
402,107 |
|
$ |
28.03 |
|
Restricted shares expected to vest |
|
382,002 |
|
|
|
The total fair value of restricted shares vested during the three months ended March 31, 2006 was $5,110.
We realized a windfall tax benefit of $258 on options exercised and restricted shares vested during the three months ended March 31, 2006.
Adoption of Statement of Financial Accounting Standards No. 123(R)
We have historically issued two forms of share-based compensation: share options and restricted shares. Prior to January 1, 2006, when we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)), our general method for accounting for these forms of share-based compensation was as follows:
Share options: These awards were accounted for using the intrinsic value method. Under this method, we recorded compensation expense only when the exercise price of a grant was less than the market price of our common shares on the option grant date; when this occurred, we recognized compensation expense equal to the
9
difference between the exercise price and the grant-date market price over the service period to which the options related.
Restricted shares: We computed compensation expense for restricted share grants based on the value of such grants, as determined by the value of our common shares on the applicable measurement date (generally the date of grant). We recognized compensation expense for such grants over the service periods to which the grants related based on the vesting schedules for such grants.
In December 2004, the Financial Accounting Standards Board (FASB) issued 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 requires 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 should then 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. In 2005, the FASB also issued several FASB Staff Positions that clarify certain aspects of SFAS 123(R). SFAS 123(R) became effective for us on January 1, 2006, applying to all awards granted after January 1, 2006 and to awards modified, repurchased or cancelled after that date. We used the modified prospective application approach to adoption provided for under SFAS 123(R); under this approach, we recognized compensation cost on or after January 1, 2006 for the portion of outstanding awards for which the requisite service was not yet rendered, based on the fair value of those awards on the date of grant.
The primary effect of our adoption of SFAS 123(R) on our Consolidated Financial Statements is that beginning January 1, 2006 we are: (1) incurring higher expense associated with share options issued to employees relative to what we would have recognized under the intrinsic value method; (2) recognizing expenses associated with restricted common shares over the life of the grant using a straight line basis methodology over the service period; and (3) reporting the benefits of tax deductions in excess of recognized compensation costs as cash flow from financing activities (such benefits were previously reported as operating cash flows).
Prior to our adoption of SFAS 123(R), we provided disclosures in our financial statements for periods prior to 2006 that summarized what our operating results would have been if we had 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 (SFAS 123). In computing the amounts that appeared in these disclosures, we accounted for forfeitures as they occurred. SFAS 123(R) requires that share-based compensation be computed based on awards that are ultimately expected to vest. As a result, future forfeitures of awards are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. SFAS 123(R) also requires that companies make a one-time cumulative effect adjustment upon adoption of the standard to record the effect that estimated future forfeitures of outstanding awards would have on expenses previously recognized in the companies financial statements; we did not record such a cumulative effect adjustment since we determined that the effect of pre-vesting forfeitures on our recorded expense has historically been negligible. The amounts included in our Consolidated Statements of Operations for share-based compensation in the three months ended March 31, 2006 reflected an estimate of pre-vesting forfeitures of approximately 5%.
In the disclosures that we provided in our financial statements for periods prior to 2006 that summarized what our operating results would have been if we had elected to account for our share-based compensation under the fair value provisions of SFAS 123, we did not capitalize costs associated with share-based compensation. Effective upon our adoption of SFAS 123(R), we began capitalizing costs associated with share-based compensation.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. We elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123(R). The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R).
We compute the fair value of share options under SFAS 123(R) using the Black-Scholes option-pricing model; the weighted average assumptions we used in that model for share options issued during the three months ended March 31, 2006 are set forth below:
10
Weighted average fair value of grants on grant date |
|
$ |
5.46 |
|
Risk-free interest rate |
|
4.62 |
%(1) |
|
Expected life-years |
|
7.06 |
|
|
Expected volatility |
|
23.88 |
% |
|
Expected dividend yield |
|
6.41 |
% |
(1) Ranged from 4.35% to 4.79%.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected option life is based on our historical experience of employee exercise behavior. Expected volatility is based on historical volatility of our common shares. Expected dividend yield is based on the average historical dividend yield on our common shares over a period of time ending on the grant date of the options.
The table below sets forth information relating to expenses from share-based compensation included in our Consolidated Statements of Operations for the three months ended March 31, 2006:
Increase in general and administrative expenses |
|
$ |
469 |
|
|
Increase in construction contract and other service operations expenses |
|
144 |
|
||
Share-based compensation expense |
|
613 |
|
||
Income taxes |
|
(17 |
) |
||
Minority interests |
|
(109 |
) |
||
Net share-based compensation expense |
|
$ |
487 |
|
|
|
|
|
|
||
Net share-based compensation expense per share |
|
|
|
||
Basic |
|
$ |
0.01 |
|
|
Diluted |
|
$ |
0.01 |
|
|
We also capitalized approximately $28 in share-based compensation costs.
