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 March 31, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                  to                  

Commission file number 1-14023

Corporate Office Properties Trust

(Exact name of registrant as specified in its charter)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

On April 27, 2007, 47,069,523 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 March 31, 2007 and December 31, 2006 (unaudited)		3
	Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (unaudited)		4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)		5
	Notes to Consolidated Financial Statements		6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4:	Controls and Procedures		39
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings		39
Item 1A:	Risk Factors		39
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3:	Defaults Upon Senior Securities		40
Item 4:	Submission of Matters to a Vote of Security Holders		40
Item 5:	Other Information		40
Item 6:	Exhibits		40
SIGNATURES			42

 

2

 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

		March 31,			December 31,
		2007			2006
Assets
Investment in real estate:
Operating properties, net		$	2,080,310		$	1,812,883
Property held for sale, net		14,573			—
Projects under construction or development		379,294			298,427
Total commercial real estate properties, net		2,474,177			2,111,310
Cash and cash equivalents		22,003			7,923
Restricted cash		19,030			52,856
Accounts receivable, net		24,478			26,367
Deferred rent receivable		44,294			41,643
Intangible assets on real estate acquisitions, net		131,934			87,325
Deferred charges, net		45,496			43,710
Prepaid and other assets		53,311			48,467
Total assets		$	2,814,723		$	2,419,601
Liabilities and shareholders’ equity
Liabilities:
Mortgage and other loans payable		$	1,515,183		$	1,298,537
3.5% Exchangeable Senior Notes		200,000			200,000
Accounts payable and accrued expenses		61,131			68,190
Rents received in advance and security deposits		25,127			20,237
Dividends and distributions payable		20,687			19,164
Deferred revenue associated with acquired operating leases		14,607			11,120
Distributions in excess of investment in unconsolidated real estate joint venture		3,797			3,614
Fair value of derivatives		556			308
Other liabilities		8,395			7,941
Total liabilities		1,849,483			1,629,111
Minority interests:
Common units in the Operating Partnership		118,614			104,934
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		2,408			2,453
Total minority interests		129,822			116,187
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 8,121,667 at March 31, 2007
and 7,590,000 at December 31, 2006 (Note 13)		81			76
Common Shares of beneficial interest ($0.01 par value;
75,000,000 shares authorized, shares issued and outstanding of
46,879,852 at March 31, 2007 and 42,897,639 at December 31, 2006		469			429
Additional paid-in capital		932,287			758,032
Cumulative distributions in excess of net income		(96,516		)	(83,541		)
Accumulated other comprehensive loss		(903		)	(693		)
Total shareholders’ equity		835,418			674,303
Total liabilities and shareholders’ equity		$	2,814,723		$	2,419,601

 

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 March 31,
		2007			2006
Revenues
Rental revenue		$	75,882		$	60,562
Tenant recoveries and other
real estate operations revenue		13,793			8,660
Construction contract revenues		8,691			14,544
Other service operations revenues		1,386			1,765
Total revenues		99,752			85,531
Expenses
Property operating expenses		31,748			21,061
Depreciation and other amortization
associated with real estate operations		26,569			18,672
Construction contract expenses		8,483			14,026
Other service operations expenses		1,405			1,678
General and administrative expenses		4,614			3,963
Total operating expenses		72,819			59,400
Operating income		26,933			26,131
Interest expense		(19,876		)	(17,029		)
Amortization of deferred financing costs		(884		)	(556		)
Income from continuing operations before equity in loss of unconsolidated entities, income taxes and minority interests		6,173			8,546
Equity in loss of unconsolidated entities		(94		)	(23		)
Income tax expense		(105		)	(215		)
Income from continuing operations before minority interests		5,974			8,308
Minority interests in income from continuing operations
Common units in the Operating Partnership		(308		)	(826		)
Preferred units in the Operating Partnership		(165		)	(165		)
Other consolidated entities		47			33
Income from continuing operations		5,548			7,350
(Loss) income from discontinued operations, net of minority interests		(1		)	2,477
Income before gain on sales of real estate		5,547			9,827
Gain on sales of real estate, net		—			110
Net income		5,547			9,937
Preferred share dividends		(3,993		)	(3,654		)
Net income available to common shareholders		$	1,554		$	6,283
Basic earnings per common share
Income from continuing operations		$	0.03		$	0.10
Discontinued operations		—			0.06
Net income available to common shareholders		$	0.03		$	0.16
Diluted earnings per common share
Income from continuing operations		$	0.03		$	0.09
Discontinued operations		—			0.06
Net income available to common shareholders		$	0.03		$	0.15

 

See accompanying notes to consolidated financial statements.

