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)

 

Maryland

 

23-2947217

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

6711 Columbia Gateway Drive, Suite 300, Columbia MD

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

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

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

)

 

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 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.

 

12



 

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

 

 

13



 

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:

 

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

)

 

13.          Shareholders’ Equity

 

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
Ended March 31,

 

 

 

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



 

14.          Dividends and Distributions

 

The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2008:

 

 

 

Record Date

 

Payable Date

 

Dividend/
Distribution Per
Share/Unit

 

Total Dividend/
Distribution

 

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



 

16.          Information by Business Segment

 

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. Mary’s 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 REIT’s operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.

 

 

 

Baltimore/
Washington
Corridor

 

Northern
Virginia

 

Suburban
Baltimore

 

Colorado
Springs

 

Suburban
Maryland

 

Greater
Philadelphia

 

St. Mary’s &
King George
Counties

 

San
Antonio

 

Northern/
Central New
Jersey

 

Other

 

Intersegment
Elimination

 

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.

 

17.          Share-Based Compensation

 

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



 

18.          Income Taxes

 

COMI’s provision for income tax expense consisted of the following:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2008

 

2007

 

Deferred

 

 

 

 

 

Federal

 

$

356

 

$

86

 

State