As of March 31, 2006, there was $1,627 of unrecognized compensation cost related to nonvested options that is expected to be recognized over a weighted average period of approximately two years. As of March 31, 2006, there was $9,714 of unrecognized compensation cost related to nonvested restricted shares that is expected to be recognized over a weighted average period of approximately three years.
Disclosure for Periods Prior to 2006, Including Pro Forma Financial Information Under SFAS 123
Expenses from share-based compensation reflected in our Consolidated Statements of Operations for the three months ended March 31, 2005 were as follows:
Increase in general and administrative expenses |
|
$ |
413 |
|
Increase in construction contract and other service operations expenses |
|
46 |
|
The following table summarizes our operating results for the three months ended March 31, 2005 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 in that period:
11
Net income, as reported |
|
$ |
9,040 |
|
Add: Share-based compensation expense, net of related tax effects and minority interests, included in the determination of net income |
|
354 |
|
|
Less: Share-based compensation expense determined under the fair value based method, net of related tax effects and minority interests |
|
(339 |
) |
|
Net income, pro forma |
|
$ |
9,055 |
|
Basic EPS on net income available to common shareholders, as reported |
|
$ |
0.15 |
|
Basic EPS on net income available to common shareholders, pro forma |
|
$ |
0.15 |
|
Diluted EPS on net income available to common shareholders, as reported |
|
$ |
0.14 |
|
Diluted EPS on net income available to common shareholders, pro forma |
|
$ |
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.
Operating properties consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
Land |
|
$ |
314,550 |
|
$ |
314,719 |
|
Buildings and improvements |
|
1,501,426 |
|
1,491,254 |
|
||
|
|
1,815,976 |
|
1,805,973 |
|
||
Less: accumulated depreciation |
|
(183,920 |
) |
(174,935 |
) |
||
|
|
$ |
1,632,056 |
|
$ |
1,631,038 |
|
Projects we had under construction or pre-construction consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
Land |
|
$ |
126,738 |
|
$ |
117,434 |
|
Construction in progress |
|
140,607 |
|
138,183 |
|
||
|
|
$ |
267,345 |
|
$ |
255,617 |
|
2006 Acquisitions
During the three months ended March 31, 2006, we acquired the following:
a property located in Colorado Springs, Colorado containing a 60,000 square foot building that will be redeveloped and a four acre parcel of land that we believe can support approximately 30,000 developable square feet for $2,602 on January 19, 2006;
a 31-acre parcel of land located in San Antonio, Texas that we believe can support up to 375,000 developable square feet for $7,430 on January 20, 2006;
a six-acre parcel of land located in Hanover, Maryland that we believe can support up to 60,000 developable square feet for $2,142 on February 28, 2006 (Hanover, Maryland is located in the Baltimore/Washington Corridor).
We also acquired a 50% interest in a joint venture called Commons Office 6-B, LLC that owns a land parcel located in Hanover, Maryland for $1,830 on February 10, 2006. The joint venture is constructing an office property totaling approximately 44,000 square feet on the land parcel.
12
2006 Construction and Pre-Construction Activities
During 2006, we placed into service a 162,000 square foot building located in Annapolis Junction, Maryland (Annapolis Junction, Maryland is located in the Baltimore/Washington Corridor).
As of March 31, 2006, we had construction underway on six new buildings in the Baltimore/Washington Corridor (including the one 50% joint venture discussed above), one in Northern Virginia, one in St. Marys County, Maryland and one in Colorado Springs, Colorado. We also had pre-construction activities underway on four new buildings located in the Baltimore/Washington Corridor, one in King George County, Virginia, one in Colorado Springs, Colorado and one in Suburban Baltimore. In addition, we had redevelopment underway on (1) two wholly owned existing buildings (one is located in the Baltimore/Washington Corridor and the other in Colorado Springs, Colorado) and (2) two buildings owned by a joint venture (one is located in Northern Virginia and the other in the Baltimore/Washington Corridor).
2006 Dispositions
During the three months ended March 31, 2006, we sold the following operating properties:
Project Name |
|
Location |
|
Date of |
|
Number of |
|
Total |
|
Sale Price |
|
Gain on |
|
||
Lakeview at the Greens |
|
Laurel, Maryland (1 |
) |
2/6/2006 |
|
2 |
|
141,783 |
|
$ |
17,000 |
|
$ |
2,087 |
|
68 Culver Road |
|
Dayton, New Jersey |
|
3/8/2006 |
|
1 |
|
57,280 |
|
9,700 |
|
348 |
|
||
|
|
|
|
|
|
3 |
|
199,063 |
|
$ |
26,700 |
|
$ |
2,435 |
|
(1) Laurel, Maryland is located in the Suburban Maryland region.
