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)

Maryland

 

23-2947217

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

6711 Columbia Gateway Drive, Suite 300, Columbia MD

 

21046

(Address of principal executive offices)

 

(Zip Code)

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):

Large accelerated filer x

 

Accelerated filer o

 

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    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.

3




 

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.

4




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.

5




 

Corporate Office Properties Trust and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)
(unaudited)

1.  Organization

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses on the 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:

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 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”):

 

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.

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

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.

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:

7




 

 

 

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

8




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.

9




 

·                  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:

10




 

Weighted average fair value of grants on grant date

 

$

5.51

 

Risk-free interest rate

 

4.73

%(1)

Expected life-years

 

7.06

 

Expected volatility

 

23.95

%

Expected dividend yield

 

6.39

%

 

 

 

 


(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:

 

 

For the Three
Months Ended
June 30, 2006

 

For the Six
Months Ended
June 30, 2006

 

Increase in general and administrative expenses

 

$

594

 

$

1,063

 

Increase in construction contract and other service
operations expenses

 

198

 

342

 

Share-based compensation expense

 

792

 

1,405

 

Income taxes

 

(25

)

(42

)

Minority interests

 

(134

)

(243

)

Net share-based compensation expense

 

$

633

 

$

1,120

 

 

 

 

 

 

 

Net share-based compensation expense per share

 

 

 

 

 

Basic

 

$

0.02

 

$

0.03

 

Diluted

 

$

0.01

 

$

0.03

 

 

 

 

 

 

 

 

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:

 

 

For the Three
Months Ended
June 30, 2005

 

For the Six
Months Ended
June 30, 2005

 

Increase in general and administrative expenses

 

$

510

 

$

923

 

Increase in construction contract and other service
operations expenses

 

77

 

123

 

 

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:

11




 

 

For the Three
Months Ended
June 30, 2005

 

For the Six
Months Ended
June 30, 2005

 

Net income, as reported

 

$

9,120

 

$

18,160

 

Add: Share-based compensation expense, net of related tax effects and minority interests, included in the determination of net income

 

448

 

802

 

Less: Share-based compensation expense determined under the fair value based method, net of related tax effects and minority interests

 

(429

)

(768

)

Net income, pro forma

 

$

9,139

 

$

18,194

 

Basic EPS on net income available to common shareholders,
as reported

 

$

0.15

 

$

0.30

 

Basic EPS on net income available to common shareholders,
pro forma

 

$

0.15

 

$

0.30

 

Diluted EPS on net income available to common shareholders,
as reported

 

$

0.14

 

$

0.28

 

Diluted EPS on net income available to common shareholders, pro forma

 

$

0.14

 

$

0.29

 

 

 

 

 

 

 

 

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:

 

 

June 30,
2006

 

December 31
2005,

 

 

 

 

 

 

 

Land

 

$

335,712

 

$

314,719

 

Buildings and improvements

 

1,602,300

 

1,491,254

 

 

 

1,938,012

 

1,805,973

 

Less: accumulated depreciation

 

(194,361

)

(174,935

)

 

 

$

1,743,651

 

$

1,631,038

 

 

 

 

 

 

 

 

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:

 

 

June 30,
2006

 

Land

 

$

2,154

 

Buildings and improvements

 

11,041

 

 

 

13,195

 

Less: accumulated depreciation

 

(3,034

)

 

 

$

10,161

 

 

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:

 

 

June 30,
2006

 

December 31,
2005

 

Land

 

$

158,096

 

$

117,434

 

Construction in progress

 

152,099

 

138,183

 

 

 

$

310,195

 

$

255,617

 

 

12




 

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:

 

 

Cost

 

Weighted
Average
Amortization
Period

 

Lease-up value

 

$

12,867

 

3

 

Tenant relationship value

 

3,345

 

6

 

Lease cost portion of deemed cost avoidance

 

1,825

 

3

 

Lease to market value

 

851

 

5

 

 

 

$

18,888

 

4

 

 

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;

13




 

·                  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.

14




 

(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:

 

 

June 30,
2006

 

December 31,
2005

 

Commercial real estate property

 

$

94,410

 

$

94,552

 

Other assets

 

5,638

 

8,006

 

Total assets

 

$

100,048

 

$

102,558

 

 

 

 

 

 

 

Liabilities

 

$

81,551

 

$

82,619

 

Owners’ equity

 

18,497

 

19,939

 

Total liabilities and owners’ equity

 

$

100,048

 

$

102,558

 

 

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:

 

 

For the Three
Months Ended
June 30, 2006

 

For the Six
Months Ended
June 30, 2006

 

Revenues

 

$

3,254

 

$

6,458

 

Property operating expenses

 

(1,082

)

(2,187

)

Interest expense

 

(1,189

)

(2,351

)

Depreciation and amortization expense

 

(993

)

(1,905

)

Net income

 

$

(10

)

$

15

 

 

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).

 

15




 

On January 17, 2006 we acquired our partner’s 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.

