UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one) |
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x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2006 |
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or |
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o |
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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 |
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23-2947217 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
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6711 Columbia Gateway Drive, Suite 300, Columbia MD |
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21046 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants 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 Noo
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 |
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Accelerated filer o |
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
o Yes Nox
On November 3, 2006, 42,821,762 shares of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued.
TABLE OF CONTENTS
FORM 10-Q
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Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005 (unaudited) |
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3 |
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4 |
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5 |
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6 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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31 |
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47 |
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48 |
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48 |
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48 |
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49 |
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49 |
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49 |
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49 |
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49 |
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51 |
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2
Corporate
Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
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September 30, |
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December 31, |
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2006 |
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2005 |
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Assets |
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Investment in real estate: |
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Operating properties, net |
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$ |
1,740,326 |
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$ |
1,631,038 |
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Projects under construction or development |
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315,360 |
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255,617 |
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Total commercial real estate properties, net |
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2,055,686 |
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1,886,655 |
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Investments in and advances to unconsolidated real estate joint ventures |
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1,451 |
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Investment in real estate, net |
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2,055,686 |
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1,888,106 |
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Cash and cash equivalents |
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10,810 |
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10,784 |
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Restricted cash |
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51,784 |
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21,476 |
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Accounts receivable, net |
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26,778 |
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15,606 |
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Investment in other unconsolidated entity |
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1,621 |
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1,621 |
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Deferred rent receivable |
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39,033 |
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32,579 |
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Intangible assets on real estate acquisitions, net |
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92,061 |
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90,984 |
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Deferred charges, net |
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40,091 |
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35,046 |
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Prepaid and other assets |
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27,684 |
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29,255 |
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Furniture, fixtures and equipment, net |
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10,374 |
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4,302 |
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Total assets |
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$ |
2,355,922 |
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$ |
2,129,759 |
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Liabilities and shareholders equity |
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Liabilities: |
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Mortgage and other loans payable |
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$ |
1,206,682 |
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$ |
1,348,351 |
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3.5% Exchangeable Senior Notes |
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200,000 |
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Accounts payable and accrued expenses |
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55,487 |
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41,693 |
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Rents received in advance and security deposits |
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20,842 |
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14,774 |
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Dividends and distributions payable |
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19,810 |
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16,703 |
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Deferred revenue associated with acquired operating leases |
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12,074 |
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12,707 |
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Distributions in excess of investment in unconsolidated real estate joint venture |
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3,103 |
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3,081 |
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Fair value of derivatives |
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473 |
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Other liabilities |
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5,526 |
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4,727 |
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Total liabilities |
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1,523,997 |
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1,442,036 |
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Minority interests: |
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Common units in the Operating Partnership |
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107,212 |
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95,014 |
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Preferred units in the Operating Partnership |
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8,800 |
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8,800 |
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Other consolidated real estate joint ventures |
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1,760 |
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1,396 |
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Total minority interests |
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117,772 |
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105,210 |
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Commitments and contingencies (Note 20) |
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Shareholders equity: |
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Preferred Shares of beneficial interest ($0.01 par value; shares authorized of 15,000,000, issued and outstanding of 9,015,000 at September 30, 2006 and 6,775,000 at December 31, 2005) (Note 14) |
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90 |
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67 |
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Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 42,810,978 at September 30, 2006 and 39,927,316 at December 31, 2005) |
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424 |
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399 |
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Additional paid-in capital |
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790,526 |
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657,339 |
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Cumulative distributions in excess of net income |
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(76,046 |
) |
(67,697 |
) |
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Value of unearned restricted common share grants |
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(7,113 |
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Accumulated other comprehensive loss |
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(841 |
) |
(482 |
) |
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Total shareholders equity |
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714,153 |
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582,513 |
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Total liabilities and shareholders equity |
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$ |
2,355,922 |
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$ |
2,129,759 |
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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)
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For the Three Months |
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For the Nine Months |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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Rental revenue |
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$ |
66,550 |
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$ |
53,182 |
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$ |
190,166 |
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$ |
155,808 |
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Tenant recoveries and other real estate operations revenue |
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11,586 |
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7,826 |
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29,686 |
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21,317 |
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Construction contract revenues |
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13,219 |
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28,476 |
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39,919 |
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61,649 |
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Other service operations revenues |
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1,572 |
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1,308 |
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5,321 |
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3,696 |
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Total revenues |
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92,927 |
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90,792 |
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265,092 |
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242,470 |