In addition, on January 17, 2006, we sold a newly constructed property in Columbia, Maryland (located in the Baltimore/Washington Corridor) for $2,530. We recognized a gain of $111 on this sale.
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:
|
|
Investment Balance at |
|
Date |
|
Ownership |
|
Nature of |
|
Total |
|
Maximum |
|
||||||
|
|
March 31, |
|
December 31, |
|
|
|
|
|
|
|||||||||
Route 46 Partners |
|
$ |
1,439 |
(2) |
$ |
1,451 |
(2) |
3/14/2003 |
|
20 |
% |
Operates one building |
(3) |
$ |
23,359 |
|
$ |
1,620 |
|
Harrisburg Corporate |
|
(3,010) |
(4) |
(3,081) |
(4) |
9/29/2005 |
|
20 |
% |
Operates 16 buildings |
(5) |
78,382 |
|
|
|
||||
(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) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $1,370 at March 31, 2006 and December 31, 2005 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture does not change.
(3) This joint ventures property is located in Fairfield, New Jersey.
(4) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5,198 at March 31, 2006 and $5,204 at December 31, 2005 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture does not change.
(5) This joint ventures properties are located in Greater Harrisburg, Pennsylvania.
The following table sets forth condensed balance sheets for our unconsolidated real estate joint ventures:
13
|
|
March 31, |
|
December 31, |
|
||
Commercial real estate property |
|
$ |
94,701 |
|
$ |
94,552 |
|
Other assets |
|
7,040 |
|
8,006 |
|
||
Total assets |
|
$ |
101,741 |
|
$ |
102,558 |
|
|
|
|
|
|
|
||
Liabilities |
|
$ |
82,275 |
|
$ |
82,619 |
|
Owners equity |
|
19,466 |
|
19,939 |
|
||
Total liabilities and owners equity |
|
$ |
101,741 |
|
$ |
102,558 |
|
The following table sets forth a combined condensed statement of operations for the three months ended March 31, 2006 for the two unconsolidated joint ventures we owned as of March 31, 2006:
Revenues |
|
$ |
3,204 |
|
Property operating expenses |
|
(1,105 |
) |
|
Interest expense |
|
(1,162 |
) |
|
Depreciation and amortization expense |
|
(912 |
) |
|
Net income |
|
$ |
25 |
|
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 three months ended March 31, 2006 since the income earned by the entity in those periods did not exceed our partners defined return.
Our investments in consolidated real estate joint ventures included the following:
|
|
Date |
|
Ownership |
|
Nature of |
|
Total |
|
Collateralized |
|
||
COPT Opportunity Invest I, LLC |
|
12/20/2005 |
|
92.5 |
% |
Redeveloping two properties (1) |
|
$ |
36,022 |
|
$ |
|
|
Commons Office 6-B, LLC |
|
2/10/2006 |
|
50.0 |
% |
Developing land parcel (2) |
|
5,614 |
|
5,569 |
|
||
MOR Forbes 2 LLC |
|
12/24/2002 |
|
50.0 |
% |
Operating building (3) |
|
4,298 |
|
3,892 |
|
||
|
|
|
|
|
|
|
|
$ |
45,934 |
|
$ |
9,461 |
|
(1) This joint venture owns one property in Northern Virginia and one in the Baltimore/Washington Corridor.
(2) This joint ventures property is located in Hanover, Maryland (located in the Baltimore/Washington Corridor region).
(3) This joint ventures property is located in Lanham, Maryland (located in the Suburban Maryland region).
On January 17, 2006 we acquired our partners remaining 50% interest in MOR Montpelier 3 LLC, an entity that recently completed the construction of an office property, for $1,186. We then sold the property to a third party for $2,530, as discussed in Note 6.
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 20.
