UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14023
(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 |
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 o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company 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 |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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
As of May 2, 2008, 47,627,737 of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
TABLE OF CONTENTS
FORM 10-Q
2
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
(unaudited)
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Assets |
|
|
|
|
|
||
Investment in real estate: |
|
|
|
|
|
||
Operating properties, net |
|
$ |
2,205,138 |
|
$ |
2,192,954 |
|
Property held for sale, net |
|
2,978 |
|
14,988 |
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||
Projects under construction or development |
|
408,963 |
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396,012 |
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||
Total commercial real estate properties, net |
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2,617,079 |
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2,603,954 |
|
||
Cash and cash equivalents |
|
37,607 |
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24,638 |
|
||
Restricted cash |
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16,712 |
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15,121 |
|
||
Accounts receivable, net |
|
19,832 |
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24,831 |
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||
Deferred rent receivable |
|
56,330 |
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53,631 |
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||
Intangible assets on real estate acquisitions, net |
|
102,647 |
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108,661 |
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||
Deferred charges, net |
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48,231 |
|
49,051 |
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||
Prepaid and other assets |
|
38,306 |
|
51,966 |
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||
Total assets |
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$ |
2,936,744 |
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$ |
2,931,853 |
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|
|
|
|
|
|
||
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
||
Mortgage and other loans payable |
|
$ |
1,645,968 |
|
$ |
1,625,842 |
|
3.5% Exchangeable Senior Notes |
|
200,000 |
|
200,000 |
|
||
Accounts payable and accrued expenses |
|
66,210 |
|
75,535 |
|
||
Rents received in advance and security deposits |
|
33,169 |
|
31,234 |
|
||
Dividends and distributions payable |
|
22,519 |
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22,441 |
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||
Deferred revenue associated with acquired operating leases |
|
10,665 |
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11,530 |
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||
Distributions in excess of investment in unconsolidated real estate joint venture |
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4,215 |
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4,246 |
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||
Other liabilities |
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10,171 |
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8,288 |
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||
Total liabilities |
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1,992,917 |
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1,979,116 |
|
||
Minority interests: |
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|
|
|
|
||
Common units in the Operating Partnership |
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111,904 |
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114,127 |
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||
Preferred units in the Operating Partnership |
|
8,800 |
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8,800 |
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||
Other consolidated real estate joint ventures |
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8,421 |
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7,168 |
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||
Total minority interests |
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129,125 |
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130,095 |
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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, 2008 and December 31, 2007 (Note 13)) |
|
81 |
|
81 |
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||
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 47,616,438 at March 31, 2008 and 47,366,475 at December 31, 2007) |
|
476 |
|
474 |
|
||
Additional paid-in capital |
|
953,473 |
|
950,615 |
|
||
Cumulative distributions in excess of net income |
|
(134,960 |
) |
(126,156 |
) |
||
Accumulated other comprehensive loss |
|
(4,368 |
) |
(2,372 |
) |
||
Total shareholders equity |
|
814,702 |
|
822,642 |
|
||
Total liabilities and shareholders equity |
|
$ |
2,936,744 |
|
$ |
2,931,853 |
|
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 |
|
||||
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2008 |
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2007 |
|
||
Revenues |
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|
|
|
|
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Rental revenue |
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$ |
81,834 |
|
$ |
75,399 |
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Tenant recoveries and other real estate operations revenue |
|
15,446 |
|
13,610 |
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Construction contract revenues |
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8,514 |
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8,691 |
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||
Other service operations revenues |
|
478 |
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1,386 |
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||
Total revenues |
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106,272 |
|
99,086 |
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||
Expenses |
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|
|
|
|
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Property operating expenses |
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34,563 |
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31,583 |
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||
Depreciation and other amortization associated with real estate operations |
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24,937 |
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25,997 |
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Construction contract expenses |
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8,283 |
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8,483 |
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Other service operations expenses |
|
602 |
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1,405 |
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General and administrative expenses |
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5,933 |
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4,877 |
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||
Total operating expenses |
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74,318 |
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72,345 |
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Operating income |
|
31,954 |
|
26,741 |
|
||
Interest expense |
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(20,329 |