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Expenses |
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Property operating expenses |
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25,430 |
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18,272 |
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68,698 |
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52,940 |
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Depreciation and other amortization associated with real estate operations |
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21,680 |
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17,522 |
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58,631 |
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45,943 |
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Construction contract expenses |
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12,465 |
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28,073 |
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38,134 |
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60,193 |
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Other service operations expenses |
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1,495 |
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1,253 |
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4,991 |
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3,499 |
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General and administrative expenses |
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4,226 |
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3,318 |
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11,895 |
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9,760 |
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Total operating expenses |
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65,296 |
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68,438 |
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182,349 |
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172,335 |
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Operating income |
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27,631 |
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22,354 |
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82,743 |
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70,135 |
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Interest expense |
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(17,974 |
) |
(13,894 |
) |
(52,493 |
) |
(39,960 |
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Amortization of deferred financing costs |
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(736 |
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(639 |
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(1,899 |
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(1,500 |
) |
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Income from continuing operations before equity in income (loss) of unconsolidated entities, income taxes and minority interests |
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8,921 |
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7,821 |
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28,351 |
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28,675 |
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Equity in income (loss) of unconsolidated entities |
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15 |
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(40 |
) |
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Income tax expense |
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(202 |
) |
(263 |
) |
(623 |
) |
(933 |
) |
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Income from continuing operations before minority interests |
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8,734 |
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7,558 |
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27,688 |
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27,742 |
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Minority interests in income from continuing operations |
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Common units in the Operating Partnership |
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(808 |
) |
(752 |
) |
(2,839 |
) |
(3,216 |
) |
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Preferred units in the Operating Partnership |
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(165 |
) |
(165 |
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(495 |
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(495 |
) |
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Other consolidated entities |
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38 |
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19 |
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96 |
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58 |
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Income from continuing operations |
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7,799 |
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6,660 |
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24,450 |
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24,089 |
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Income from discontinued operations, net of minority interests |
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12,191 |
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3,870 |
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14,458 |
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4,413 |
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Income before gain on sales of real estate |
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19,990 |
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10,530 |
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38,908 |
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28,502 |
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Gain on sales of real estate, net |
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597 |
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59 |
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732 |
|
247 |
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Net income |
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20,587 |
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10,589 |
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39,640 |
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28,749 |
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Preferred share dividends |
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(4,307 |
) |
(3,653 |
) |
(11,614 |
) |
(10,961 |
) |
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Issuance costs associated with redeemed preferred shares |
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(1,829 |
) |
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(1,829 |
) |
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Net income available to common shareholders |
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$ |
14,451 |
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$ |
6,936 |
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$ |
26,197 |
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$ |
17,788 |
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Basic earnings per common share |
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Income from continuing operations |
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$ |
0.05 |
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$ |
0.08 |
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$ |
0.29 |
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$ |
0.36 |
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Discontinued operations |
|
0.29 |
|
0.11 |
|
0.35 |
|
0.12 |
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Net income |
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$ |
0.34 |
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$ |
0.19 |
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$ |
0.64 |
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$ |
0.48 |
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Diluted earnings per common share |
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|
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Income from continuing operations |
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$ |
0.05 |
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$ |
0.08 |
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$ |
0.27 |
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$ |
0.35 |
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Discontinued operations |
|
0.28 |
|
0.10 |
|
0.34 |
|
0.11 |
|
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Net income |
|
$ |
0.33 |
|
$ |
0.18 |
|
$ |
0.61 |
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$ |
0.46 |
|
See accompanying notes to consolidated financial statements.
4
Corporate
Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
|
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For the Nine Months |
|
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|
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2006 |
|
2005 |
|
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Cash flows from operating activities |
|
|
|
|
|
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Net income |
|
$ |
39,640 |
|
$ |
28,749 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
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Minority interests |
|
6,471 |
|
4,806 |
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Depreciation and other amortization |
|
59,993 |
|
47,951 |
|
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Amortization of deferred financing costs |
|
2,032 |
|
1,508 |
|
||
Amortization of deferred market rental revenue |
|
(1,326 |
) |
(32 |
) |
||
Equity in loss of unconsolidated entities |
|
40 |
|
|
|
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Gain on sales of real estate |
|
(17,990 |
) |
(4,674 |
) |
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Increase in deferred rent receivable |
|
(7,446 |
) |
(4,570 |
) |
||
Increase in accounts receivable, restricted cash and prepaid and other assets |
|
(11,308 |
) |
(3,504 |
) |
||
Increase in accounts payable, accrued expenses, rents received in advance and security deposits |
|
14,176 |
|
4,322 |
|
||
Other |
|
2,304 |
|
1,666 |
|
||
Net cash provided by operating activities |
|
86,586 |
|
76,222 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Purchases of and additions to commercial real estate properties |
|
(227,592 |
) |
(279,082 |
) |
||
Proceeds from sales of properties |
|
46,708 |
|
29,470 |
|
||
Proceeds from sale of unconsolidated real estate joint venture |
|
1,524 |
|
|
|
||
Proceeds from contributions of assets to unconsolidated real estate joint venture |
|
|
|
68,646 |
|
||
Investments in and advances from unconsolidated entities |
|
127 |
|
36 |
|
||
Distributions from unconsolidated entities |
|
367 |
|
|
|
||
Leasing costs paid |
|
(6,106 |
) |
(6,582 |
) |
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Decrease (increase) in restricted cash associated with investing activities |
|
5,559 |
|
(110 |
) |
||
Purchases of furniture, fixtures and equipment |
|
(7,549 |
) |
(1,850 |
) |
||
Other |
|
(182 |
) |
(759 |
) |
||
Net cash used in investing activities |
|
(187,144 |
) |
(190,231 |
) |
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from mortgage and other loans payable |
|
368,259 |
|
423,699 |
|
||
Proceeds from 3.5% Exchangeable Senior Notes |
|
200,000 |
|
|
|
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Repayments of mortgage and other loans payable |
|
(548,090 |
) |
(334,890 |
) |
||
Deferred financing costs paid |
|
(5,402 |
) |
(2,752 |
) |
||
Acquisition of partner interests in consolidated joint ventures |
|
(3,016 |
) |
(1,208 |
) |
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Distributions paid to partners in consolidated joint ventures |
|
(787 |
) |
|
|
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Net proceeds from issuance of common shares |
|
88,622 |
|
78,260 |
|
||
Net proceeds from issuance of preferred shares |
|
81,863 |
|
|
|
||
Redemption of preferred shares |
|
(28,750 |
) |
|
|
||
Dividends paid |
|
(45,138 |
) |
(38,968 |
) |
||
Distributions paid |
|
(7,614 |
) |
(7,060 |
) |
||
Other |
|
637 |
|
455 |
|
||
Net cash provided by financing activities |
|
100,584 |
|
117,536 |
|
||
Net increase in cash and cash equivalents |
|
26 |
|
3,527 |
|
||
Cash and cash equivalents |
|
|
|
|
|
||
Beginning of period |
|
10,784 |
|
13,821 |
|
||
End of period |
|
$ |
10,810 |
|
$ |
17,348 |
|
See accompanying notes to consolidated financial statements.