Intangible assets on real estate acquisitions consisted of the following:
14
|
|
March 31, 2006 |
|
December 31, 2005 |
|
||||||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
||||||
Lease-up value |
|
$ |
92,854 |
|
$ |
24,845 |
|
$ |
68,009 |
|
$ |
92,812 |
|
$ |
20,824 |
|
$ |
71,988 |
|
Lease cost portion of deemed cost avoidance |
|
11,054 |
|
4,375 |
|
6,679 |
|
11,054 |
|
3,991 |
|
7,063 |
|
||||||
Lease to market value |
|
9,772 |
|
5,688 |
|
4,084 |
|
9,772 |
|
5,277 |
|
4,495 |
|
||||||
Tenant relationship value |
|
6,026 |
|
310 |
|
5,716 |
|
6,349 |
|
130 |
|
6,219 |
|
||||||
Market concentration premium |
|
1,333 |
|
122 |
|
1,211 |
|
1,333 |
|
114 |
|
1,219 |
|
||||||
|
|
$ |
121,039 |
|
$ |
35,340 |
|
$ |
85,699 |
|
$ |
121,320 |
|
$ |
30,336 |
|
$ |
90,984 |
|
Deferred charges consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
Deferred leasing costs |
|
$ |
43,239 |
|
$ |
42,752 |
|
Deferred financing costs |
|
21,659 |
|
21,574 |
|
||
Goodwill |
|
1,853 |
|
1,853 |
|
||
Deferred other |
|
155 |
|
155 |
|
||
|
|
66,906 |
|
66,334 |
|
||
Accumulated amortization |
|
(33,175 |
) |
(31,288 |
) |
||
Deferred charges, net |
|
$ |
33,731 |
|
$ |
35,046 |
|
Our accounts receivable are reported net of an allowance for bad debts of $388 at March 31, 2006 and $421 at December 31, 2005.
Prepaid and other assets consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
Construction contract costs incurred in excess of billings |
|
$ |
10,309 |
|
$ |
15,277 |
|
Prepaid expenses |
|
4,733 |
|
7,007 |
|
||
Other assets |
|
6,680 |
|
6,971 |
|
||
Prepaid and other assets |
|
$ |
21,722 |
|
$ |
29,255 |
|
The following table sets forth our one derivative contract at March 31, 2006 and its fair value:
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
||||
Nature of Derivative |
|
Notional |
|
One-Month |
|
Effective |
|
Expiration |
|
March 31, |
|
December 31, |
|
||
Interest rate swap |
|
$ |
50,000 |
|
5.0360 |
% |
3/28/2006 |
|
3/30/2009 |
|
$ |
110 |
|
N/A |
|
We designated this derivative as a cash flow hedge. The contract hedges the risk of changes in interest rates on certain of our one-month LIBOR-based variable rate borrowings until its maturity.
15
The table below sets forth our accounting application of changes in derivative fair values:
|
|
For the Three Months Ended |
|
||||
|
|
2006 |
|
2005 |
|
||
Increase in fair value applied to AOCL (1) and minority interests |
|
$ |
110 |
|
$ |
|
|
(1) AOCL is accumulated other comprehensive loss.
Mortgage and other loans payable consisted of the following:
|
|
Maximum |
|
|
|
|
|
Scheduled |
|
|||||
|
|
|
March 31, |
|
December 31, |
|
Stated Interest Rates |
|
|
|||||
|
|
|
|
|
|
|
||||||||
Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|||
Wachovia Bank, N.A. Revolving Credit Facility |
|
$ |
400,000 |
|
$ |
279,000 |
|
$ |
273,000 |
|
LIBOR + 1.15% to 1.55% |
|
March 2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage Loans |
|
|
|
|
|
|
|
|
|
|
|
|||
Fixed rate mortgage loans (2) |
|
N/A |
|
913,562 |
|
921,265 |
|
3.00% - 9.48% (3) |
|
2006 - 2034 (4) |
|
|||
Variable rate construction loan facilities |
|
125,701 |
|
84,228 |
|
70,238 |
|
LIBOR + 1.40 to 2.20% |
|
2006 - 2008 (5) |
|
|||
Other variable rate mortgage loans |
|
N/A |
|
82,800 |
|
82,800 |
|
LIBOR + 1.15% to 1.55%
and |
|
2006 - 2010 |
|
|||
Total mortgage loans |
|
|
|
1,080,590 |
|
1,074,303 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Note payable |
|
|
|
|
|
|
|
|
|
|
|
|||
Unsecured seller note |
|
N/A |
|
1,048 |
|
1,048 |
|
5.95% |
|
May 2007 (6) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total mortgage and other loans payable, net |
|
|
|
$ |
1,360,638 |
|
$ |
1,348,351 |
|
|
|
|
|
|
(1) The Revolving Credit Facility may be extended for a one-year period, subject to certain conditions.
(2) Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore are recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net premiums totaling $1,247 at March 31, 2006 and $1,391 at December 31, 2005.
(3) The weighted average interest rate on these loans was 6.9% at March 31, 2006.
(4) A loan with a balance of $4,945 at March 31, 2006 that matures in 2034 may be repaid in March 2014, subject to certain conditions.
(5) At March 31, 2006, $44.4 million in loans scheduled to mature in 2008 may be extended for a one-year period, subject to certain conditions.
(6) This loan is callable within 90 days by the lender.
16
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, 2006, we converted 43,425 common units in our Operating Partnership into common shares on the basis of one common share for each common unit.
See Note 5 for disclosure of common share activity pertaining to our share-based compensation plans.