8.  Intangible Assets on Real Estate Acquisitions

Intangible assets on real estate acquisitions consisted of the following:

 

 

 

 

June 30, 2006

 

December 31, 2005

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Lease-up value

 

$

105,687

 

$

28,220

 

$

77,467

 

$

92,812

 

$

20,824

 

$

71,988

 

Lease cost portion of deemed cost avoidance

 

12,875

 

4,782

 

8,093

 

11,054

 

3,991

 

7,063

 

Lease to market value

 

10,623

 

6,102

 

4,521

 

9,772

 

5,277

 

4,495

 

Tenant relationship value

 

9,371

 

522

 

8,849

 

6,349

 

130

 

6,219

 

Market concentration premium

 

1,333

 

131

 

1,202

 

1,333

 

114

 

1,219

 

 

 

$

139,889

 

$

39,757

 

$

100,132

 

$

121,320

 

$

30,336

 

$

90,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of the intangible asset categories set forth above totaled approximately $7,608 in the six months ended June 30, 2006 and $3,914 in the six months ended June 30, 2005.  The approximate weighted average amortization periods of the categories set forth above follow: lease up value: 6 years; lease cost portion of deemed cost avoidance: 4 years; lease to market value: 2 years; tenant relationship value: 5 years; and market concentration premium: 36 years.  The approximate weighted average amortization period for all of the categories combined above is 5 years.  Estimated amortization expense associated with the intangible asset categories set forth above for the six months ended December 31, 2006 is $9.6 million, 2007 is $16.0 million, 2008 is $13.5 million, 2009 is $11.5 million, 2010 is $8.5 million and 2011 is 6.7 million.

9.  Deferred Charges

Deferred charges consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Deferred leasing costs

 

$

45,125

 

$

42,752

 

Deferred financing costs

 

22,394

 

21,574

 

Goodwill

 

1,853

 

1,853

 

Deferred other

 

155

 

155

 

 

 

69,527

 

66,334

 

Accumulated amortization

 

(34,725

)

(31,288

)

Deferred charges, net

 

$

34,802

 

$

35,046

 

 

 

10.  Accounts Receivable

Our accounts receivable are reported net of an allowance for bad debts of $452 at June 30, 2006 and $421 at December 31, 2005.

16




 

11.  Prepaid and Other Assets

Prepaid and other assets consisted of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Construction contract costs incurred in excess of billings

 

$

12,057

 

$

15,277

 

Prepaid expenses

 

1,894

 

7,007

 

Other assets

 

7,471

 

6,971

 

Prepaid and other assets

 

$

21,422

 

$

29,255

 

 

12.  Derivatives

The following table sets forth our derivative contracts at June 30, 2006 and their respective fair values:

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

 

 

Notional

 

One-Month

 

Effective

 

Expiration

 

June 30,

 

December 31,

 

Nature of Derivative

 

Amount

 

LIBOR base

 

Date

 

Date

 

2006

 

2005

 

Interest rate swap

 

$

50,000

 

5.0360

%

3/28/2006

 

3/30/2009

 

$

539

 

N/A

 

Interest rate swap

 

25,000

 

5.2320

%

5/1/2006

 

5/1/2009

 

147

 

N/A

 

Interest rate swap

 

25,000

 

5.2320

%

5/1/2006

 

5/1/2009

 

147

 

N/A

 

 

 

 

 

 

 

 

 

 

 

$

833

 

$

 

 

We designated these derivatives as cash flow hedges.  These contracts hedge the risk of changes in interest rates on certain of our one-month LIBOR-based variable rate borrowings until their respective maturities.

The table below sets forth our accounting application of changes in derivative fair values:

 

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended 
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Increase in fair value applied to accumulated comprehensive income (loss) and minority interests

 

$

723

 

$

(4,188

)

$

833

 

$

(4,188

)

 

The activity reported in the table above for the three and six months ended June 30, 2005 represents changes in the fair value of a forward starting swap into which we entered to lock in the 10-year LIBOR swap rate in contemplation of our obtaining a long-term, fixed rate financing later in 2005.  We obtained this long-term financing in October 2005 and cash settled the swap at that time for a payment to the swap party of $603.

17




 

13.  Mortgages and Other Loans Payable

Mortgage and other loans payable consisted of the following:

 

 

 

 

Maximum

 

 

 

 

 

Scheduled

 

 

 

Principal Amount

 

Carrying Value at

 

 

 

Maturity

 

 

 

Under Loans at

 

June 30,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

June 30, 2006

 

2006

 

2005

 

at June 30, 2006

 

June 30, 2006

 

Revolving Credit Facility

 

 

 

 

 

 

 

 

 

 

 

Wachovia Bank, N.A. Revolving Credit Facility

 

$

400,000

 

$

303,000

 

$

273,000

 

LIBOR + 1.15% to 1.55%

 

March 2008 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (2)

 

N/A

 

946,979

 

921,265

 

3.00% - 9.48 % (3)

 

2006 - 2034 (4)

 

Variable rate construction loan facilities

 

173,701

 

100,069

 

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
Prime rate + 2.50%

 

2006 - 2010

 

Total mortgage loans

 

 

 

1,129,848

 

1,074,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable

 

 

 

 

 

 

 

 

 

 

 

Unsecured seller note

 

N/A

 

870

 

1,048

 

5.95%

 

May 2007 (6)

 

Total mortgage and other loans payable, net

 

 

 

$

1,433,718

 

$

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 $580 at June 30, 2006 and $1,391 at December 31, 2005.