) |
(19,776 |
) |
||
Amortization of deferred financing costs |
|
(803 |
) |
(884 |
) |
||
Gain on sales of non-real estate investments |
|
46 |
|
|
|
||
Income from continuing operations before equity in loss of unconsolidated entities, income taxes and minority interests |
|
10,868 |
|
6,081 |
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||
Equity in loss of unconsolidated entities |
|
(54 |
) |
(94 |
) |
||
Income tax expense |
|
(112 |
) |
(105 |
) |
||
Income from continuing operations before minority interests |
|
10,702 |
|
5,882 |
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||
Minority interests in income from continuing operations |
|
|
|
|
|
||
Common units in the Operating Partnership |
|
(994 |
) |
(293 |
) |
||
Preferred units in the Operating Partnership |
|
(165 |
) |
(165 |
) |
||
Other consolidated entities |
|
14 |
|
47 |
|
||
Income from continuing operations |
|
9,557 |
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5,471 |
|
||
Income from discontinued operations, net of minority interests |
|
1,036 |
|
76 |
|
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Income before gain on sales of real estate |
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10,593 |
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5,547 |
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Gain on sales of real estate, net of minority interests and taxes |
|
802 |
|
|
|
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Net income |
|
11,395 |
|
5,547 |
|
||
Preferred share dividends |
|
(4,025 |
) |
(3,993 |
) |
||
Net income available to common shareholders |
|
$ |
7,370 |
|
$ |
1,554 |
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Basic earnings per common share |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.14 |
|
$ |
0.03 |
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Discontinued operations |
|
0.02 |
|
|
|
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Net income available to common shareholders |
|
$ |
0.16 |
|
$ |
0.03 |
|
Diluted earnings per common share |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.13 |
|
$ |
0.03 |
|
Discontinued operations |
|
0.02 |
|
|
|
||
Net income available to common shareholders |
|
$ |
0.15 |
|
$ |
0.03 |
|
Dividends declared per common share |
|
$ |
0.34 |
|
$ |
0.31 |
|
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 Three Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
11,395 |
|
$ |
5,547 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Minority interests |
|
1,589 |
|
426 |
|
||
Depreciation and other amortization |
|
25,328 |
|
26,626 |
|
||
Amortization of deferred financing costs |
|
803 |
|
884 |
|
||
Amortization of deferred market rental revenue |
|
(445 |
) |
(511 |
) |
||
Equity in loss of unconsolidated entities |
|
54 |
|
94 |
|
||
Gain on sales of real estate |
|
(2,908 |
) |
|
|
||
Gain on sale of non-real estate investment |
|
(46 |
) |
|
|
||
Share-based compensation |
|
2,160 |
|
1,340 |
|
||
Excess income tax benefits from share-based compensation |
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(1,041 |
) |
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Increase in deferred rent receivable |
|
(2,711 |
) |
(2,651 |
) |
||
Decrease in accounts receivable |
|
4,999 |
|
1,889 |
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||
Decrease in restricted cash and prepaid and other assets |
|
1,040 |
|
1,349 |
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||
Increase (decrease) in accounts payable, accrued expenses and other liabilities |
|
807 |
|
(5,129 |
) |
||
Increase in rents received in advance and security deposits |
|
1,935 |
|
6,014 |
|
||
Other |
|
131 |
|
(25 |
) |
||
Net cash provided by operating activities |
|
43,090 |
|
35,853 |
|
||
|
|
|
|
|
|
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Cash flows from investing activities |
|
|
|
|
|
||
Purchases of and additions to commercial real estate properties |
|
(49,502 |
) |
(188,067 |
) |
||
Proceeds from sales of properties |
|
25,270 |
|
|
|
||
Leasing costs paid |
|
(1,703 |
) |
(4,059 |
) |
||
(Increase) decrease in restricted cash associated with investing activities |
|
(200 |
) |
13,858 |
|
||
Other |
|
(848 |
) |
(5,761 |
) |
||
Net cash used in investing activities |
|
(26,983 |
) |
(184,029 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from mortgage and other loans payable |
|
56,000 |
|
188,090 |
|
||
Repayments of mortgage and other loans payable |
|
(35,847 |
) |
(10,380 |
) |
||
Net proceeds from issuance of common shares |
|
392 |
|
5,120 |
|
||
Dividends paid |
|
(20,114 |
) |
(16,931 |
) |
||
Distributions paid |
|
(2,942 |
) |
(2,787 |
) |
||
Excess income tax benefits from share-based compensation |
|
1,041 |
|
|
|
||
Restricted share redemptions |
|
(1,149 |
) |
(351 |
) |
||
Other |
|
(519 |
) |
(505 |
) |
||
Net cash (used in) provided by financing activities |
|
(3,138 |
) |
162,256 |
|
||
|
|
|
|
|
|
||
Net increase in cash and cash equivalents |
|
12,969 |
|
14,080 |
|
||
Cash and cash equivalents |
|
|
|
|
|
||
Beginning of period |
|
24,638 |
|
7,923 |
|
||
End of period |
|
$ |
37,607 |
|
$ |
22,003 |
|
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 specialty office real estate investment trust (REIT) that focuses on strategic customer relationships and specialized tenant requirements in the United States Government, defense information technology and data sectors. We acquire, develop, manage and lease properties which are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in demographically strong markets possessing growth opportunities. As of March 31, 2008, our investments in real estate included the following:
· |
230 wholly owned operating properties totaling 17.9 million square feet; |
· |
17 wholly owned properties under construction or development that we estimate will total approximately 1.6 million square feet upon completion; |
· |
wholly owned land parcels totaling 1,479 acres that we believe are potentially developable into approximately 12.4 million square feet; and |
· |
partial ownership interests in a number of other real estate projects in operation or under development or redevelopment. |
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the Operating Partnership), for which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (LLCs). A summary of our Operating Partnerships forms of ownership and the percentage of those securities owned by COPT as of March 31, 2008 follows:
Common Units |
|
85 |
% |
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 |
% |
Three of our trustees also controlled, either directly or through ownership by other entities or family members, 13% of the Operating Partnerships common units.
In addition to owning interests in real estate, the Operating Partnership also owns 100% of Corporate Office Management, Inc. (COMI) and owns, either directly or through COMI, 100% of the consolidated subsidiaries that are set forth below (collectively defined as the Service Companies):
Entity Name |
|
Type of Service Business |
|
COPT Property Management Services, LLC (CPM) |
|
Real Estate Management |
|
COPT Development & Construction Services, LLC (CDC) |
|
Construction and Development |
|
Corporate Development Services, LLC (CDS) |
|
Construction and Development |
|
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.
6
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 Statements are not included herein. These interim financial statements should be read together with the financial statements and notes thereto included in our 2007 Annual Report on Form 10-K. The interim financial statements 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 reclassified certain amounts from the prior period to conform to the current period presentation of our Consolidated Financial Statements. These reclassifications did not affect previously reported consolidated net income or shareholders equity.