Accumulated Other Comprehensive Loss
The table below sets forth activity in the AOCL component of shareholders equity:
|
|
For the Three Months |
|
||||
|
|
2006 |
|
2005 |
|
||
Beginning balance |
|
$ |
(482 |
) |
$ |
|
|
Unrealized gain on derivatives, net of minority interests |
|
90 |
|
|
|
||
Realized loss on derivatives, net of minority interests |
|
12 |
|
|
|
||
Ending balance |
|
$ |
(380 |
) |
$ |
|
|
The table below sets forth our comprehensive income:
|
|
For the Three Months Ended March 31, |
|
||||
|
|
2006 |
|
2005 |
|
||
Net income |
|
$ |
9,937 |
|
$ |
9,040 |
|
Unrealized gain on derivatives, net of minority interests |
|
90 |
|
|
|
||
Realized loss on derivatives, net of minority interests |
|
12 |
|
|
|
||
Total comprehensive income |
|
$ |
10,039 |
|
$ |
9,040 |
|
17
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2006:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
Total Dividend/ |
|
||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.6406 |
|
$ |
737 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.6406 |
|
$ |
737 |
|
|
|
|
|
|
|
|
|
|
|
||
Series F Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.6172 |
|
$ |
880 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.6172 |
|
$ |
880 |
|
|
|
|
|
|
|
|
|
|
|
||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
||
Series H Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.4688 |
|
$ |
938 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.4688 |
|
$ |
938 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.2800 |
|
$ |
11,180 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.2800 |
|
$ |
11,268 |
|
|
|
|
|
|
|
|
|
|
|
||
Series I Preferred Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.4688 |
|
$ |
165 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.4688 |
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.2800 |
|
$ |
2,387 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.2800 |
|
$ |
2,374 |
|
|
|
For the Three Months Ended |
|
||||
|
|
2006 |
|
2005 |
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Increase (decrease) in accrued capital improvements and leasing costs |
|
$ |
6,307 |
|
$ |
(1,091 |
) |
Amortization of discounts and premiums on mortgage loans to commercial real estate properties |
|
$ |
45 |
|
$ |
68 |
|
Increase (decrease) in fair value of derivatives applied to AOCL and minority interests |
|
$ |
110 |
|
$ |
|
|
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT |
|
$ |
778 |
|
$ |
55 |
|
Dividends/distribution payable |
|
$ |
16,878 |
|
$ |
14,766 |
|
Decrease in minority interests and increase in shareholders equity in connection with the conversion of common units into common shares |
|
$ |
1,945 |
|
$ |
|
|
Issuance of restricted shares |
|
$ |
|
|
$ |
3,481 |
|
18
As of March 31, 2006, we had nine primary office property segments: Baltimore/Washington Corridor; Northern Virginia; Suburban Baltimore, Maryland, Suburban Maryland; Greater Philadelphia; St. Marys and King George Counties; Northern/Central New Jersey; Colorado Springs, Colorado; and San Antonio, Texas. During 2005, we also had an office property segment in Greater Harrisburg, Pennsylvania prior to the contribution of our properties in that region into a real estate joint venture in exchange for cash and a 20% interest in such joint venture on September 29, 2005.
The table below reports segment financial information. Our segment entitled Other includes assets and operations not specifically associated with the other defined segments, including corporate assets, investments in unconsolidated entities and 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 |
|
Suburban |
|
Suburban |
|
Greater |
|
St. Marys & |
|
Colorado |
|
Northern/ |
|
San |
|
Greater |
|
Other |
|
Total |
|
||||||||||||
Three Months Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
34,393 |
|
$ |
15,573 |
|
$ |
7,357 |
|
$ |
3,553 |
|
$ |
2,505 |
|
$ |
2,988 |
|
$ |
1,289 |
|
$ |
2,893 |
|
$ |
1,810 |
|
$ |
|
|
$ |
(182 |
) |
$ |
72,179 |
|
Property operating expenses |
|
10,369 |
|
5,490 |
|
2,840 |