4

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

		For the Three Months
		Ended March 31,
		2007			2006
Cash flows from operating activities
Net income		$	5,547		$	9,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests		426			1,538
Depreciation and other amortization		26,626			19,337
Amortization of deferred financing costs		884			559
Amortization of deferred market rental revenue		(511		)	(556		)
Equity in loss of unconsolidated entities		94			23
Gain on sales of real estate		—			(2,571		)
Share-based compensation		1,340			642
Excess income tax benefits from share-based compensation		(865		)	(258		)
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(2,651		)	(2,198		)
Decrease (increase) in accounts receivable		1,889			(1,123		)
Decrease in restricted cash and prepaid and other assets		1,349			5,152
Decrease in accounts payable, accrued expenses and other liabilities		(4,005		)	(2,637		)
Increase in rents received in advance and security deposits		4,890			1,620
Other		(25		)	(79		)
Net cash provided by operating activities		34,988			29,386
Cash flows from investing activities
Purchases of and additions to commercial real estate properties		(187,966		)	(38,267		)
Proceeds from sales of properties		—			28,217
Investments in and advances to unconsolidated entities		—			(190		)
Acquisition of partner interests in consolidated joint ventures		—			(3,016		)
Distributions from unconsolidated entities		89			113
Leasing costs paid		(4,059		)	(1,984		)
Decrease in restricted cash associated with investing activities		13,858			218
Other		(5,951		)	(175		)
Net cash used in investing activities		(184,029		)	(15,084		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		188,090			47,905
Repayments of mortgage and other loans payable		(10,380		)	(36,559		)
Deferred financing costs paid		(507		)	(49		)
Distributions paid to partners in consolidated joint ventures		—			(787		)
Net proceeds from issuance of common shares		5,120			1,581
Dividends paid		(16,931		)	(14,721		)
Distributions paid		(2,787		)	(2,553		)
Excess income tax benefits from share-based compensation		865			258
Other		(349		)	8
Net cash provided by (used in) financing activities		163,121			(4,917		)
Net increase in cash and cash equivalents		14,080			9,385
Cash and cash equivalents
Beginning of period		7,923			10,784
End of period		$	22,003		$	20,169

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 also have a core customer expansion strategy that is built on meeting, through acquisitions and development, the multi-location requirements of our strategic tenants.  As of March 31, 2007, our investments in real estate included the following:

·                  226 wholly owned operating properties in our portfolio totaling 17.4 million square feet;

·                  17 wholly owned properties under construction or development that we estimate will total approximately 1.9 million square feet upon completion and two wholly owned office properties totaling approximately 129,000 square feet that were under redevelopment;

·                  wholly owned land parcels totaling 1,254 acres that we believe are potentially developable into approximately 10.3 million square feet; and

·                  partial ownership interests in a number of other real estate projects in operations or under development or redevelopment.

We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), for which we are the managing general partner.  The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”).  A summary of our Operating Partnership’s forms of ownership and the percentage of those securities owned by COPT as of March 31, 2007 follows:

Common Units	84%
Series G Preferred Units	100%
Series H Preferred Units	100%
Series I Preferred Units	0%
Series J Preferred Units	100%
Series K Preferred Units	100%		(issued on January 9, 2007)

Two of our trustees also controlled, either directly or through ownership by other entities or family members, 13% 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
COPT Environmental Systems, LLC (“CES”)		Heating and Air Conditioning

Most of the services that CPM provides are for us.  CDC, CDS and CES 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 required by accounting principles generally accepted in the United States for complete Consolidated Financial

6

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Statements are not included herein.  These interim financial statements should be read together with the financial statements and notes thereto included in our 2006 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 of beneficial interest (“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 changes in income or loss that would result from the assumed conversion of securities into common shares that were added to the denominator.