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 into common shares that we 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):
7
|
|
For the Three Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
Numerator: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
9,557 |
|
$ |
5,471 |
|
Add: Gain on sales of real estate, net |
|
802 |
|
|
|
||
Less: Preferred share dividends |
|
(4,025 |
) |
(3,993 |
) |
||
Numerator for basic and diluted EPS from continuing operations |
|
6,334 |
|
1,478 |
|
||
Income from discontinued operations, net |
|
1,036 |
|
76 |
|
||
Numerator for basic and diluted EPS on net income available to common shareholders |
|
$ |
7,370 |
|
$ |
1,554 |
|
Denominator (all weighted averages): |
|
|
|
|
|
||
Denominator for basic EPS (common shares) |
|
47,001 |
|
45,678 |
|
||
Dilutive effect of share-based compensation awards |
|
765 |
|
1,465 |
|
||
Denominator for diluted EPS |
|
47,766 |
|
47,143 |
|
||
|
|
|
|
|
|
||
Basic EPS: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.14 |
|
$ |
0.03 |
|
Income from discontinued operations |
|
0.02 |
|
|
|
||
Net income available to common shareholders |
|
$ |
0.16 |
|
$ |
0.03 |
|
Diluted EPS: |
|
|
|
|
|
||
Income from continuing operations |
|
$ |
0.13 |
|
$ |
0.03 |
|
Income from discontinued operations |
|
0.02 |
|
|
|
||
Net income available to common shareholders |
|
$ |
0.15 |
|
$ |
0.03 |
|
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 |
|
||
|
|
2008 |
|
2007 |
|
Conversion of weighted average common units |
|
8,154 |
|
8,411 |
|
Conversion of weighted average convertible preferred units |
|
176 |
|
176 |
|
Conversion of weighted average convertible preferred shares |
|
434 |
|
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 current period was less than $53.88 per share.
4. |
Recent Accounting Pronouncements |
SFAS 157
In September 2006, the Financial Accounting Standards Board (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. With respect to SFAS 157, the FASB also issued FASB Staff Position SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 157-1) and FASB Staff Position SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-1 amends SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under Statement of Financial Accounting Standards No. 13, Accounting for Leases. FSP FAS 157-2 amends SFAS 157 to defer the effective date of SFAS 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008. Effective January 1, 2008, we adopted, on a prospective basis, the portions of SFAS 157 not deferred by FSP FAS 157-2; this adoption
8
did not have a material effect on our financial position, results of operations or cash flows. We are evaluating the impact that SFAS 157 will have on our non-financial assets and non-financial liabilities since the application of SFAS 157 for such items for us was deferred to January 1, 2009.
Under SFAS 157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS 157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The assets held in connection with our non-qualified elective deferred compensation plan and the corresponding liability to the participants are measured at fair value on a recurring basis on our consolidated balance sheet using quoted market prices. The assets are treated as trading securities for accounting purposes and included in restricted cash on our consolidated balance sheet. The offsetting liability is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in other liabilities in our consolidated balance sheet. The assets and corresponding liability of our non-qualified elective deferred compensation plan are classified in Level 1 of the fair value hierarchy.
The valuation of our derivatives is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy under SFAS 157, the credit valuation adjustments associated with our derivatives also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of March 31, 2008, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2008:
|
|
Quoted Prices in |
|
|
|
|
|
|
|
||||
|
|
Active Markets for |
|
Significant Other |
|
Significant |
|
|
|
||||
|
|
Identical Assets |
|
Observable Inputs |
|
Unobservable Inputs |
|
|
|
||||
Description |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
||||
Deferred compensation plan assets (1) |
|
$ |
5,386 |
|
$ |
|
|
$ |
|
|
$ |
5,386 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Deferred compensation plan liability (2) |
|
$ |
5,386 |
|
$ |
|
|
$ |
|
|
$ |
5,386 |
|
Interest rate swap contracts (2) |
|
|
|
4,701 |
|
|
|
4,701 |
|
||||
Liabilities |
|
$ |
5,386 |
|
$ |
4,701 |
|
$ |
|
|
$ |
10,087 |
|
|
(1) Included in the line entitled restricted cash on our Consolidated Balance Sheet. |
|
(2) Included in the line entitled other liabilities on our Consolidated Balance Sheet. |
Other Recent Accounting Pronouncements
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. We adopted SFAS 159 on a prospective basis effective January 1, 2008. Our adoption of SFAS 159 did not have a material effect on our financial position, results of operations or cash flows since we did not elect to apply the fair value option for any of our eligible financial instruments or other items on the January 1, 2008 effective date.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transactions; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. While we are currently assessing the impact of SFAS 141(R) on our consolidated financial position and results of operations, SFAS 141(R) will require us to expense transaction costs associated with property acquisitions, which is a significant change since our current practice is to capitalize such costs into the cost of acquisitions.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of SFAS 160 on our consolidated financial position and results of operations.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). This new standard expands the disclosure requirements for derivative instruments and for hedging activities in order to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities and its related interpretations; and (3) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161 is to be applied prospectively for the first annual reporting period beginning on or after November 15, 2008. We are evaluating the impact that SFAS 161 will have on our reporting for derivatives.