|
1,317 |
|
40 |
|
691 |
|
491 |
|
985 |
|
333 |
|
|
|
(489 |
) |
22,067 |
|
||||||||||||
NOI |
|
$ |
24,024 |
|
$ |
10,083 |
|
$ |
4,517 |
|
$ |
2,236 |
|
$ |
2,465 |
|
$ |
2,297 |
|
$ |
798 |
|
$ |
1,908 |
|
$ |
1,477 |
|
$ |
|
|
$ |
307 |
|
$ |
50,112 |
|
Commercial real estate property expenditures |
|
$ |
31,563 |
|
$ |
3,123 |
|
$ |
871 |
|
$ |
404 |
|
$ |
338 |
|
$ |
311 |
|
$ |
5,833 |
|
$ |
587 |
|
$ |
7,702 |
|
$ |
|
|
$ |
(268 |
) |
$ |
50,464 |
|
Segment assets at March 31, 2006 |
|
$ |
925,067 |
|
$ |
462,441 |
|
$ |
187,732 |
|
$ |
114,873 |
|
$ |
99,029 |
|
$ |
98,818 |
|
$ |
69,086 |
|
$ |
58,203 |
|
$ |
51,570 |
|
$ |
|
|
$ |
76,056 |
|
$ |
2,142,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Three Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
29,679 |
|
$ |
14,419 |
|
$ |
2,662 |
|
$ |
2,454 |
|
$ |
2,506 |
|
$ |
2,878 |
|
$ |
|
|
$ |
3,871 |
|
$ |
|
|
$ |
2,244 |
|
$ |
(86 |
) |
$ |
60,627 |
|
Property operating expenses |
|
9,409 |
|
5,015 |
|
1,173 |
|
1,089 |
|
36 |
|
706 |
|
|
|
1,509 |
|
|
|
744 |
|
(763 |
) |
18,918 |
|
||||||||||||
NOI |
|
$ |
20,270 |
|
$ |
9,404 |
|
$ |
1,489 |
|
$ |
1,365 |
|
$ |
2,470 |
|
$ |
2,172 |
|
$ |
|
|
$ |
2,362 |
|
$ |
|
|
$ |
1,500 |
|
$ |
677 |
|
$ |
41,709 |
|
Commercial real estate property expenditures |
|
$ |
23,049 |
|
$ |
22,393 |
|
$ |
1,158 |
|
$ |
343 |
|
$ |
207 |
|
$ |
2,745 |
|
$ |
|
|
$ |
141 |
|
$ |
34,092 |
|
$ |
109 |
|
$ |
(58 |
) |
$ |
84,179 |
|
Segment assets at March 31, 2005 |
|
$ |
792,391 |
|
$ |
438,831 |
|
$ |
60,590 |
|
$ |
68,486 |
|
$ |
100,636 |
|
$ |
98,299 |
|
$ |
|
|
$ |
82,719 |
|
$ |
34,092 |
|
$ |
67,631 |
|
$ |
55,245 |
|
$ |
1,798,920 |
|
19
The following table reconciles our segment revenues to total revenues as reported on our Consolidated Statements of Operations:
|
|
For the Three Months |
|
||||
|
|
2006 |
|
2005 |
|
||
Segment revenues |
|
$ |
72,179 |
|
$ |
60,627 |
|
Construction contract revenues |
|
14,544 |
|
15,728 |
|
||
Other service operations revenues |
|
1,765 |
|
1,369 |
|
||
Less: Revenues from discontinued real estate operations (Note 19) |
|
(479 |
) |
(1,699 |
) |
||
Total revenues |
|
$ |
88,009 |
|
$ |
76,025 |
|
The following table reconciles our segment property operating expenses to property operating expenses as reported on our Consolidated Statements of Operations:
|
|
For the Three Months |
|
||||
|
|
2006 |
|
2005 |
|
||
|
|
|
|
|
|
||
Segment property operating expenses |
|
$ |
22,067 |
|
$ |
18,918 |
|
Less: Property operating expenses from
discontinued |
|
(182 |
) |
(749 |
) |
||
Total property operating expenses |
|
$ |
21,885 |
|
$ |
18,169 |
|
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 |
|
||||
|
|
2006 |
|
2005 |
|
||
NOI for reportable segments |
|
$ |
50,112 |
|
$ |
41,709 |
|
Construction contract revenues |
|
14,544 |
|
15,728 |
|
||
Other service operations revenues |
|
1,765 |
|
1,369 |
|
||
Equity in loss of unconsolidated entities |
|
(23 |
) |
|
|
||
Income tax expense |
|
(215 |
) |
(457 |
) |
||
Less: |
|
|
|
|
|
||
Depreciation and other amortization
associated with |
|
(19,313 |
) |
(14,169 |
) |
||
Construction contract expenses |
|
(14,026 |
) |
(14,897 |
) |
||
Other service operations expenses |
|
(1,678 |
) |
(1,291 |
) |
||
General and administrative expenses |
|
(3,963 |
) |
(3,276 |
) |
||
Interest expense on continuing operations |
|
(17,584 |
) |
(12,962 |
) |
||
Amortization of deferred financing costs |
|
(559 |
) |
(396 |
) |
||
Minority interests in continuing operations |
|
(1,041 |
) |
(1,433 |
) |
||
NOI from discontinued operations |
|
(297 |
) |
(950 |
) |
||
Income from continuing operations |
|
$ |
7,722 |
|
$ |
8,975 |
|
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 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
20
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 |
|
||||
|
|
2006 |
|
2005 |
|
||
Deferred |
|
|
|
|
|
||
Federal |
|
$ |
176 |
|
$ |
374 |
|
State |
|
39 |
|
83 |
|
||
Total |
|
$ |
215 |
|
$ |
457 |
|
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, 2006 and 2005.