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 March 31,
		2007			2006
Numerator:
Income from continuing operations		$	5,548		$	7,350
Add: Gain on sales of real estate, net		—			110
Less: Preferred share dividends		(3,993		)	(3,654		)
Numerator for basic and diluted EPS from continuing operations		1,555			3,806
(Loss) income from discontinued operations, net		(1		)	2,477
Numerator for basic and diluted EPS on net income available
to common shareholders		$	1,554		$	6,283
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		45,678			39,668
Dilutive effect of share-based compensation awards		1,465			1,842
Denominator for diluted EPS		47,143			41,510
Basic EPS:
Income from continuing operations		$	0.03		$	0.10
Income from discontinued operations		—			0.06
Net income available to common shareholders		$	0.03		$	0.16
Diluted EPS:
Income from continuing operations		$	0.03		$	0.09
Income from discontinued operations		—			0.06
Net income available to common shareholders		$	0.03		$	0.15

Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods: 

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		Weighted Average Shares in Denominator For the Three Months Ended March 31,
		2007		2006
Conversion of weighted average common units		8,411		8,520
Conversion of weighted average convertible preferred units		176		176
Conversion of weighted average convertible preferred shares		395		—

The 3.5% Exchangeable Senior Notes did not affect our diluted EPS reported above since the weighted average closing price of our common shares during the period over which the notes were outstanding was less than $54.30.

4.             Recent Accounting Pronouncements

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.  Our adoption of FIN 48 did not 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 February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We are currently assessing the impact of SFAS 159 on our consolidated financial position and results of operations.

5.             Commercial Real Estate Properties

Operating properties consisted of the following:

		March 31,			December 31,
		2007			2006
Land		$	409,859		$	343,098
Buildings and improvements		1,904,154			1,689,359
		2,314,013			2,032,457
Less: accumulated depreciation		(233,703		)	(219,574		)
		$	2,080,310		$	1,812,883

At March 31, 2007, 429 Ridge Road, an office property located in Dayton, New Jersey that we were under contract to sell for $17,000, was classified as held for sale (Dayton, New Jersey is located in the Northern/Central New Jersey Region).  We expect to complete the sale of this property by January 2008.  The components associated with 429 Ridge Road as of March 31, 2007 included the following:

8

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		March 31,
		2007
Land		$	2,932
Buildings and improvements		14,588
		17,520
Less: accumulated depreciation		(2,947		)
		$	14,573

Projects we had under construction or development consisted of the following:

		March 31,			December 31,
		2007			2006
Land		$	193,715		$	153,436
Construction in progress		185,579			144,991
		$	379,294		$	298,427

2007 Acquisitions

On January 9 and 10, 2007, we completed a series of transactions that resulted in the acquisition of 56 operating properties totaling approximately 2.4 million square feet and land parcels totaling 187 acres.  We refer to these transactions collectively as the Nottingham Acquisition.  All of the acquired properties are located in Maryland, with 36 of the operating properties, totaling 1.6 million square feet, and land parcels totaling 175 acres, located in White Marsh, Maryland (located in the Suburban Baltimore region) and the remaining properties and land parcels located in other regions in Northern Baltimore County and the Baltimore/Washington Corridor.  We believe that the land parcels can support at least 2.0 million developable square feet.  We completed the Nottingham Acquisition for an aggregate cost of $366,830.  The table below sets forth the allocation of the acquisition costs of the Nottingham Acquisition:

Land, operating properties		$	69,322
Land, construction or development		37,789
Building and improvements		211,194
Intangible assets on real estate acquisitions		53,214
Total assets		371,519
Deferred revenue associated with acquired operating leases		(4,689		)
Total acquisition cost		$	366,830

Intangible assets recorded in connection with the Nottingham Acquisition include the following:

					Weighted
					Average
					Amortization
		Cost			Period (in Years)
Tenant relationship value		$	25,778		8
Lease-up value		19,425			4
Lease cost portion of deemed cost avoidance		4,206			5
Lease to market value		3,805			4
		$	53,214		6

 