9
5. |
Commercial Real Estate Properties |
Operating properties consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Land |
|
$ |
415,876 |
|
$ |
413,779 |
|
Buildings and improvements |
|
2,092,256 |
|
2,064,960 |
|
||
|
|
2,508,132 |
|
2,478,739 |
|
||
Less: accumulated depreciation |
|
(302,994 |
) |
(285,785 |
) |
||
|
|
$ |
2,205,138 |
|
$ |
2,192,954 |
|
As of March 31, 2008, 47 Commerce Drive, an office property located in Cranbury, New Jersey that we sold on April 1, 2008 for $3,150, was classified as held for sale (Cranbury, New Jersey is located in the Northern/Central New Jersey Region). Properties held for sale, which included 47 Commerce Drive as of March 31, 2008 and 429 Ridge Road as of December 31, 2007 (which was sold on January 31, 2008), consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Land |
|
$ |
756 |
|
$ |
2,932 |
|
Buildings and improvements |
|
2,922 |
|
15,003 |
|
||
|
|
3,678 |
|
17,935 |
|
||
Less: accumulated depreciation |
|
(700 |
) |
(2,947 |
) |
||
|
|
$ |
2,978 |
|
$ |
14,988 |
|
Projects we had under construction or development consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Land |
|
$ |
210,449 |
|
$ |
214,696 |
|
Construction in progress |
|
198,514 |
|
181,316 |
|
||
|
|
$ |
408,963 |
|
$ |
396,012 |
|
2008 Construction, Development and Redevelopment Activities
During the three months ended March 31, 2008, we had three properties totaling 291,658 square feet (two located in Colorado Springs, Colorado (Colorado Springs) and one in the Baltimore/Washington Corridor) become fully operational (89,497 of these square feet were placed into service in 2007).
As of March 31, 2008, we had construction underway on five new buildings in the Baltimore/Washington Corridor (including one through a joint venture), three in Colorado Springs, two in San Antonio, Texas and one in the Suburban Maryland region through a joint venture. We also had development activities underway on two new buildings each located in the Baltimore/Washington Corridor, Colorado Springs, Suburban Maryland (including one through a joint venture) and Suburban Baltimore and one in King George County, Virginia. In addition, we had redevelopment underway on two buildings owned by a joint venture (one located in the Baltimore/Washington Corridor and the other in Northern Virginia).
2008 Dispositions
On January 31, 2008, we sold 429 Ridge Road, a 142,385 square foot office property located in Dayton, New Jersey, for $17,000 (Dayton, New Jersey is located in the Northern/Central New Jersey Region). We recognized a gain of $1,392 in connection with this sale.
During the three months ended March 31, 2008 we also completed the sale of six recently constructed office condominiums located in Herndon Virginia (Herndon, Virginia is located in the Northern Virginia region) for sale prices totaling $8,388 in the aggregate. We recognized an aggregate gain before minority interests and taxes of $1,340 on these sales.
10
The table below sets forth the components of the line on our Consolidated Statements of Operations entitled gain on sales of real estate for the three months ended March 31, 2008:
Gain on sales of real estate |
|
$ |
1,632 |
|
Income taxes |
|
(573 |
) |
|
Minority interests |
|
|
|
|
Common units in the Operating Partnership |
|
(143 |
) |
|
Other consolidated entities |
|
(114 |
) |
|
Gain on sales of real estate, net |
|
$ |
802 |
|
6. |
Real Estate Joint Ventures |
During the three months ended March 31, 2008, 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 |
|
|
|
Nature of |
|
Assets at |
|
Exposure |
|
|
|||||
|
|
2008 |
|
2007 |
|
Acquired |
|
Ownership |
|
Activity |
|
3/31/2008 |
|
to Loss (1) |
|
|
|||||
Harrisburg Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gateway Partners, L.P. |
|
$ |
(4,215 |
)(2) |
$ |
(4,246 |
)(2) |
9/29/2005 |
|
20 |
% |
Operates 16 buildings |
(3) |
$ |
72,106 |
|
$ |
|
|
|
|
(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 $5,196 at March 31, 2008 and December 31, 2007 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 ventures 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, |
|
||
|
|
2008 |
|
2007 |
|
||
Commercial real estate property |
|
$ |
70,801 |
|
$ |
71,205 |
|
Other assets |
|
1,305 |
|
1,619 |
|
||
Total assets |
|
$ |
72,106 |
|
$ |
72,824 |
|
|
|
|
|
|
|
||
Liabilities |
|
$ |
67,860 |
|
$ |
67,991 |
|
Owners equity |
|
4,246 |
|
4,833 |
|
||
Total liabilities and owners equity |
|
$ |
72,106 |
|
$ |
72,824 |
|
The following table sets forth combined condensed statements of operations for Harrisburg Corporate Gateway Partners, L.P.:
|
|
For the Three Months |
|
||||
|
|
2008 |
|
2007 |
|
||
Revenues |
|
$ |
2,383 |
|
$ |
2,444 |
|
Property operating expenses |
|
(825 |
) |
(960 |
) |
||
Interest expense |
|
(980 |
) |
(1,138 |
) |
||
Depreciation and amortization expense |
|
(830 |
) |
(867 |
) |
||
Net loss |
|
$ |
(252 |
) |
$ |
(521 |
) |
11
On January 29, 2008, we completed the formation of M Square Associates, LLC (M Square), a consolidated joint venture in which we hold 50% equity interest through Enterprise Campus Developer, LLC, another consolidated joint venture in which we own a 90% interest. M Square will own, develop and manage office properties, approved for up to approximately 750,000 square feet, located in M Square Research Park in College Park, Maryland (College Park, Maryland is located in the Suburban Maryland region). This joint venture was nearing completion of construction on a 116,107 square foot property within M Square Research Park at March 31, 2008.