5
Corporate Office Properties Trust and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollars in thousands, except per share data)
(unaudited)
Corporate Office Properties Trust (COPT) and subsidiaries (collectively, the Company) is a fully-integrated and self-managed real estate investment trust (REIT) that focuses on the acquisition, development, ownership, management and leasing of primarily Class A suburban office properties in the Greater Washington, D.C. region and other select submarkets. We have implemented a core customer expansion strategy that is built on meeting, through acquisitions and development, the multi-location requirements of our strategic tenants. As of September 30, 2006, our investments in real estate included the following:
· 168 wholly owned operating properties totaling 14.6 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 555 acres that we believe are potentially developable into approximately 6.9 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 Partnerships forms of ownership and the percentage of those securities owned by COPT as of September 30, 2006 follows:
Common Units |
|
83 |
% |
Series F Preferred Units |
|
100 |
% |
Series G Preferred Units |
|
100 |
% |
Series H Preferred Units |
|
100 |
% |
Series I Preferred Units |
|
0 |
% |
Series J Preferred Units |
|
100 |
% |
Two of our trustees controlled, either directly or through ownership by other entities or family members, an additional 14% of the Operating Partnerships common units.
In addition to owning interests in real estate, the Operating Partnership also owns 100% of Corporate Office Management, Inc. (COMI) and, either directly or through COMI, 100% of the consolidated subsidiaries that are set forth below (collectively defined as the Service Companies):
Entity Name |
|
Type of Service Business |
COPT Property Management Services, LLC (CPM) |
|
Real Estate Management |
COPT Development & Construction Services, LLC (CDC) |
|
Construction and Development |
Corporate Development Services, LLC (CDS) |
|
Construction and Development |
Corporate Cooling & Controls, LLC (CC&C) |
|
Heating and Air Conditioning |
Most of the services that CPM provides are for us. CDC, CDS and CC&C provide services to us and to third parties.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures
6
required by accounting principles generally accepted in the United States for complete Consolidated Financial Statements are not included herein. These interim financial statements should be read together with the financial statements and notes thereto included in our Current Report on Form 8-K filed on August 31, 2006. The interim financial statements on the previous pages reflect all adjustments that we believe are necessary for the fair statement of our financial position and results of operations for the interim periods presented. These adjustments are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of the results for a full year.
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. 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 |
|
For the Nine Months |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
$ |
7,799 |
|
$ |
6,660 |
|
$ |
24,450 |
|
$ |
24,089 |
|
Add: Gain on sales of real estate, net |
|
597 |
|
59 |
|
732 |
|
247 |
|
||||
Less: Preferred share dividends |
|
(4,307 |
) |
(3,653 |
) |
(11,614 |
) |
(10,961 |
) |
||||
Less: Issuance costs associated with redeemed preferred shares |
|
(1,829 |
) |
|
|
(1,829 |
) |
|
|
||||
Numerator for basic and diluted EPS from continuing operations available to common shareholders |
|
2,260 |
|
3,066 |
|
11,739 |
|
13,375 |
|
||||
Add: Income from discontinued operations, net |
|
12,191 |
|
3,870 |
|
14,458 |
|
4,413 |
|
||||
Numerator for basic and diluted EPS on net income available to common shareholders |
|
$ |
14,451 |
|
$ |
6,936 |
|
$ |
26,197 |
|
$ |
17,788 |
|
Denominator (all weighted averages): |
|
|
|
|
|
|
|
|
|
||||
Denominator for basic EPS (common shares) |
|
42,197 |
|
36,913 |
|
41,134 |
|
36,721 |
|
||||
Dilutive effect of share-based compensation awards |
|
1,649 |
|
1,667 |
|
1,785 |
|
1,595 |
|
||||
Denominator for diluted EPS |
|
43,846 |
|
38,580 |
|
42,919 |
|
38,316 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
$ |
0.05 |
|
$ |
0.08 |
|
$ |
0.29 |
|
$ |
0.36 |
|
Income from discontinued operations |
|
0.29 |
|
0.11 |
|
0.35 |
|
0.12 |
|
||||
Net income available to common shareholders |
|
$ |
0.34 |
|
$ |
0.19 |
|
$ |
0.64 |
|
$ |
0.48 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
$ |
0.05 |
|
$ |
0.08 |
|
$ |
0.27 |
|
$ |
0.35 |
|
Income from discontinued operations |
|
0.28 |
|
0.10 |
|
0.34 |
|
0.11 |
|
||||
Net income available to common shareholders |
|
$ |
0.33 |
|
$ |
0.18 |
|
$ |
0.61 |
|
$ |
0.46 |
|
7
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods:
|
|
Weighted Average Shares in Denominator |
|
||||||
|
|
For the Three Months |
|
For the Nine Months |
|
||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Conversion of weighted average common units |
|
8,562 |
|
8,758 |
|
8,516 |
|
8,707 |
|
Conversion of weighted average convertible preferred units |
|
176 |
|
176 |
|
176 |
|
176 |
|
Share-based compensation awards |
|
|
|
191 |
|
|
|
175 |
|
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 Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) regarding EITF 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. The conclusion provided a framework for addressing the question of when a general partner, as defined in EITF 04-05, should consolidate a limited partnership. Under the consensus, a general partner is presumed to control a limited partnership (or similar entity) and should consolidate that entity unless the limited partners possess kick-out rights or other substantive participating rights as described in EITF 96-16, Investors Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. This EITF was initially effective for all new limited partnerships formed and for existing limited partnerships for which the partnership agreements were 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 enterprises 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.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements but does apply under other accounting pronouncements that require or permit fair value measurements. The changes to current practice resulting from the Statement relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with earlier application encouraged. We do not expect that the adoption of this Statement will have a material effect on our financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), which addresses diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. There have historically been two widely recognized methods for quantifying the effects of financial statement errors: the roll-over method and the iron curtain method. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements, but its use can lead to the accumulation of misstatements on the balance sheet. Conversely, the iron-curtain method focuses primarily on the effect of correcting the period end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of the
8
error on each of the companys financial statements and the related financial statement disclosures. This model is commonly referred to as a dual approach because it requires quantification of errors under both the iron-curtain and the roll-over methods. SAB 108 is effective for financial statements for fiscal years ending after November 15, 2006. We do not expect that SAB 108 will have a material effect on our consolidated financial position or results of operations.
