UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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)

Registrant’s telephone number, including area code:  (443) 285-5400

 

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.
x  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):

 

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

On August 1, 2006, 42,398,668 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 June 30, 2006 and December 31, 2005 (unaudited)				3
		Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005 (unaudited)				4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)				5
		Notes to Consolidated Financial Statements				6
Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations				29
Item 3:		Quantitative and Qualitative Disclosures About Market Risk				44
Item 4:		Controls and Procedures				45
PART II: OTHER INFORMATION
Item 1:		Legal Proceedings				45
Item 1A:		Risk Factors				45
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds				45
Item 3:		Defaults Upon Senior Securities				46
Item 4:		Submission of Matters to a Vote of Security Holders				46
Item 5:		Other Information				46
Item 6:		Exhibits				46
SIGNATURES						48

 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)

		June 30,			December 31,
		2006			2005
Assets
Investment in real estate:
Operating properties, net		$	1,743,651		$	1,631,038
Property held for sale, net		10,161			—
Projects under construction or development		310,195			255,617
Total commercial real estate properties, net		2,064,007			1,886,655
Investments in and advances to unconsolidated real estate joint ventures		1,509			1,451
Investment in real estate, net		2,065,516			1,888,106
Cash and cash equivalents		5,748			10,784
Restricted cash		21,073			21,476
Accounts receivable, net		15,446			15,606
Investment in other unconsolidated entity		1,621			1,621
Deferred rent receivable		36,638			32,579
Intangible assets on real estate acquisitions, net		100,132			90,984
Deferred charges, net		34,802			35,046
Prepaid and other assets		21,422			29,255
Furniture, fixtures and equipment, net		5,887			4,302
Fair value of derivatives		833			—
Total assets		$	2,309,118		$	2,129,759
Liabilities and shareholders’ equity
Liabilities:
Mortgage and other loans payable		$	1,433,718		$	1,348,351
Accounts payable and accrued expenses		46,040			41,693
Rents received in advance and security deposits		18,124			14,774
Dividends and distributions payable		17,450			16,703
Deferred revenue associated with acquired operating leases		13,906			12,707
Distributions in excess of investment in unconsolidated real estate joint venture		3,067			3,081
Other liabilities		5,135			4,727
Total liabilities		1,537,440			1,442,036
Minority interests:
Common units in the Operating Partnership		105,452			95,014
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		1,778			1,396
Total minority interests		116,030			105,210
Commitments and contingencies (Note 20)
Shareholders’ equity:
Preferred Shares of beneficial interest ($0.01 par value; shares authorized of  15,000,000, issued and outstanding of 6,775,000) (Note 14)		67			67
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 42,373,505 at June 30, 2006 and 39,927,316 at December 31, 2005)		421			399
Additional paid-in capital		733,996			657,339
Cumulative distributions in excess of net income		(79,062		)	(67,697		)
Value of unearned restricted common share grants		—			(7,113		)
Accumulated other comprehensive income (loss)		226			(482		)
Total shareholders’ equity		655,648			582,513
Total liabilities and shareholders’ equity		$	2,309,118		$	2,129,759

 

See accompanying notes to consolidated financial statements.