The table below sets forth information pertaining to our investments in consolidated joint ventures at March 31, 2008:
|
|
|
|
Ownership |
|
|
|
Total |
|
Collateralized |
|
||
|
|
Date |
|
% at |
|
Nature of |
|
Assets at |
|
Assets at |
|
||
|
|
Acquired |
|
3/31/2008 |
|
Activity |
|
3/31/2008 |
|
3/31/2008 |
|
||
COPT Opportunity Invest I, LLC |
|
12/20/2005 |
|
92.5 |
% |
Redeveloping three properties (1) |
|
$ |
43,219 |
|
$ |
|
|
Arundel Preserve #5, LLC |
|
7/2/2007 |
|
50.0 |
% |
Developing land parcel (2) |
|
24,044 |
|
|
|
||
Enterprise Campus Developer, LLC |
|
6/26/2007 |
|
90.0 |
% |
Developing land parcels (3) |
|
22,723 |
|
|
|
||
COPT-FD Indian Head, LLC |
|
10/23/2006 |
|
75.0 |
% |
Developing land parcel (4) |
|
4,655 |
|
|
|
||
MOR Forbes 2 LLC |
|
12/24/2002 |
|
50.0 |
% |
Operates one building (5) |
|
4,396 |
|
|
|
||
13849 Park Center Road, LLC |
|
10/2/2007 |
|
92.5 |
% |
Redeveloping one property (6) |
|
535 |
|
|
|
||
|
|
|
|
|
|
|
|
$ |
99,572 |
|
$ |
|
|
(1) |
This joint venture owns one property in the Northern Virginia region and one in the Baltimore/Washington Corridor region. |
(2) |
This joint venture is developing a land parcel located in Hanover, Maryland (located in the Baltimore/Washington Corridor). |
(3) |
This joint venture is developing land parcels located in College Park, Maryland (located in the Suburban Maryland region) through the M Square joint venture. |
(4) |
This joint ventures property is located in Charles County, Maryland (located in our other business segment). |
(5) |
This joint ventures property is located in Lanham, Maryland (located in the Suburban Maryland region). |
(6) |
This joint venture is redeveloping a property in the Northern Virginia region. |
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, 2008 |
|
December 31, 2007 |
|
||||||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
||||||
|
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
||||||
Lease-up value |
|
$ |
125,338 |
|
$ |
61,980 |
|
$ |
63,358 |
|
$ |
125,338 |
|
$ |
58,435 |
|
$ |
66,903 |
|
Tenant relationship value |
|
35,189 |
|
9,349 |
|
25,840 |
|
35,189 |
|
7,892 |
|
27,297 |
|
||||||
Lease cost portion of deemed cost avoidance |
|
17,133 |
|
9,281 |
|
7,852 |
|
17,133 |
|
8,697 |
|
8,436 |
|
||||||
Lease to market value |
|
14,428 |
|
9,975 |
|
4,453 |
|
14,428 |
|
9,555 |
|
4,873 |
|
||||||
Market concentration premium |
|
1,333 |
|
189 |
|
1,144 |
|
1,333 |
|
181 |
|
1,152 |
|
||||||
|
|
$ |
193,421 |
|
$ |
90,774 |
|
$ |
102,647 |
|
$ |
193,421 |
|
$ |
84,760 |
|
$ |
108,661 |
|
Amortization of the intangible asset categories set forth above totaled $6,039 in the three months ended March 31, 2008 and $8,628 in the three months ended March 31, 2007. The approximate weighted average amortization periods of the categories set forth above follow: lease-up value: nine years; tenant relationship value: seven years; lease cost portion of deemed cost avoidance: five years; lease to market value: four years; and market concentration premium: 34 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 is $15.5 million for the nine months ending December 31, 2008, $18.4 million for 2009, $14.2 million for 2010, $11.4 million for 2011, $9.2 million for 2012 and $6.7 million for 2013.
12
Deferred charges consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Deferred leasing costs |
|
$ |
64,484 |
|
$ |
63,052 |
|
Deferred financing costs |
|
32,617 |
|
32,617 |
|
||
Goodwill |
|
1,853 |
|
1,853 |
|
||
Deferred other |
|
155 |
|
155 |
|
||
|
|
99,109 |
|
97,677 |
|
||
Accumulated amortization |
|
(50,878 |
) |
(48,626 |
) |
||
Deferred charges, net |
|
$ |
48,231 |
|
$ |
49,051 |
|
Our accounts receivable are reported net of an allowance for bad debts of $922 at March 31, 2008 and $798 at December 31, 2007.