2007 Construction and Development Activities

As of March 31, 2007, we had construction underway on four new buildings in the Baltimore/Washington Corridor (including one partially operational property owned through a 50% joint venture), two in Colorado Springs, Colorado and one each in Suburban Baltimore, Southwest Virginia and Chesterfield, Virginia.  We also had development activities underway on five new buildings located in the Baltimore/Washington Corridor (including one owned through a joint venture), two in Suburban Baltimore, two in Suburban Maryland and one each

9

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in King George County, Virginia and Colorado Springs, Colorado (we owned a 50% undivided interest in the Colorado Springs property until April 6, 2007, when we purchased the remaining 50%).  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).

6.                                      Real Estate Joint Ventures

During the three months ended March 31, 2007, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting.  Information pertaining to this joint venture investment is set forth below.

Investment Balance at

Total

Maximum

March 31,

December 31,

Date

Owner-

Nature of

Assets at

Exposure

2007

2006

Acquired

ship

Activity

3/31/2007

to Loss (1)

Harrisburg Corporate

Gateway Partners, L.P.

$(3,797)(2

)

$(3,614)(2

)

9/29/2005

20%

Operates 16 buildings(3

)

$75,190

—

(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, which we would be required to make if certain contingent events occur.

(2)             The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $4,860 at March 31, 2007 and $5,072 at December 31, 2006 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 remains the same.

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

The following table sets forth condensed balance sheets for Harrisburg Corporate Gateway Partners, L.P.:

		March 31,			December 31,
		2007			2006
Commercial real estate property		$	72,199		$	72,688
Other assets		2,991			3,207
Total assets		$	75,190		$	75,895
Liabilities		$	68,149		$	67,350
Owners’ equity		7,041			8,545
Total liabilities and owners’ equity		$	75,190		$	75,895

The following table sets forth a combined condensed statement of operations for Harrisburg Corporate Gateway Partners, L.P. for the three months ended March 31, 2007:

Revenues		$	2,444
Property operating expenses		(960		)
Interest expense		(1,138		)
Depreciation and amortization expense		(867		)
Net loss		$	(521	)

 

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

				Ownership				Total			Collateralized
		Date		% at		Nature of		Assets at			Assets at
		Acquired		3/31/2007		Activity		3/31/2007			3/31/2007
COPT Opportunity Invest I, LLC		12/20/2005		92.5%		Redeveloping two properties (1)		$	44,919		$	—
Commons Office 6-B, LLC		2/10/2006		50.0%		Developing land parcel (2)		7,466			7,430
MOR Forbes 2 LLC		12/24/2002		50.0%		Operates one building (3)		4,074			3,697
COPT-FD Indian Head, LLC		10/23/2006		75.0%		Developing land parcel (4)		3,003			—
								$	59,462		$	11,127

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

(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).

(4)             This joint venture’s property is located in Charles County, Maryland (located in our “other” business segment).

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

7.             Intangible Assets on Real Estate Acquisitions

Intangible assets on real estate acquisitions consisted of the following:

		March 31, 2007									December 31, 2006
		Gross Carrying			Accumulated			Net Carrying			Gross Carrying			Accumulated			Net Carrying
		Amount			Amortization			Amount			Amount			Amortization			Amount
Lease-up value		$	125,144		$	43,900		$	81,244		$	105,719		$	38,279		$	67,440
Tenant relationship value		35,149			2,691			32,458			9,371			1,178			8,193
Lease cost portion of deemed
cost avoidance		17,086			6,591			10,495			12,880			5,819			7,061
Lease to market value		14,428			7,869			6,559			10,623			7,178			3,445
Market concentration premium		1,333			155			1,178			1,333			147			1,186
		$	193,140		$	61,206		$	131,934		$	139,926		$	52,601		$	87,325

Amortization of the intangible asset categories set forth above totaled $8,628 in the three months ended March 31, 2007 and $5,017 in the three months ended March 31, 2006.  The approximate weighted average amortization periods of the categories set forth below follow: lease-up value: nine years; tenant relationship value: eight years; lease cost portion of deemed cost avoidance: six years; lease to market value: five years; and market concentration premium: 35 years.  The approximate weighted average amortization period for all of the categories combined is nine years.  Estimated amortization expense associated with the intangible asset categories set forth above for the nine months ended December 31, 2007 is $20.1 million, for 2008 is $21.8 million, for 2009 is $19.1 million, for 2010 is $14.8 million, for 2011 is $11.9 million and for 2012 is $9.6 million.