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Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2006			2005			2006			2005
Revenues
Rental revenue		$	63,308		$	52,483		$	125,534		$	103,740
Tenant recoveries and other real estate operations revenue		9,303			6,529			18,304			13,726
Construction contract revenues		12,156			17,445			26,700			33,173
Other service operations revenues		1,984			1,019			3,749			2,388
Total revenues		86,751			77,476			174,287			153,027
Expenses
Property operating expenses		22,240			17,139			43,944			35,144
Depreciation and other amortization associated with real estate operations		18,603			14,713			37,774			28,685
Construction contract expenses		11,643			17,223			25,669			32,120
Other service operations expenses		1,818			955			3,496			2,246
General and administrative expenses		3,706			3,166			7,669			6,442
Total operating expenses		58,010			53,196			118,552			104,637
Operating income		28,741			24,280			55,735			48,390
Interest expense		(17,536		)	(13,391		)	(35,017		)	(26,246		)
Amortization of deferred financing costs		(609		)	(471		)	(1,168		)	(867		)
Income from continuing operations before equity in loss of unconsolidated entities, income taxes and minority interests		10,596			10,418			19,550			21,277
Equity in loss of unconsolidated entities		(32		)	—			(55		)	—
Income tax expense		(206		)	(213		)	(421		)	(670		)
Income from continuing operations before minority interests		10,358			10,205			19,074			20,607
Minority interests in income from continuing operations
Common units in the Operating Partnership		(1,153		)	(1,256		)	(2,053		)	(2,547		)
Preferred units in the Operating Partnership		(165		)	(165		)	(330		)	(330		)
Other consolidated entities		25			15			58			39
Income from continuing operations		9,065			8,799			16,749			17,769
Income from discontinued operations, net of minority interests		26			152			2,169			203
Income before gain on sales of real estate		9,091			8,951			18,918			17,972
Gain on sales of real estate, net		25			169			135			188
Net income		9,116			9,120			19,053			18,160
Preferred share dividends		(3,653		)	(3,654		)	(7,307		)	(7,308		)
Net income available to common shareholders		$	5,463		$	5,466		$	11,746		$	10,852
Basic earnings per common share
Income from continuing operations		$	0.13		$	0.14		$	0.24		$	0.29
Discontinued operations		—			0.01			0.05			0.01
Net income		$	0.13		$	0.15		$	0.29		$	0.30
Diluted earnings per common share
Income from continuing operations		$	0.13		$	0.14		$	0.23		$	0.28
Discontinued operations		—			—			0.05			—
Net income		$	0.13		$	0.14		$	0.28		$	0.28

 

See accompanying notes to consolidated financial statements.

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Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)

		For the Six Months Ended June 30,
		2006			2005
Cash flows from operating activities
Net income		$	19,053		$	18,160
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests		2,835			2,934
Depreciation and other amortization		38,087			29,924
Amortization of deferred financing costs		1,168			867
Amortization of deferred market rental revenue		(1,050		)	(261		)
Equity in loss of unconsolidated entities		55			—
Gain on sales of real estate		(2,563		)	(234		)
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(4,586		)	(3,009		)
Decrease in accounts receivable, restricted cash and prepaid and other assets		3,493			235
Increase in accounts payable, accrued expenses, rents received in advance and security deposits		1,964			9,854
Other		1,335			1,647
Net cash provided by operating activities		59,791			60,117
Cash flows from investing activities
Purchases of and additions to commercial real estate properties		(186,597		)	(174,455		)
Proceeds from sales of properties		28,209			2,545
Acquisition of minority interest in consolidated joint venture		—			(1,208		)
Investments in and advances to unconsolidated entities		(372		)	(32		)
Distributions from unconsolidated entities		254			—
Leasing costs paid		(4,232		)	(2,468		)
Other		4,434			(1,593		)
Net cash used in investing activities		(158,304		)	(177,211		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		234,748			278,455
Repayments of mortgage and other loans payable		(187,660		)	(123,154		)
Deferred financing costs paid		(756		)	(2,173		)
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		85,054			2,252
Dividends paid		(29,632		)	(25,933		)
Distributions paid		(5,091		)	(4,688		)
Other		617			—
Net cash provided by financing activities		93,477			124,759
Net (decrease) increase in cash and cash equivalents		(5,036		)	7,665
Cash and cash equivalents
Beginning of period		10,784			13,821
End of period		$	5,748		$	21,486

 

See accompanying notes to consolidated financial statements.

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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 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 June 30, 2006, our investments in real estate included the following:

·                  170 wholly owned operating properties totaling 14.8 million square feet;

·                  17 wholly owned properties under construction or development that we estimate will total approximately 2.1 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 563 acres that we believe are potentially developable into approximately 6.8 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”), of which we are the 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 securities owned by COPT as of June 30, 2006 follows:

 

Two of our trustees controlled, either directly or through ownership by other entities or family members, an additional 14% of the Operating Partnership’s 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”):

 

 

Most of the services that CPM provides are for us.  CDC, CDS and CC&C provide services to us and to third parties.

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

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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.