Prepaid and other assets consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
Furniture, fixtures and equipment |
|
$ |
11,725 |
|
$ |
11,395 |
|
Prepaid expenses |
|
11,344 |
|
13,907 |
|
||
Other assets |
|
8,357 |
|
7,239 |
|
||
Construction contract costs incurred in excess of billings |
|
6,880 |
|
19,425 |
|
||
Prepaid and other assets |
|
$ |
38,306 |
|
$ |
51,966 |
|
13
Our debt consisted of the following:
|
|
Maximum |
|
|
|
|
|
|
|
Scheduled |
|
|||
|
|
Principal Amount |
|
Carrying Value at |
|
|
|
Maturity |
|
|||||
|
|
Under Debt at |
|
March 31, |
|
December 31, |
|
Stated Interest Rates |
|
Dates at |
|
|||
|
|
March 31, 2008 |
|
2008 |
|
2007 |
|
at March 31, 2008 |
|
March 31, 2008 |
|
|||
Mortgage and other loans payable: |
|
|
|
|
|
|
|
|
|
|
|
|||
Revolving Credit Facility |
|
$ |
600,000 |
|
$ |
397,000 |
|
$ |
361,000 |
|
LIBOR + 0.75 to 1.25% |
|
September 30, 2011 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage and Other Secured Loans |
|
|
|
|
|
|
|
|
|
|
|
|||
Fixed rate mortgage loans (2) |
|
N/A |
|
1,108,661 |
|
1,124,551 |
|
5.20 - 8.63% (3) |
|
2008 - 2034 (4) |
|
|||
Variable rate construction loan facilities |
|
111,500 |
|
104,089 |
|
104,089 |
|
LIBOR + 1.40 to 1.50% |
|
2008 (5) |
|
|||
Other variable-rate secured loans |
|
N/A |
|
34,500 |
|
34,500 |
|
LIBOR + 1.20 to 1.50% |
|
2008 |
|
|||
Total mortgage and other secured loans |
|
|
|
1,247,250 |
|
1,263,140 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Note payable |
|
|
|
|
|
|
|
|
|
|
|
|||
Unsecured seller notes |
|
N/A |
|
1,718 |
|
1,702 |
|
0 - 5.95% |
|
2008-2016 |
|
|||
Total mortgage and other loans payable |
|
|
|
1,645,968 |
|
1,625,842 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
3.5% Exchangeable Senior Notes |
|
N/A |
|
200,000 |
|
200,000 |
|
3.50% |
|
September 2026 (6) |
|
|||
Total debt |
|
|
|
$ |
1,845,968 |
|
$ |
1,825,842 |
|
|
|
|
|
|
|
(1) |
The Revolving Credit Facility may be extended for a one-year period at our option, 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 $578 at March 31, 2008 and $605 at December 31, 2007. |
|
(3) |
The weighted average interest rate on these loans was 5.89% at March 31, 2008. |
|
(4) |
A loan with a balance of $4,800 at March 31, 2008 that matures in 2034 may be repaid in March 2014, subject to certain conditions. |
|
(5) |
At March 31, 2008, $84,589 in loans scheduled to mature in 2008 may be extended by us for a one-year period, subject to certain conditions; we expect to extend $40,589 of these loans. |
|
(6) |
Refer to our 2007 Annual Report on Form 10-K for descriptions of provisions for early redemption and repurchase of these notes. |
We capitalized interest costs of $4,596 in the three months ended March 31, 2008 and $4,132 in the three months ended March 31, 2007.
12. Derivatives
The following table sets forth our interest rate swap contracts in place during the three months ended March 31, 2008 and their respective fair values:
|
|
|
|
|
|
|
|
Fair Value at |
|
|||||
Notional |
|
One-Month |
|
Effective |
|
Expiration |
|
March 31, |
|
December 31, |
|
|||
Amount |
|
LIBOR base |
|
Date |
|
Date |
|
2008 |
|
2007 |
|
|||
$ |
50,000 |
|
4.3300 |
% |
10/23/2007 |
|
10/23/2009 |
|
$ |
(1,640 |
) |
$ |
(596 |
) |
|
50,000 |
|
5.0360 |
% |
3/28/2006 |
|
3/30/2009 |
|
(1,415 |
) |
(765 |
) |
||
|
25,000 |
|
5.2320 |
% |
5/1/2006 |
|
5/1/2009 |
|
(823 |
) |
(486 |
) |
||
|
25,000 |
|
5.2320 |
% |
5/1/2006 |
|
5/1/2009 |
|
(823 |
) |
(486 |
) |
||
|
|
|
|
|
|
|
|
$ |
(4,701 |
) |
$ |
(2,333 |
) |
These amounts are included on our Consolidated Balance Sheets as other liabilities.
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:
14
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Beginning balance |
|
$ |
(2,333 |
) |
$ |
(308 |
) |
Decrease in fair value applied to accumulated other comprehensive loss and minority interests |
|
(2,368 |
) |
(248 |
) |
||
Ending Balance |
|
$ |
(4,701 |
) |
$ |
(556 |
) |
Preferred Shares
Preferred shares of beneficial interest (preferred shares) consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
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 |
|
5 |
|
||
Total preferred shares |
|
$ |
81 |
|
$ |
81 |
|
Common Shares
During the three months ended March 31, 2008, we converted 15,242 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.
15
Accumulated Other Comprehensive Loss
The table below sets forth activity in the accumulated other comprehensive loss component of shareholders equity:
|
|
For the Three Months |
|
||||
|
|
2008 |
|
2007 |
|
||
Beginning balance |
|
$ |
(2,372 |
) |
$ |
(693 |
) |
Unrealized loss on derivatives, net of minority interests |
|
(2,009 |
) |
(223 |
) |
||
Realized loss on derivatives, net of minority interests |
|
13 |
|
13 |
|
||
Ending balance |
|
$ |
(4,368 |
) |
$ |
(903 |
) |
The table below sets forth our comprehensive income:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Net income |
|
$ |
11,395 |
|
$ |
5,547 |
|
Unrealized loss on derivatives, net of minority interests |
|
(2,009 |
) |
(223 |
) |
||
Realized loss on derivatives, net of minority interests |
|
13 |
|
13 |
|
||
Total comprehensive income |
|
$ |
9,399 |
|
$ |
5,337 |
|
16
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2008:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
Total Dividend/ |
|
||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.5000 |
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