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 Form S-8 that became effective upon filing with the Securities and Exchange Commission. As of September 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 are three years. Options expire ten years after the date of grant. 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. Shares for this plan are issued under a registration statement on Form S-8 that became effective upon filing with the Securities and Exchange Commission. As of September 30, 2006, we had 743,683 awards available for future grant under this plan.
The following table summarizes share
option transactions under the plans described above for the nine months
ended September 30, 2006:
|
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
|
||||
Outstanding at December 31, 2005 |
|
2,709,927 |
|
$ |
14.41 |
|
|
|
|
|
|
|
|
Granted |
|
443,149 |
|
$ |
42.00 |
|
|
|
|
|
|
|
|
Forfeited |
|
(41,978 |
) |
$ |
32.11 |
|
|
|
|
|
|
|
|
Exercised |
|
(561,568 |
) |
$ |
11.16 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
2,549,530 |
|
$ |
19.63 |
|
|
6 |
|
|
$ |
64,172 |
|
Exercisable at September 30, 2006 |
|
1,771,197 |
|
$ |
12.64 |
|
|
5 |
|
|
$ |
56,886 |
|
Options expected to vest |
|
739,416 |
|
$ |
35.52 |
|
|
9 |
|
|
$ |
6,922 |
|
The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $18,916.
We received $6,265 in proceeds from the exercise of share options during the nine months ended September 30, 2006.
9
The following table summarizes restricted share transactions under the plans described above for the nine months ended September 30, 2006:
|
Shares |
|
Weighted |
|
||
Unvested at December 31, 2005 |
|
395,609 |
|
$ |
19.88 |
|
Granted |
|
163,420 |
|
$ |
42.65 |
|
Forfeited |
|
(20,822 |
) |
$ |
23.67 |
|
Vested |
|
(124,517 |
) |
$ |
17.16 |
|
Unvested at September 30, 2006 |
|
413,690 |
|
$ |
29.51 |
|
Restricted shares expected to vest |
|
393,006 |
|
|
|
The total fair value of restricted shares vested during the nine months ended September 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.
· 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).
10
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 nine months ended September 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 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 nine months ended September 30, 2006 are set forth below:
Weighted average fair value of grants on grant date |
|
$ |
5.85 |
|
Risk-free interest rate |
|
4.91 |
%(1) |
|
Expected life-years |
|
7.06 |
|
|
Expected volatility |
|
23.83 |
% |
|
Expected dividend yield |
|
6.31 |
% |
(1) Ranged from 4.35% to 5.31%.
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 nine months ended September 30, 2006:
11
|
For the Three Months |
|
For the Nine Months |
|
|||
Increase in general and administrative expenses |
|
$ |
710 |
|
$ |
1,773 |
|
Increase in construction contract and other service operations expenses |
|
233 |
|
575 |
|
||
Share-based compensation expense |
|
943 |
|
2,348 |
|
||
Income taxes |
|
(24 |
) |
(66 |
) |
||
Minority interests |
|
(161 |
) |
(404 |
) |
||
Net share-based compensation expense |
|
$ |
758 |
|
$ |
1,878 |
|
|
|
|
|
|
|
||
Net share-based compensation expense per share |
|
|
|
|
|
||
Basic |
|
$ |
0.02 |
|
$ |
0.05 |
|
Diluted |
|
$ |
0.02 |
|
$ |
0.04 |
|
We also capitalized share-based compensation costs of approximately $52 in the three months ended September 30, 2006 and $137 in the nine months ended September 30, 2006.
As of September 30, 2006, there was $1,492 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 September 30, 2006, there was $9,273 of unrecognized compensation cost related to unvested 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 nine months ended September 30, 2005 were as follows:
|
For the Three |
|
For the Nine |
|
|||
Increase in general and administrative expenses |
|
$ |
497 |
|
$ |
1,420 |
|
Increase in construction contract and other service operations expenses |
|
80 |
|
203 |
|
||
The following table summarizes our operating results for the three and nine months ended September 30, 2005 as if we elected to account for our share-based compensation under the fair value provisions of SFAS 123 in that period:
12
|
|
For the Three |
|
For the Nine |
|
||
Net income, as reported |
|
$ |
10,589 |
|
$ |
28,749 |
|
Add: Share-based
compensation expense, net of related tax effects |
|
437 |
|
1,239 |
|
||
Less: Share-based
compensation expense determined under the |
|
(432 |
) |
(1,200 |
) |
||
Net income, pro forma |
|
$ |
10,594 |
|
$ |
28,788 |
|
Basic EPS on net income available to common shareholders, as reported |
|
$ |
0.19 |
|
$ |
0.48 |
|
Basic EPS on net income available to common shareholders, pro forma |
|
$ |
0.19 |
|
$ |
0.49 |
|
Diluted EPS on net income available to common shareholders, as reported |
|
$ |
0.18 |
|
$ |
0.46 |
|
Diluted EPS on net income available to common shareholders, pro forma |
|
$ |
0.18 |
|
$ |
0.47 |
|
The share-based compensation expense under the fair value method, as reported in the above table, was computed using the Black-Scholes option-pricing model.