3.  Earnings Per Share (“EPS”)

 We present both basic and diluted EPS.  We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the 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 Ended June 30,						For the Six Months Ended June 30,
		2006			2005			2006			2005
Numerator:
Income from continuing operations		$	9,065		$	8,799		$	16,749		$	17,769
Add: Gain on sales of real estate, net		25			169			135			188
Less: Preferred share dividends		(3,653		)	(3,654		)	(7,307		)	(7,308		)
Numerator for basic and diluted EPS from continuing operations available to common shareholders		5,437			5,314			9,577			10,649
Add: Income from discontinued operations, net		26			152			2,169			203
Numerator for basic and diluted EPS on net income  available to common shareholders		$	5,463		$	5,466		$	11,746		$	10,852
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		41,510			36,692			40,594			36,624
Dilutive effect of share-based compensation awards		1,721			1,528			1,801			1,534
Denominator for diluted EPS		43,231			38,220			42,395			38,158
Basic EPS:
Income from continuing operations		$	0.13		$	0.14		$	0.24		$	0.29
Income from discontinued operations		—			0.01			0.05			0.01
Net income available to common shareholders		$	0.13		$	0.15		$	0.29		$	0.30
Diluted EPS:
Income from continuing operations		$	0.13		$	0.14		$	0.23		$	0.28
Income from discontinued operations		—			—			0.05			—
Net income available to common shareholders		$	0.13		$	0.14		$	0.28		$	0.28

 

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:

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		Weighted Average Shares in Denominator
		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2006		2005		2006		2005
Conversion of weighted average common units		8,465		8,676		8,493		8,681
Conversion of weighted average convertible preferred units		176		176		176		176
Share-based compensation awards		—		147		—		149

 

4.  Recent Accounting Pronouncements

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, “Investor’s 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.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  We do not expect that the implementation of FIN 48 will have a material effect on our financial position, results of operations or cash flows.

5.  Share-Based Compensation

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 June 30, 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

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S-8 that became effective upon filing with the Securities and Exchange Commission.  As of June 30, 2006, we had 906,517 awards available for future grant under this plan.

The following table summarizes share option transactions under the plans described above for the six months ended June 30, 2006:

		Shares		Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2005		2,709,927		$	14.41
Granted		249,739		$	40.69
Forfeited		(27,921	)	$	31.35
Exercised		(205,110	)	$	12.95
Outstanding at June 30, 2006		2,726,635		$	16.75		6		$	69,101
Exercisable at June 30, 2006		2,029,350		$	11.51		5		$	62,038
Options expected to vest		662,421		$	32.00		9		$	6,710

 

The total intrinsic value of options exercised during the six months ended June 30, 2006 was $5,952.

We received $2,656 in proceeds from the exercise of share options during the six months ended June 30, 2006.

The following table summarizes restricted share transactions under the plans described above for the six months ended June 30, 2006:

		Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2005		395,609		$	19.88
Granted		133,420		$	42.06
Forfeited		(20,822	)	$	23.67
Vested		(124,517	)	$	17.16
Unvested at June 30, 2006		383,690		$	28.28
Restricted shares expected to vest		364,506

 

The total fair value of restricted shares vested during the six months ended June 30, 2006 was $5,319.

We did not realize a windfall tax benefit for the 2006 periods on options exercised and restricted shares vested by employees of our subsidiaries that are subject to income tax due to the existence of a net operating loss carryforward on such subsidiaries.

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 difference between the exercise price and the grant-date market price over the service period to which the options related.

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·                  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 and six months ended June 30, 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 six months ended June 30, 2006 are set forth below:

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(1) Ranged from 4.35% to 5.27%.

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 and six months ended June 30, 2006:

 

 

We also capitalized share-based compensation costs of approximately $57 in the three months ended June 30, 2006 and $85 in the six months ended June 30, 2006.

As of June 30, 2006, there was $1,709 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 June 30, 2006, there was $8,654 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 and six months ended June 30, 2005 were as follows:

 

 

The following table summarizes our operating results for the three and six months ended June 30, 2005 as if we elected to account for our share-based compensation under the fair value provisions of SFAS 123 in that period:

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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.

6.  Commercial Real Estate Properties

Operating properties consisted of the following:

 

 

At June 30, 2006, we were under contract to sell 710 Route 46, an office property located in Fairfield, New Jersey that we classified as held for sale (Fairfield, New Jersey is located in the Northern/Central New Jersey region).  The components associated with this property as of June 30, 2006 included the following:

 

 

We sold this property on July 26, 2006 for a contract price of $15,750.

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

 

 

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2006 Acquisitions

We acquired the following office properties during the six months ended June 30, 2006:

 

Project Name		Location		Date of Acquisition		Number of Buildings		Total Rentable Square Feet		Initial Cost
North Creek		Colorado Springs, CO		5/18/2006		3		324,549		$	41,508
1915 & 1925 Aerotech Drive		Colorado Springs, CO		6/8/2006		2		75,892		8,378
7125 Columbia Gateway Drive		Columbia, MD (1)		6/29/2006		1		611,379		73,975
						6		1,011,820		$	123,861

(1) Located in the Baltimore/Washington Corridor.