||
Series H Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.4688 |
|
$ |
938 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.4688 |
|
$ |
938 |
|
|
|
|
|
|
|
|
|
|
|
||
Series J Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.4766 |
|
$ |
1,616 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.4766 |
|
$ |
1,616 |
|
|
|
|
|
|
|
|
|
|
|
||
Series K Preferred Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.7000 |
|
$ |
372 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.7000 |
|
$ |
372 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Shares: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.3400 |
|
$ |
16,097 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.3400 |
|
$ |
16,173 |
|
|
|
|
|
|
|
|
|
|
|
||
Series I Preferred Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.4688 |
|
$ |
165 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.4688 |
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
||
Common Units: |
|
|
|
|
|
|
|
|
|
||
Fourth Quarter 2007 |
|
December 31, 2007 |
|
January 15, 2008 |
|
$ |
0.3400 |
|
$ |
2,777 |
|
First Quarter 2008 |
|
March 31, 2008 |
|
April 15, 2008 |
|
$ |
0.3400 |
|
$ |
2,771 |
|
17
15. Supplemental Information to Statements of Cash Flows
|
|
For the Three Months Ended |
|
||||||
|
|
March 31, |
|
||||||
|
|
2008 |
|
2007 |
|
||||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||||
|
|
|
|
|
|
||||
Debt assumed in connection with acquisition of properties |
|
$ |
|
|
$ |
38,848 |
|
||
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 acquisitions of properties |
|
$ |
|
|
$ |
20,122 |
|
||
Decrease in accrued capital improvements, leasing, and acquisition costs |
|
$ |
(11,089 |
) |
$ |
(2,600 |
) |
||
Consolidation of real estate joint venture: |
|
|
|
|
|
||||
Real estate assets |
|
$ |
14,208 |
|
$ |
|
|
||
Prepaid and other assets |
|
(12,530 |
) |
|
|
||||
Minority interest |
|
(1,678 |
) |
|
|
||||
Net adjustment |
|
$ |
|
|
$ |
|
|
||
Amortization of discounts and premiums on mortgage loans to commercial real estate properties |
|
$ |
13 |
|
$ |
255 |
|
||
Decrease in fair value of derivatives applied to AOCL and minority interests |
|
$ |
(2,368 |
) |
$ |
(248 |
) |
||
Adjustments to minority interests resulting from changes in ownership of the Operating Partnership by COPT |
|
$ |
|
|
$ |
26,511 |
|
||
Dividends/distribution payable |
|
$ |
22,519 |
|
$ |
20,687 |
|
||
Decrease in minority interests and increase in shareholders equity in connection with the conversion of common units into common shares |
|
$ |
420 |
|
$ |
10,563 |
|
||
18
As of March 31, 2008, we had nine primary office property segments: Baltimore/Washington Corridor; Northern Virginia; Suburban Baltimore; Colorado Springs, Colorado; Suburban Maryland; Greater Philadelphia; St. Marys and King George Counties; San Antonio, Texas; and Northern/Central New Jersey.
The table below reports segment financial information. Our segment entitled Other includes assets and operations not specifically associated with the other defined segments, including corporate assets and investments in unconsolidated entities. We measure the performance of our segments based on total revenues less property operating expenses, a measure we define as net operating income (NOI). We believe that NOI is an important supplemental measure of operating performance for a REITs operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.
|
|
Baltimore/ |
|
Northern |
|
Suburban |
|
Colorado |
|
Suburban |
|
Greater |
|
St. Marys & |
|
San |
|
Northern/ |
|
Other |
|
Intersegment |
|
Total |
|
||||||||||||
Three Months Ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
45,577 |
|
$ |
19,004 |
|
$ |
13,910 |
|
$ |
4,172 |
|
$ |
4,584 |
|
$ |
2,506 |
|
$ |
3,160 |
|
$ |
1,908 |
|
$ |
752 |
|
$ |
2,726 |
|
$ |
(878 |
) |
$ |
97,421 |
|
Property operating expenses |
|
16,215 |
|
6,984 |
|
6,323 |
|
1,582 |
|
1,664 |
|
64 |
|
742 |
|
433 |
|
209 |
|
1,317 |
|
(804 |
) |
34,729 |
|
||||||||||||
NOI |
|
$ |
29,362 |
|
$ |
12,020 |
|
$ |
7,587 |
|
$ |
2,590 |
|
$ |
2,920 |
|
$ |
2,442 |
|
$ |
2,418 |
|
$ |
1,475 |
|
$ |
543 |
|
$ |
1,409 |
|
$ |
(74 |
) |
$ |
62,692 |
|
Additions to commercial real estate properties |
|
$ |
14,087 |
|
$ |
926 |
|
$ |
3,428 |
|
$ |
11,978 |
|
$ |
20,858 |
|
$ |
228 |
|
$ |
562 |
|
$ |
(490 |
) |
$ |
21 |
|
$ |
1,282 |
|
$ |
|
|
$ |
52,880 |
|
Segment assets at March 31, 2008 |
|
$ |
1,214,145 |
|
$ |
472,119 |
|
$ |
445,186 |
|
$ |
192,414 |
|
$ |
155,906 |
|
$ |
95,508 |
|
$ |
95,108 |
|
$ |
59,556 |
|
$ |
25,340 |
|
$ |
182,425 |
|
$ |
(963 |
) |
$ |
2,936,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Three Months Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
43,837 |
|
$ |
17,172 |
|
$ |
13,081 |
|
$ |
3,595 |
|
$ |
3,967 |
|
$ |
2,506 |
|
$ |
3,098 |
|
$ |
1,781 |
|
$ |
1,786 |
|
$ |
499 |
|
$ |
(927 |
) |
$ |
90,395 |
|
Property operating expenses |
|
14,535 |
|
6,328 |
|
5,771 |
|
1,289 |
|
1,668 |
|
37 |
|
776 |
|
362 |
|
700 |
|
1,302 |
|
(681 |
) |
32,087 |
|
||||||||||||
NOI |
|
$ |
29,302 |
|
$ |
10,844 |
|
$ |
7,310 |
|
$ |
2,306 |
|
$ |
2,299 |
|
$ |
2,469 |
|
$ |
2,322 |
|
$ |
1,419 |
|
$ |
1,086 |
|
$ |
(803 |
) |
$ |
(246 |
) |
$ |
58,308 |
|
Additions to commercial real estate properties |
|
$ |
78,526 |
|
$ |
10,897 |
|
$ |
260,380 |
|
$ |
3,803 |
|
$ |
496 |
|
$ |
232 |
|
$ |
69 |
|
$ |
(34 |
) |
$ |
254 |
|
$ |
25,852 |
|
$ |
(432 |
) |
$ |
380,043 |
|