(3)          The weighted average interest rate on these loans was 6.9% at June 30, 2006.

(4)          A loan with a balance of $4,928 at June 30, 2006 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(5)          At June 30, 2006, $59,210 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.

On July 3, 2006, we exercised our right to increase the borrowing capacity under our Revolving Credit Facility from $400.0 million to $500.0 million.

14.  Shareholders’ Equity

Preferred Shares

Preferred shares of beneficial interest (“preferred shares”) consisted of the following:

 

 

 

June 30, 2006

 

December 31,
2005

 

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

 

 

18




 

Common Shares

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 net proceeds totaling $82,440 to our Operating Partnership in exchange for 2.0 million common units.

During the six months ended June 30, 2006, we converted 109,317 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 Income (Loss)

The table below sets forth activity in the accumulated other comprehensive income (loss) component of shareholders’ equity:

 

 

For the Six Months Ended
June 30,

 

 

 

2006

 

2005

 

Beginning balance

 

$

(482

)

$

 

Unrealized gain (loss) on derivatives, net of minority interests

 

683

 

(3,358

)

Realized loss on derivatives, net of minority interests

 

25

 

 

Ending balance

 

$

226

 

$

(3,358

)

 

The table below sets forth our comprehensive income:

 

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

9,116

 

$

9,120

 

$

19,053

 

$

18,160

 

Unrealized gain (loss) on derivatives, net of minority interests

 

593

 

(3,358

)

683

 

(3,358

)

Realized loss on derivatives, net of minority interests

 

13

 

 

25

 

 

Total comprehensive income

 

$

9,722

 

$

5,762

 

$

19,761

 

$

14,802

 

 

19




 

15.  Dividends and Distributions

The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the six months ended June 30, 2006:

 

 

 

Record Date

 

Payable Date

 

Dividend/
Distribution Per
Share/Unit

 

Total Dividend/
Distribution

 

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

 

Second Quarter 2006

 

June 30, 2006

 

July 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

 

Second Quarter 2006

 

June 30, 2006

 

July 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

 

Second Quarter 2006

 

June 30, 2006

 

July 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

 

Second Quarter 2006

 

June 30, 2006

 

July 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

 

Second Quarter 2006

 

June 30, 2006

 

July 14, 2006

 

$

0.2800

 

$

11,859

 

 

 

 

 

 

 

 

 

 

 

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

 

Second Quarter 2006

 

June 30, 2006

 

July 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

 

Second Quarter 2006

 

June 30, 2006

 

July 14, 2006

 

$

0.2800

 

$

2,357

 

 

 

 

 

 

 

 

 

 

 

 

20




 

16.  Supplemental Information to Statements of Cash Flows

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2006

 

2005

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in accrued capital improvements and leasing costs

 

$

6,557

 

$

(1,099

)

Amortization of discounts and premiums on mortgage loans to commercial real estate properties

 

$

87

 

$

135

 

Increase (decrease) in fair value of derivatives applied to AOCL and minority interests

 

$

833

 

$

(4,188

)

Issuance of common units in connection with acquisition of properties

 

$

7,497

 

$

 

Issuance of common units in the Operating Partnership in connection with contribution of properties accounted for under the financing method of accounting

 

$

 

$

3,687

 

Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT

 

$

9,643

 

$

(1,708

)

Dividends/distribution payable

 

$

17,450

 

$

14,834

 

Decrease in minority interests and increase in shareholders’ equity in connection with the conversion of common units into common shares

 

$

4,691

 

$

324

 

Issuance of restricted shares

 

$

 

$

3,481

 

Increase in accrued furniture, fixtures and equipment

 

$

1,584

 

$

 

Mortgages assumed with acquisitions

 

$

37,484

 

$

 

 

21




17.  Information by Business Segment

As of June 30, 2006, we had nine primary office property segments: Baltimore/Washington Corridor; Northern Virginia; Suburban Baltimore, Maryland; Suburban Maryland; Greater Philadelphia; St. Mary’s and King George Counties; Colorado Springs, Colorado; Northern/Central New Jersey; 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 REIT’s 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/
Washington
Corridor

 

Northern
Virginia

 

Suburban
Baltimore

 

Colorado
Springs

 

Suburban
Maryland

 

Greater
Philadelphia

 

St. Mary’s
& King
George
Counties

 

Northern/
Central
New Jersey