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

 

		North Creek			Aerotech Drive			Columbia Gateway Drive			Total
Land, operating properties		$	2,735		$	1,113		$	17,126		$	20,974
Building and improvements		34,161			6,161			46,771			87,093
Intangible assets on real estate acquisitions		5,694			1,235			11,959			18,888
Total assets		42,590			8,509			75,856			126,955
Deferred revenue associated with acquired operating leases		(1,082		)	(131		)	(1,881		)	(3,094		)
Total acquisition cost		$	41,508		$	8,378		$	73,975		$	123,861

 

Intangible assets recorded in connection with these acquisitions included the following:

 

 

During the six months ended June 30, 2006, we also 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);

·                  a 20 acre parcel of land located in Colorado Springs, Colorado that we believe can support up to 300,000 developable square feet for $1,060 on April 21, 2006

·                  a 13 acre parcel of land located in Colorado Springs, Colorado that we believe can support up to 120,000 developable square feet for $2,254 on May 19, 2006;

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·                  a 178 acre parcel of land located in Annapolis Junction, Maryland, located adjacent to the National Business Park, that we believe can support up to 1.25 million developable square feet for $26,854 on June 29, 2006 (Annapolis Junction, Maryland is located in the Baltimore/Washington Corridor); and

·                  a 5 acre parcel of land located in Columbia, Maryland that we believe can support up to 120,000 developable square feet for $3,361 on June 29, 2006.

We also acquired a 50% interest in a consolidated 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.

2006 Construction and Pre-Construction Activities

During 2006, we placed into service a 162,000 square foot building and 59% of a 157,000 square foot building, both of which are located in Annapolis Junction, Maryland.

As of  June 30, 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. Mary’s County, Maryland, one in Colorado Springs, Colorado, one in Suburban Baltimore and one in Richmond, Virginia.  We also had pre-construction activities underway on four new buildings located in the Baltimore/Washington Corridor (including one through a 50% joint venture the formation of which was pending at June 30, 2006), one in Suburban Maryland, one in King George County, Virginia, one in Colorado Springs Colorado and one in Suburban Baltimore.  In addition, we had redevelopment underway on two wholly owned existing buildings (one is located in the Baltimore/Washington Corridor and the other in Colorado Springs, Colorado) and 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 six months ended June 30, 2006, we sold the following operating properties:

 

Project Name		Location		Date of Sale		Number of Buildings		Total Rentable Square Feet		Sale Price			Gain on Sale
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			316
						3		199,063		$	26,700		$	2,403

(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 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												Total			Maximum
		June 30, 2006			December 31, 2005			Date Acquired		Owner- ship		Nature of Activity		Assets at 6/30/2006			Exposure to Loss (1)
Route 46 Partners		$	1,509	(2)	$	1,451	(2)	3/14/2003		20%		Operates one building(3)		$	22,811		$	1,630
Harrisburg Corporate Gateway Partners, L.P.		(3,067		)(4)	(3,081		)(4)	9/29/2005		20%		Operates 16 buildings(5)		77,237			—

(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.

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(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 June 30, 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 venture’s 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 $5,218 at June 30, 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 venture’s properties are located in Greater Harrisburg, Pennsylvania.

The following table sets forth condensed balance sheets for our unconsolidated real estate joint ventures:

 

 

The following table sets forth combined condensed statements of operations for the three and six months ended June 30, 2006 for the two unconsolidated joint ventures we owned as of June 30, 2006:

 

 

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 and six months ended June 30, 2006 and 2005 since the income earned by the entity in those periods did not exceed our partner’s defined return.

On July 26, 2006, the property owned by Route 46 Partners was sold for a contract price of $27,000, after which the joint venture was dissolved.

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

 

		Date Acquired		Ownership % at 6/30/2006		Nature of Activity		Total Assets at 6/30/2006			Collateralized Assets at 6/30/2006
COPT Opportunity Invest I, LLC		12/20/2005		92.5%		Redeveloping two properties(1)		$	37,647		$	—
Commons Office 6-B, LLC		2/10/2006		50.0%		Developing land parcel(2)		6,146			6,146
MOR Forbes 2 LLC		12/24/2002		50.0%		Operating building(3)		4,250			3,839
								$	48,043		$	9,985

(1)             This joint venture owns one property in Northern Virginia and one in the Baltimore/Washington Corridor.

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

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

 

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