Income from discontinued operations includes revenues and expenses associated with the following:
three properties located in the Northern/Central New Jersey region that were sold on September 8, 2005;
the two Lakeview at the Greens properties that were sold on February 6, 2006; and
the 68 Culver Road property sold on March 8, 2006.
The table below sets forth the components of income from discontinued operations:
|
|
For the Three Months |
|
||||
|
|
2006 |
|
2005 |
|
||
Revenue from real estate operations |
|
$ |
479 |
|
$ |
1,699 |
|
Expenses from real estate operations: |
|
|
|
|
|
||
Property operating expenses |
|
182 |
|
749 |
|
||
Depreciation and amortization |
|
24 |
|
497 |
|
||
Interest expense |
|
131 |
|
396 |
|
||
Expenses from real estate operations |
|
337 |
|
1,642 |
|
||
Income from discontinued operations before
gain on sales of real estate |
|
142 |
|
57 |
|
||
Gain on sales of real estate |
|
2,435 |
|
|
|
||
Minority interests in discontinued operations |
|
(472 |
) |
(11 |
) |
||
Income from discontinued operations, net of minority interests |
|
$ |
2,105 |
|
$ |
46 |
|
Interest expense that is specifically identifiable to properties included in discontinued operations is used in the computation of interest expense attributable to discontinued operations. When properties included in the borrowing base to support lines of credit are classified as discontinued operations, we
21
allocate a portion of such credit lines interest expense to discontinued operations; we compute this allocation based on the percentage that the related properties represent of all properties included in the borrowing base to support such credit lines.
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.
Acquisitions
As of March 31, 2006, we were under contract to acquire a property in Washington County, Maryland for $9,000, subject to potential reductions ranging from $750 to $4,000; the amount of such decrease, if any, 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. We submitted a $500 deposit in connection with this acquisition.
On March 31, 2006, we were also under contract to acquire, for $78,000, a mixed-use facility containing 328,000 square feet of office space and 285,000 square feet of warehouse space, located in Columbia, Maryland. We submitted a $750 deposit in connection with this acquisition.
Joint Ventures
As part of our obligations under the partnership agreement of Harrisburg Corporate Gateway Partners, LP, we may be required to make unilateral payments to fund rent shortfalls on behalf of a tenant that was in bankruptcy at the time the partnership was formed. Our total unilateral commitment under this guaranty is approximately $712; the tenants account was current as of March 31, 2006. We also agreed to indemnify the partnerships lender for 80% of any losses under standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation) during the period of time in which we manage the partnerships properties; we do not expect to incur any losses under these loan guarantees.
For Route 46 Partners, we may 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 $181 in the event that funds are needed by the entity.
We are party to 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. 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.
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.
22
In two of the consolidated joint ventures that we owned as of March 31, 2006, we would be obligated to acquire the other members 50% interests in the joint ventures if defined events were to occur. The amounts we would need to pay for those membership interests are computed based on the amounts that the owners of the interests would receive under the joint venture agreements in the event that office properties owned by the joint ventures were sold for a capitalized fair value (as defined in the agreements) on a defined date. We estimate the aggregate amount we would need to pay for the other members membership interests in these joint ventures to be $1,691; however, since the determination of this amount is dependent on the operations of the office properties, which are not both completed and sufficiently occupied, this estimate is preliminary and could be materially different from the actual obligation.
Ground Lease
On March 8, 2006, we entered into a 62 year ground lease agreement on a five-acre land parcel on which we intend to construct a 24,000 square foot property. We paid $118 to the lessor upon lease execution and expect to pay an additional $399 in rent under the lease in 2006; no other rental payments are required over the life of the lease, although we are responsible for expenses associated with the property. We will recognize the total lease payments incurred under the lease evenly over the term of the lease.