Operating properties consisted of the following:
|
September 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Land |
|
$ |
334,430 |
|
$ |
314,719 |
|
Buildings and improvements |
|
1,611,425 |
|
1,491,254 |
|
||
|
|
1,945,855 |
|
1,805,973 |
|
||
Less: accumulated depreciation |
|
(205,529 |
) |
(174,935 |
) |
||
|
|
$ |
1,740,326 |
|
$ |
1,631,038 |
|
Projects we had under construction or pre-construction consisted of the following:
|
September 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Land |
|
$ |
155,232 |
|
$ |
117,434 |
|
Construction in progress |
|
160,128 |
|
138,183 |
|
||
|
|
$ |
315,360 |
|
$ |
255,617 |
|
13
2006 Acquisitions
We acquired the following office properties during the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
Total |
|
|
|||
|
|
|
|
Date of |
|
Number of |
|
Rentable |
|
|
|||
Project Name |
|
Location |
|
Acquisition |
|
Buildings |
|
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 |
|
74,168 |
|
|
|
|
|
|
|
|
6 |
|
|
1,011,820 |
|
$ |
124,054 |
(1) Located in the Baltimore/Washington Corridor.
The table below sets forth the allocation of the acquisition costs of the properties described above:
|
|
|
|
1915 & 1925 |
|
7125 |
|
|
|
||||
|
|
|
|
Aerotech |
|
Columbia |
|
|
|
||||
|
|
North Creek |
|
Drive |
|
Gateway Drive |
|
Total |
|
||||
Land, operating properties |
|
$ |
2,735 |
|
$ |
1,113 |
|
$ |
17,126 |
|
$ |
20,974 |
|
Building and improvements |
|
34,161 |
|
6,161 |
|
46,964 |
|
87,286 |
|
||||
Intangible assets on real estate acquisitions |
|
5,694 |
|
1,235 |
|
11,959 |
|
18,888 |
|
||||
Total assets |
|
42,590 |
|
8,509 |
|
76,049 |
|
127,148 |
|
||||
Deferred revenue associated with acquired operating leases |
|
(1,082 |
) |
(131 |
) |
(1,881 |
) |
(3,094 |
) |
||||
Total acquisition cost |
|
$ |
41,508 |
|
$ |
8,378 |
|
$ |
74,168 |
|
$ |
124,054 |
|
Intangible assets recorded in connection with these acquisitions included the following:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Amortization |
|
|
|
|
Cost |
|
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 nine months ended September 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 $2,141 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 150,000 developable square feet for $2,263 on May 19, 2006;
14
· 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 $26,833 on June 29, 2006 (Annapolis Junction, Maryland is located in the Baltimore/Washington Corridor);
· a five-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; and
· a 28-acre parcel of land located in Chesterfield, Virginia on September 15, 2006 that was acquired under the terms of a lease for a 193,000 square foot building that we are constructing on the property (Chesterfield, Virginia, which is located in Greater Richmond, Virginia, is included in our other business segment). The fair value of the land and closing costs associated with the title transfer totaled $1,303.
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 fully placed into service two properties totaling 212,000 (one located in the Baltimore/Washington Corridor and one in Colorado Springs, Colorado) and placed into service a portion of two properties totaling 179,000 square feet (both located in the Baltimore/Washington Corridor).
As of September 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. Marys County, Maryland, one in Suburban Baltimore and one in Chesterfield, 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 September 30, 2006), one in Suburban Maryland, one in King George County, Virginia, two 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 one in Colorado Springs, Colorado) and two buildings owned by a joint venture (one is located in Northern Virginia and one in the Baltimore/Washington Corridor).
2006 Dispositions
We sold the following operating properties during the nine months ended September 30, 2006:
|
|
|
|
|
|
Number |
|
Total |
|
|
|
|
||||
|
|
|
|
Date of |
|
of |
|
Rentable |
|
|
|
Gain on |
||||
Project Name |
|
Location |
|
Sale |
|
Buildings |
|
Square Feet |
|
Sale Price |
|
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 |
||
710 Route 46 |
|
Fairfield, New Jersey |
|
7/26/2006 |
|
|
1 |
|
|
101,263 |
|
15,750 |
|
4,498 |
||
230 Schilling Circle |
|
Woodlawn, Maryland (2) |
|
8/9/2006 |
|
|
1 |
|
|
107,348 |
|
13,795 |
|
951 |
||
7 Centre Drive |
|
Monroe, New Jersey |
|
8/30/2006 |
|
|
1 |
|
|
19,468 |
|
3,000 |
|
684 |
||
Browns Wharf |
|
Baltimore, Maryland |
|
9/28/2006 |
|
|
1 |
|
|
104,203 |
|
20,300 |
|
8,565 |
||
|
|
|
|
|
|
|
7 |
|
|
531,345 |
|
$ |
79,545 |
|
$ |
17,101 |
(1) Located in the Suburban Maryland region.
(2) Located in the Suburban Baltimore region.
