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 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

 

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, 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):

 

 

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 Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

 

 

TABLE OF CONTENTS

 

FORM 10-Q

 

		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements:
	Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (unaudited)	3
	Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4:	Controls and Procedures	41
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	41
Item 1A:	Risk Factors	41
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3:	Defaults Upon Senior Securities	42
Item 4:	Submission of Matters to a Vote of Security Holders	42
Item 5:	Other Information	42
Item 6:	Exhibits	42
SIGNATURES		43

 

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,
		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
Projects under construction or development		408,963			396,012
Total commercial real estate properties, net		2,617,079			2,603,954
Cash and cash equivalents		37,607			24,638
Restricted cash		16,712			15,121
Accounts receivable, net		19,832			24,831
Deferred rent receivable		56,330			53,631
Intangible assets on real estate acquisitions, net		102,647			108,661
Deferred charges, net		48,231			49,051
Prepaid and other assets		38,306			51,966
Total assets		$	2,936,744		$	2,931,853
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			22,441
Deferred revenue associated with acquired operating leases		10,665			11,530
Distributions in excess of investment in unconsolidated real estate joint venture		4,215			4,246
Other liabilities		10,171			8,288
Total liabilities		1,992,917			1,979,116
Minority interests:
Common units in the Operating Partnership		111,904			114,127
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		8,421			7,168
Total minority interests		129,125			130,095
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
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 Ended March 31,
		2008			2007
Revenues
Rental revenue		$	81,834		$	75,399
Tenant recoveries and other real estate operations revenue		15,446			13,610
Construction contract revenues		8,514			8,691
Other service operations revenues		478			1,386
Total revenues		106,272			99,086
Expenses
Property operating expenses		34,563			31,583
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
Total operating expenses		74,318			72,345
Operating income		31,954			26,741
Interest expense		(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
Equity in loss of unconsolidated entities		(54		)	(94		)
Income tax expense		(112		)	(105		)
Income from continuing operations before minority interests		10,702			5,882
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			5,471
Income from discontinued operations, net of minority interests		1,036			76
Income before gain on sales of real estate		10,593			5,547
Gain on sales of real estate, net of minority interests and taxes		802			—
Net income		11,395			5,547
Preferred share dividends		(4,025		)	(3,993		)
Net income available to common shareholders		$	7,370		$	1,554
Basic earnings per common share
Income from continuing operations		$	0.14		$	0.03
Discontinued operations		0.02			—
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)

 

		For the Three Months Ended March 31,
		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		(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
Decrease in restricted cash and prepaid and other assets		1,040			1,349
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
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 Partnership’s 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 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.

 

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 March 31,
		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 Shares in Denominator
		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 entity’s 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 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,
		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 Ended March 31,
		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	)

 

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

 

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8.             Deferred Charges

 

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

 

9.             Accounts Receivable

 

Our accounts receivable are reported net of an allowance for bad debts of $922 at March 31, 2008 and $798 at December 31, 2007.

 

10.          Prepaid and Other Assets

 

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

 

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11.          Debt

 

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:

 

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