Segment assets at March 31, 2007 |
|
$ |
1,153,457 |
|
$ |
480,989 |
|
$ |
462,330 |
|
$ |
137,948 |
|
$ |
117,496 |
|
$ |
97,306 |
|
$ |
96,884 |
|
$ |
57,250 |
|
$ |
44,486 |
|
$ |
166,577 |
|
$ |
|
|
$ |
2,814,723 |
|
19
The following table reconciles our segment revenues to total revenues as reported on our Consolidated Statements of Operations:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Segment revenues |
|
$ |
97,421 |
|
$ |
90,395 |
|
Construction contract revenues |
|
8,514 |
|
8,691 |
|
||
Other service operations revenues |
|
478 |
|
1,386 |
|
||
Less: Revenues from discontinued real estate operations (Note 19) |
|
(141 |
) |
(1,386 |
) |
||
Total revenues |
|
$ |
106,272 |
|
$ |
99,086 |
|
The following table reconciles our segment property operating expenses to property operating expenses as reported on our Consolidated Statements of Operations:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Segment property operating expenses |
|
$ |
34,729 |
|
$ |
32,087 |
|
Less: Property operating expenses from discontinued real estate operations (Note 19) |
|
(166 |
) |
(504 |
) |
||
Total property operating expenses |
|
$ |
34,563 |
|
$ |
31,583 |
|
The following table reconciles our NOI for reportable segments to income from continuing operations as reported on our Consolidated Statements of Operations:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
NOI for reportable segments |
|
$ |
62,692 |
|
$ |
58,308 |
|
Construction contract revenues |
|
8,514 |
|
8,691 |
|
||
Other service operations revenues |
|
478 |
|
1,386 |
|
||
Equity in loss of unconsolidated entities |
|
(54 |
) |
(94 |
) |
||
Income tax expense |
|
(112 |
) |
(105 |
) |
||
Other adjustments: |
|
|
|
|
|
||
Depreciation and other amortization associated with real estate operations |
|
(24,937 |
) |
(25,997 |
) |
||
Construction contract expenses |
|
(8,283 |
) |
(8,483 |
) |
||
Other service operations expenses |
|
(602 |
) |
(1,405 |
) |
||
General and administrative expenses |
|
(5,933 |
) |
(4,877 |
) |
||
Interest expense on continuing operations |
|
(20,329 |
) |
(19,776 |
) |
||
Gain on sale of non-real estate investment |
|
46 |
|
|
|
||
Amortization of deferred financing costs |
|
(803 |
) |
(884 |
) |
||
Minority interests in continuing operations |
|
(1,145 |
) |
(411 |
) |
||
Add (less) net operating loss (income) from discontinued operations |
|
25 |
|
(882 |
) |
||
Income from continuing operations |
|
$ |
9,557 |
|
$ |
5,471 |
|
The accounting policies of the segments are the same as those previously disclosed for Corporate Office Properties Trust and subsidiaries, where applicable. We did not allocate interest expense, amortization of deferred financing costs and depreciation and other amortization to segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate construction contract
20
revenues, other service operations revenues, construction contract expenses, other service operations expenses, equity in loss of unconsolidated entities, general and administrative expense, gain on sale of non-real estate investment, income taxes and minority interests because these items represent general corporate items not attributable to segments.
During the three months ended March 31, 2008, 17,435 options to purchase common shares (options) were exercised. The weighted average exercise price of these options was $23.75 per share, and the total intrinsic value of options exercised was $154.
During the three months ended March 31, 2008, certain employees were granted a total of 261,094 restricted shares with a weighted average grant date fair value of $31.65 per share. These shares are subject to forfeiture restrictions that lapse in equal increments annually over a three-year period (for most of the grants) or a five-year period beginning on the first anniversary of the grant date provided that the employees remain employed by us. During the three months ended March 31, 2008, forfeiture restrictions lapsed on 122,794 common shares previously issued to employees. These shares had a weighted average grant date fair value of $36.07 per share, and the total fair value of the shares on the vesting dates was $3,827.
We realized a windfall tax benefit of $1,041 in the three months ended March 31, 2008 on options exercised and vesting restricted shares in connection with employees of our subsidiaries that are subject to income tax. We did not realize a windfall tax benefit in the three months ended March 31, 2007 because COMI had a net operating loss carryforward for tax purposes; had COMI not had a net operating loss carryforward during the three months ended March 31, 2007, we would have recognized a windfall tax benefit of $865 in that period.
Expenses from share-based compensation are reflected in our Consolidated Statements of Operations as follows:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2008 |
|
2007 |
|
||
Increase in general and administrative expenses |
|
$ |
1,531 |
|
$ |
879 |
|
Increase in construction contract and other service operations expenses |
|
515 |
|
354 |
|
||
Share-based compensation expense |
|
2,046 |
|
1,233 |
|
||
Income taxes |
|
(39 |
) |
(35 |
) |
||
Minority interests |
|
(306 |
) |
(193 |
) |
||
Net share-based compensation expense |
|
$ |
1,701 |
|
$ |
1,005 |
|
21
COMIs provision for income tax expense consisted of the following:
|
|
For the Three Months |
|
||||
|
|
2008 |
|
2007 |
|
||
Deferred |
|
|
|
|
|
||
Federal |
|
$ |
356 |
|
$ |
86 |
|
State |