During the nine months ended September 30, 2006, we also sold the following:
· a newly constructed property in Columbia, Maryland for $2,530 on January 17, 2006. We recognized a gain of $111 on this sale; and
· a two-acre parcel of land located in Linthicum Heights, Maryland for $900 on September 7, 2006. We recognized a gain of $165 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:
15
|
|
Investment Balance at |
|
|
|
|
|
|
|
Total |
|
Maximum |
||
|
|
September 30, |
|
December 31, |
|
Date |
|
Owner- |
|
Nature of |
|
Assets at |
|
Exposure |
|
|
2006 |
|
2005 |
|
Acquired |
|
ship |
|
Activity |
|
9/30/2006 |
|
to Loss (1) |
Harrisburg Corporate Gateway Partners, L.P. |
|
$(3,103) |
(2) |
$(3,081) |
(2) |
9/29/2005 |
|
20 % |
|
Operates 16 buildings |
(3) |
$76,827 |
|
|
Route 46 Partners |
|
|
(4) |
1,451 |
|
3/14/2003 |
|
20 % |
|
Operates one building |
(5) |
N/A |
|
N/A |
(1) Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that would be due if certain contingent events occurred.
(2) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5,195 at September 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.
(3) This joint ventures properties are located in Greater Harrisburg, Pennsylvania.
(4) As discussed further below, we sold the property owned by this joint venture on July 26, 2006, after which the joint venture was dissolved. 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 December 31, 2005 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation.
(5) This joint ventures property was located in Fairfield, New Jersey.
On July 26, 2006, Rt. 46 Partners sold its property for $27,000. After the sale, the joint venture was dissolved. We recognized a gain of $563 on the disposition of our joint venture interest.
The following table sets forth condensed balance sheets for our unconsolidated real estate joint ventures:
|
September 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Commercial real estate property |
|
$ |
72,915 |
|
$ |
94,552 |
|
Other assets |
|
3,912 |
|
8,006 |
|
||
Total assets |
|
$ |
76,827 |
|
$ |
102,558 |
|
|
|
|
|
|
|
||
Liabilities |
|
$ |
67,901 |
|
$ |
82,619 |
|
Owners equity |
|
8,926 |
|
19,939 |
|
||
Total liabilities and owners equity |
|
$ |
76,827 |
|
$ |
102,558 |
|
The following table sets forth combined condensed statements of operations for the three and nine months ended September 30, 2006 for the two unconsolidated joint ventures we owned during the nine months ended September 30, 2006:
|
For the Three |
|
For the Nine |
|
|||
Revenues |
|
$ |
2,738 |
|
$ |
9,196 |
|
Property operating expenses |
|
(1,000 |
) |
(3,187 |
) |
||
Interest expense |
|
(1,050 |
) |
(3,401 |
) |
||
Depreciation and amortization expense |
|
(1,677 |
) |
(3,582 |
) |
||
Gain on sale |
|
4,033 |
|
4,033 |
|
||
Net income |
|
$ |
3,044 |
|
$ |
3,059 |
|
The table above includes net income from Rt. 46 Partners of $3,272 for the three month period and $3,501 for the nine month period. Our joint venture partner in Route 46 Partners had preference in receiving distributions of cash flows for a defined return. We were not entitled to receive distributions for a defined return until our partner received its defined return. We did not recognize income from our investment in Route 46 Partners in the three and nine months ended September 30, 2006 and 2005 until the dissolution of the entity since the income earned by
16
the entity in those periods did not exceed our partners defined return until that point in time. Upon dissolution of the entity, we recognized income from our investment of $60, excluding the $563 gain on disposition of the joint venture interest discussed above.
Our investments in consolidated real estate joint ventures included the following:
|
|
|
|
Ownership |
|
|
|
Total |
|
Collateralized |
||
|
|
Date |
|
% at |
|
Nature of |
|
Assets at |
|
Assets at |
||
|
|
Acquired |
|
9/30/2006 |
|
Activity |
|
9/30/2006 |
|
9/30/2006 |
||
COPT Opportunity Invest I, LLC |
|
12/20/2005 |
|
92.5% |
|
Redeveloping two properties(1) |
|
$ |
39,130 |
|
$ |
|
Commons Office 6-B, LLC |
|
2/10/2006 |
|
50.0% |
|
Developing land parcel(2) |
|
7,118 |
|
7,118 |
||
MOR Forbes 2 LLC |
|
12/24/2002 |
|
50.0% |
|
Operating building(3) |
|
4,192 |
|
3,787 |
||
|
|
|
|
|
|
|
|
$ |
50,440 |
|
$ |
10,905 |
(1) This joint venture owns one property in Northern Virginia and one in the Baltimore/Washington Corridor.
(2) This joint ventures property is located in Hanover, Maryland (located in the Baltimore/Washington Corridor region).
(3) This joint ventures property is located in Lanham, Maryland (located in the Suburban Maryland region).
On January 17, 2006 we acquired our partners remaining 50% interest in MOR Montpelier 3 LLC, an entity that recently completed the construction of an office property, for $1,186. We then sold the property to a third party for $2,530, as discussed in Note 6.
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 20.