8.             Deferred Charges

Deferred charges consisted of the following:

		March 31,			December 31,
		2007			2006
Deferred leasing costs		$	55,716		$	52,263
Deferred financing costs		28,837			28,275
Goodwill		1,853			1,853
Deferred other		155			155
		86,561			82,546
Accumulated amortization		(41,065		)	(38,836		)
Deferred charges, net		$	45,496		$	43,710

 

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9.             Accounts Receivable

Our accounts receivable are reported net of an allowance for bad debts of $286 at March 31, 2007 and $252 at December 31, 2006.

10.          Prepaid and Other Assets

Prepaid and other assets consisted of the following:

		March 31,			December 31,
		2007			2006
Construction contract costs incurred in excess of billings		$	19,194		$	18,324
Furniture, fixtures and equipment		10,587			10,495
Prepaid expenses		7,714			9,059
Other assets		15,816			10,589
Prepaid and other assets		$	53,311		$	48,467

11.          Debt

Our debt consisted of the following:

		Maximum
		Principal Amount			Carrying Value at								Scheduled Maturity
		Under Debt at			March 31,			December 31,			Stated Interest Rates at		Dates at
		March 31, 2007			2007			2006			March 31, 2007		March 31, 2007
Mortgage and other loans payable:
Revolving Credit Facility
Wachovia Bank, N.A. Revolving Credit Facility		$	500,000		$	264,000		$	185,000		LIBOR + 1.15% to 1.55%		March 2008 (1)
Mortgage Loans
Fixed rate mortgage loans (2)		N/A			1,048,913			1,020,619			5.20% — 9.48% (3)		2007 — 2034 (4)
Variable rate construction loan facilities		122,447			76,324			56,079			LIBOR + 1.40% to 2.20%		2007 — 2008 (5)
Other variable rate mortgage loans		N/A			123,615			34,500			LIBOR + 1.20% to 1.50%		2007 (6)
Total mortgage loans					1,248,852			1,111,198
Note payable
Unsecured seller notes		N/A			2,331			2,339			0% — 5.95%		2007-2008
Total mortgage and other loans payable					1,515,183			1,298,537
3.5% Exchangeable Senior Notes		N/A			200,000			200,000			3.50%		September 2026(7)
Total debt					$	1,715,183		$	1,498,537

(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 $839 at March 31, 2007 and $210 at December 31, 2006.

(3)             The weighted average interest rate on these loans was 6.05% at March 31, 2007.

(4)             A loan with a balance of $4,874 at March 31, 2007 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(5)             At March 31, 2007, $53,505 in loans scheduled to mature in 2008 may be extended for a one-year period, subject to certain conditions.

(6)             At March 31, 2007, a $34,500 loan scheduled to mature in 2007 may be extended for a one-year period, subject to certain conditions.

(7)             Refer to our 2006 Annual Report on Form 10-K for descriptions of provisions for early redemption and repurchase of these notes.

 

We capitalized interest costs of $4,132 in the three months ended March 31, 2007 and $3,130 in three months ended March 31, 2006.

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12.          Derivatives

The following table sets forth our derivative contracts at March 31, 2007 and their respective fair values:

											Fair Value at
		Notional			One-Month		Effective		Expiration		March 31,			December 31,
Nature of Derivative		Amount			LIBOR base		Date		Date		2007			2006
Interest rate swap		$	50,000		5.0360	%	3/28/2006		3/30/2009		$	(174	)	$	(42	)
Interest rate swap		25,000			5.2320	%	5/1/2006		5/1/2009		(191		)	(133		)
Interest rate swap		25,000			5.2320	%	5/1/2006		5/1/2009		(191		)	(133		)
											$	(556	)	$	(308	)

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:

13.          Shareholders’ Equity

Preferred Shares

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

		March 31,			December 31,
		2007			2006
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
3,390,000 designated as Series J Cumulative Redeemable Preferred Shares of beneficial interest (3,390,000 shares issued with an aggregate liquidation preference of $84,750)		34			34
531,667 designated as Series K Cumulative Redeemable Convertible Preferred Shares of beneficial interest (531,667 shares issued with an aggregate liquidation preference of $26,583)		5			—
Total preferred shares		$	81		$	76

We issued the Series K Cumulative Redeemable Convertible Preferred Shares of beneficial interest (the “Series K Preferred Shares”) in the Nottingham Acquisition at a value of, and liquidation preference equal to, $50 per share.  The Series K Preferred Shares are nonvoting, redeemable for cash at $50 per share at our option on or after January 9, 2017, and are convertible, subject to certain conditions, into common shares on the basis of 0.8163 common shares for each preferred share, in accordance with the terms of the Articles Supplementary describing the Series K Preferred Shares.  Holders of the Series K Preferred Shares are entitled to cumulative dividends, payable quarterly (as and if declared by our Board of Trustees).  Dividends accrue from the date of issue at the annual rate of $2.80 per share, which is equal to 5.6% of the $50 per share liquidation preference.

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Common Shares

In connection with the Nottingham Acquisition in January 2007, we issued 3,161,000 common shares at a value of $49.57 per share.

During the three months ended March 31, 2007, we converted 221,350 common units in our Operating Partnership into common shares on the basis of one common share for each common unit.

See Note 17 for disclosure of common share activity pertaining to our share-based compensation plans.

Accumulated Other Comprehensive Loss

The table below sets forth activity in the AOCL component of shareholders’ equity:

		For the Three Months Ended March 31,
		2007			2006
Beginning balance		$	(693	)	$	(482	)
Unrealized (loss) gain on derivatives, net of minority interests		(223		)	90
Realized loss on derivatives, net of minority interests		13			12
Ending balance		$	(903	)	$	(380	)

The table below sets forth our comprehensive income:

		For the Three Months Ended March 31,
		2007			2006
Net income		$	5,547		$	9,937
Unrealized (loss) gain on derivatives, net of minority interests		(223		)	90
Realized loss on derivatives, net of minority interests		13			12
Total comprehensive income		$	5,337		$	10,039

 

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14.          Dividends and Distributions

The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2007:

						Dividend/
						Distribution Per			Total Dividend/
		Record Date		Payable Date		Share/Unit			Distribution
Series G Preferred Shares:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.5000		$	1,100
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.5000		$	1,100
Series H Preferred Shares:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.4688		$	938
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.4688		$	938
Series J Preferred Shares:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.4766		$	1,616
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.4766		$	1,616
Series K Preferred Shares:
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.7466		$	397
Common Shares:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.3100		$	13,292
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.3100		$	14,529
Series I Preferred Units:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.4688		$	165
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.4688		$	165
Common Units:
Fourth Quarter 2006		December 29, 2006		January 17, 2007		$	0.3100		$	2,622
First Quarter 2007		March 30, 2007		April 17, 2007		$	0.3100		$	2,554

 

15.          Supplemental Information to Statements of Cash Flows

		For the Three Months Ended
		March 31,
		2007			2006
Supplemental schedule of non-cash investing and financing activities:
Debt assumed in connection with acquisition of properties		$	38,848		$	—
(Decrease) increase in accrued capital improvements and leasing costs		$	(2,600	)	$	6,307
Amortization of discounts and premiums on mortgage loans to
commercial real estate properties		$	255		$	45
(Decrease) increase in fair value of derivatives applied to AOCL and minority interests		$	(248	)	$	110
Issuance of common shares in connection with acquisition of properties		$	156,691		$	—
Issuance of preferred shares in connection with acquisition of properties		$	26,583		$	—
Restricted cash used in connection with acquisition of properties		$	20,122		$	—
Adjustments to minority interests resulting from changes in ownership
of Operating Partnership by COPT		$	26,511		$	778
Dividends/distribution payable		$	20,687		$	16,878
Decrease in minority interests and increase in shareholders’ equity in
connection with the conversion of common units into common shares		$	10,563		$	1,945

 

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