Operating Leases
We are obligated as lessee under seven operating leases for office space. Future minimum rental payments due under the terms of these leases as of March 31, 2006 follow:
2006 |
|
$ |
242 |
|
2007 |
|
80 |
|
|
2008 |
|
71 |
|
|
2009 |
|
11 |
|
|
|
|
$ |
404 |
|
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, 2006 follow:
2006 |
|
$ |
309 |
|
2007 |
|
316 |
|
|
2008 |
|
230 |
|
|
2009 |
|
80 |
|
|
2010 |
|
3 |
|
|
|
|
$ |
938 |
|
Environmental Indemnity Agreement
We agreed to provide certain environmental indemnifications in connection with a lease of three properties in our New Jersey region. The prior owner of the properties, a Fortune 100 company that is responsible for groundwater contamination at such properties, previously agreed to indemnify us for (1) direct losses incurred in connection with the contamination and (2) its failure to perform remediation activities required by the State of New Jersey, up to the point that the state declares the remediation to be complete. Under the lease agreement, we agreed to the following:
to indemnify the tenant against losses covered under the prior owners indemnity agreement if the prior owner fails to indemnify the tenant for such losses. This indemnification is capped at $5,000 in perpetuity after the State of New Jersey declares the remediation to be complete;
to indemnify the tenant for consequential damages (e.g., business interruption) at one of the buildings in perpetuity and another of the buildings for 15 years after the tenants acquisition of the property from us, if such acquisition occurs. This indemnification is capped at $12,500; and
23
to pay 50% of additional costs related to construction and environmental regulatory activities incurred by the tenant as a result of the indemnified environmental condition of the properties. This indemnification is capped at $300 annually and $1,500 in the aggregate.
21. Pro Forma Financial Information (Unaudited)
We accounted for our 2005 and 2006 acquisitions using the purchase method of accounting. We included the results of operations on our acquisitions in our Consolidated Statements of Operations from their respective purchase dates through March 31, 2006.
We prepared our pro forma condensed consolidated financial information presented below as if our acquisition of the Hunt Valley/Rutherford portfolios on December 22, 2005 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 purport to indicate our results of operations for future periods.
|
|
For the Three |
|
|
|
|
2005 |
|
|
|
|
|
|
|
Pro forma total revenues |
|
$ |
80,663 |
|
Pro forma net income |
|
$ |
8,490 |
|
Pro forma net income available to common shareholders |
|
$ |
4,836 |
|
Pro forma earnings per common share on net
income |
|
|
|
|
Basic |
|
$ |
0.13 |
|
Diluted |
|
$ |
0.13 |
|
In April 2006, we sold 2.0 million common shares to an underwriter at a net price of $41.31 per share for gross proceeds before offering costs of $82,620. We contributed the proceeds to our Operating Partnership in exchange for 2.0 million common units. The proceeds were used primarily to pay down our Revolving Credit Facility.
On April 4, 2006, we entered into a 62-year ground lease agreement on a six-acre land parcel on which we expect to construct a 110,000 square foot property. We paid $550 to the lessor upon lease execution and expect to pay an additional $1,870 in rent under the lease by 2007. No other rental payments are required over the life of the lease, although we are responsible for expenses associated with the property. We will recognize the total lease payments incurred under the lease evenly over the term of the lease.
On April 21, 2006, we acquired a 20-acre land parcel that we believe can support approximately 300,000 developable square feet for a contract price of $1,050 using cash reserves.
On April 27, 2006, we entered into two interest rate swap agreements that fix the one-month LIBOR base rate at 5.232% on an aggregate notional amount of $50,000. These swap agreements became effective on May 1, 2006 and carry three-year terms.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a REIT that focuses on the acquisition, development, ownership, management and leasing of primarily Class A suburban office properties 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 March 31, 2006, our investments in real estate included the following:
163 wholly owned operating properties totaling 13.7 million square feet;
13 wholly owned properties under construction or development that we estimate will total approximately 1.6 million square feet upon completion and two wholly owned office properties totaling approximately 115,000 square feet that were under redevelopment;
wholly owned land parcels totaling 352 acres that we believe are potentially developable into approximately 5.1 million square feet; and
partial ownership interests in a number of other real estate projects in operations or under development or redevelopment.
During the three months ended March 31, 2006, we:
experienced increased revenues, operating expenses and operating income due primarily to the addition of properties through acquisition and construction activities since January 1, 2005;
finished the period with occupancy for our wholly owned portfolio of properties at 93.3%;
acquired a 60,000 square foot property to be redeveloped, and 41 acres of land that can support up to approximately 465,000 developable square feet, for $12.2 million;
placed into service a newly-constructed property totaling 162,000 square feet in the Baltimore/Washington Corridor; and
sold three operating properties and a newly constructed property for a total of $29.2 million.
In this section, we discuss our financial condition and results of operations as of and for the three months ended March 31, 2006. 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, 2006 compared to the same period in 2005;
how we raised cash for acquisitions and other capital expenditures during the three months ended March 31, 2006;
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, 2006 and 2005.
You should refer to our Consolidated Financial Statements 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 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
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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;
our ability to satisfy and operate effectively under federal income tax rules relating to real estate investment trusts and partnerships;
governmental actions and initiatives; and
environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
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Corporate Office Properties Trust and Subsidiaries
Operating Data Variance Analysis
(Dollars for this table are in thousands, except per share data)
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For the Three Months Ended March 31, |
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2006 |
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2005 |
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Variance |