Intangible assets on real estate acquisitions consisted of the following:
|
|
September 30, 2006 |
|
December 31, 2005 |
|
||||||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
||||||
|
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
||||||
Lease-up value |
|
$ |
105,719 |
|
$ |
34,608 |
|
$ |
71,111 |
|
$ |
92,812 |
|
$ |
20,824 |
|
$ |
71,988 |
|
Lease cost portion of deemed cost avoidance |
|
12,880 |
|
5,409 |
|
7,471 |
|
11,054 |
|
3,991 |
|
7,063 |
|
||||||
Lease to market value |
|
10,623 |
|
6,802 |
|
3,821 |
|
9,772 |
|
5,277 |
|
4,495 |
|
||||||
Tenant relationship value |
|
9,371 |
|
907 |
|
8,464 |
|
6,349 |
|
130 |
|
6,219 |
|
||||||
Market concentration premium |
|
1,333 |
|
139 |
|
1,194 |
|
1,333 |
|
114 |
|
1,219 |
|
||||||
|
|
$ |
139,926 |
|
$ |
47,865 |
|
$ |
92,061 |
|
$ |
121,320 |
|
$ |
30,336 |
|
$ |
90,984 |
|
Amortization of the intangible asset categories set forth above totaled approximately $15.9 million in the nine months ended September 30, 2006 and $10.2 million in the nine months ended September 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: 3 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 three months ended December 31, 2006 is $4.3 million, for 2007 is $15.1 million, 2008 is $13.4 million, 2009 is $11.5 million, 2010 is $8.5 million and 2011 is $6.7 million.
17
Deferred charges consisted of the following:
|
September 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Deferred leasing costs |
|
$ |
47,658 |
|
$ |
42,752 |
|
Deferred financing costs |
|
26,902 |
|
21,574 |
|
||
Goodwill |
|
1,853 |
|
1,853 |
|
||
Deferred other |
|
155 |
|
155 |
|
||
|
|
76,568 |
|
66,334 |
|
||
Accumulated amortization |
|
(36,477 |
) |
(31,288 |
) |
||
Deferred charges, net |
|
$ |
40,091 |
|
$ |
35,046 |
|
Our accounts receivable are reported net of an allowance for bad debts of $253 at September 30, 2006 and $421 at December 31, 2005.
Prepaid and other assets consisted of the following:
|
September 30, |
|
December 31, |
|
|||
|
|
2006 |
|
2005 |
|
||
Construction contract costs incurred in excess of billings |
|
$ |
9,933 |
|
$ |
15,277 |
|
Prepaid expenses |
|
9,287 |
|
7,007 |
|
||
Other assets |
|
8,464 |
|
6,971 |
|
||
Prepaid and other assets |
|
$ |
27,684 |
|
$ |
29,255 |
|
The following table sets forth our derivative contracts at September 30, 2006 and their respective fair values:
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|||||
|
|
Notional |
|
One-Month |
|
Effective |
|
Expiration |
|
September 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 |
|
$ |
(113 |
) |
N/A |
|
|
Interest rate swap |
|
25,000 |
|
5.2320 |
% |
5/1/2006 |
|
5/1/2009 |
|
(180 |
) |
N/A |
|
|||
Interest rate swap |
|
25,000 |
|
5.2320 |
% |
5/1/2006 |
|
5/1/2009 |
|
(180 |
) |
N/A |
|
|||
|
|
|
|
|
|
|
|
|
|
$ |
(473 |
) |
$ |
|
|
|
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 |
|
For the Nine Months Ended |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
(Decrease) increase in fair value applied to accumulated comprehensive loss and minority interests |
|
$ |
(1,306 |
) |
$ |
2,672 |
|
$ |
(473 |
) |
$ |
(1,516 |
) |
18
The activity reported in the table above for the three and nine months ended September 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.
Mortgage and other loans payable consisted of the following:
|
|
Maximum |
|
|
|
|
|
|
|
Scheduled |
|||
|
|
Principal Amount |
|
|
|
|
|
|
|
Maturity |
|||
|
|
Under Loans at |
|
Carrying Value at |
|
|
|
Dates at |
|||||
|
|
September 30, |
|
September 30, |
|
December 31, |
|
Stated Interest Rates |
|
September 30, |
|||
|
|
2006 |
|
2006 |
|
2005 |
|
at September 30, 2006 |
|
2006 |
|||
Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|||
Wachovia Bank, N.A. Revolving Credit |
|
|
|
|
|
|
|
|
|
|
|||
Facility |
|
$ |
500,000 |
|
$ |
200,000 |
|
$ |
273,000 |
|
LIBOR + 1.15% to 1.55% |
|
March 2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage Loans |
|
|
|
|
|
|
|
|
|
|
|||
Fixed rate mortgage loans (2) |
|
N/A |
|
877,985 |
|
921,265 |
|
3.00% - 9.48% (3) |
|
2006 - 2034 (4) |
|||
Variable rate construction loan facilities |
|
154,447 |
|
93,327 |
|
70,238 |
|
LIBOR + 1.40% to 2.20% |
|
2006 - 2008 (5) |
|||
Other variable rate mortgage loans |
|
N/A |
|
34,500 |
|
82,800 |
|
LIBOR + 1.20% to 1.50% |
|
September 2007 |
|||
Total mortgage loans |
|
|
|
1,005,812 |
|
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 |
|
|
|
$ |
1,206,682 |
|
$ |
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 $461 at September 30, 2006 and $1,391 at December 31, 2005.
(3) The weighted average interest rate on these loans was 7.03% at September 30, 2006.
(4) A loan with a balance of $4,911 at September 30, 2006 that matures in 2034 may be repaid in March 2014, subject to certain conditions.
(5) At September 30, 2006, $71,095 in loans scheduled to mature in 2008 may be extended for a one-year period, subject to certain conditions; two of these loans, totaling $37,203 at September 30, 2006, were repaid on October 2, 2006.
(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 $400,000 to $500,000.
On September 18, 2006, the Operating Partnership issued a $200,000 aggregate principal amount of 3.50% Exchangeable Senior Notes due 2026. Interest on the notes is payable on March 15 and September 15 of each year. The notes have an exchange settlement feature which provides that the notes may, under certain circumstances, be exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, into (at our option) cash, our common shares or a combination of cash and our common shares at an initial exchange rate of 18.4162 shares per one thousand dollar principal amount of the notes (equivalent to an initial exchange price of $54.30 per common share). On or after September 20, 2011, the Operating Partnership may redeem the notes in cash in whole or in part. The holders of the notes have the right to require us to repurchase the notes in cash in whole or in part on each of September 15, 2011, September 15, 2016 and September 15, 2021, or in the event of a fundamental change, as defined under the terms of the notes, for a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. Prior to September 11, 2011, subject to certain exceptions, if (1) a fundamental change occurs as a result of certain forms of transactions or series of transactions and (2) a holder elects to exchange its notes in connection with such fundamental change, we will increase the applicable exchange rate for the notes surrendered for exchange by a number of additional shares of our common shares as a make whole premium. The notes are general unsecured senior obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership. The Operating Partnerships obligations under the notes are fully and unconditionally guaranteed by us.
19
Preferred Shares
Preferred shares of beneficial interest (preferred shares) consisted of the following:
|
|
September 30, |
|
December 31, |
|
||
1,265 designated as Series E Cumulative Redeemable Preferred Shares of beneficial interest (1,150 shares issued with an aggregate liquidation preference of $28,750) |
|
$ |
|
|
$ |
11 |
|
1,425 designated as Series F Cumulative Redeemable Preferred Shares of beneficial interest (1,425 shares issued with an aggregate liquidation preference of $35,625) |
|
14 |
|
14 |
|
||
2,200 designated as Series G Cumulative Redeemable Preferred Shares of beneficial interest (2,200 shares issued with an aggregate liquidation preference of $55,000) |
|
22 |
|
22 |
|
||
2,000 designated as Series H Cumulative Redeemable Preferred Shares of beneficial interest (2,000 shares issued with an aggregate liquidation preference of $50,000) |
|
20 |
|
20 |
|
||
3,390 designated as Series J Cumulative Redeemable Preferred Shares of beneficial interest (3,390 shares issued with an aggregate liquidation preference of $84,750) |
|
34 |
|
|
|
||
Total preferred shares |
|
$ |
90 |
|
$ |
67 |
|
On July 15, 2006, we redeemed all of the outstanding 10.25% Series E Cumulative Redeemable Preferred Shares of beneficial interest (the Series E Preferred Shares) at a price of $25 per share, or $28,750. We recognized a $1,829 decrease to net income available to common shareholders pertaining to the original issuance costs incurred on these shares at the time of the redemption.
On July 20, 2006, we completed the sale of 3.4 million Series J Preferred Shares at a price of $25.00 per share for net proceeds of $81,863. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after July 20, 2011. Holders of these shares are entitled to cumulative dividends, payable quarterly (as and if declared by the Board of Trustees). Dividends accrue from the date of issue at the annual rate of $1.90625 per share, which is equal to 7.625% of the $25.00 per share redemption price. We contributed the net proceeds from the sale to our Operating Partnership in exchange for 3.4 million Series J Preferred Units. The Series J Preferred Units carry terms that are substantially the same as the Series J Preferred Shares.
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 net proceeds of $82,438. We contributed the net proceeds to our Operating Partnership in exchange for 2.0 million common units.
During the nine months ended September 30, 2006, we converted 179,227 common units in our Operating Partnership into common shares on the basis of one common share for each common unit.
See Note 5 for disclosure of common share activity pertaining to our share-based compensation plans.
Accumulated Other Comprehensive Loss
The table below sets forth activity in the accumulated other comprehensive loss component of shareholders equity:
20
|
For the Nine Months |
|
|||||
|
|
2006 |
|
2005 |
|
||
Beginning balance |
|
$ |
(482 |
) |
$ |
|
|
Unrealized loss on derivatives, net of minority interests |
|
(397 |
) |
(1,396 |
) |
||
Realized loss on derivatives, net of minority interests |
|
38 |
|
|
|
||
Ending balance |
|
$ |
(841 |
) |
$ |
(1,396 |
) |
The table below sets forth our comprehensive income:
|
|
For the Three Months |
|
For the Nine Months |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Net income |
|
$ |
20,587 |
|
$ |
10,589 |
|
$ |
39,640 |
|
$ |
28,749 |
|
Unrealized (loss) gain on derivatives, net of minority interests |
|
(1,080 |
) |
1,962 |
|
(397 |
) |
(1,396 |
) |
||||
Realized loss on derivatives, net of minority interests |
|
13 |
|
|
|
38 |
|
|
|
||||
Total comprehensive income |
|
$ |
19,520 |
|
$ |
12,551 |
|
$ |
39,281 |
|
$ |
27,353 |
|
21
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the nine months ended September 30, 2006:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
Total Dividend/ |
|
||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.6406 |
|
$ |
737 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
April 14, 2006 |
|
$ |
0.6406 |
|
$ |
737 |
|
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 |
|
Third Quarter 2006 |
|
September 30, 2006 |
|
October 13, 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 |
|
Third Quarter 2006 |
|
September 30, 2006 |
|
October 13, 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 |
|
Third Quarter 2006 |
|
September 30, 2006 |
|
October 13, 2006 |
|
$ |
0.4688 |
|
$ |
938 |
|
|
|
|
|
|
|
|
|
|
|
||
Series J Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Third Quarter 2006 |
|
September 30, 2006 |
|
October 13, 2006 |
|
$ |
0.4501 |
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2005 |
|
December 31, 2005 |
|
January 13, 2006 |
|
$ |
0.2800 |
|
$ |
11,180 |
|
First Quarter 2006 |
|
March 31, 2006 |
|
A |