UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2009 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 1-14023
(Exact name of registrant as specified in its charter)
Maryland |
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23-2947217 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
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6711 Columbia Gateway Drive, Suite 300, Columbia, MD |
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21046 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (443) 285-5400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o 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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:
Large accelerated filer x |
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Non-accelerated filer o |
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(Do not check if a smaller reporting company) |
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Accelerated filer o |
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Smaller reporting company o |
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 April 30, 2009, 57,373,196 of the Companys Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
FORM 10-Q
2
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
(unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
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Assets |
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Properties, net: |
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Operating properties, net |
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$ |
2,291,484 |
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$ |
2,283,870 |
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Projects under construction or development |
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517,928 |
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494,596 |
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Total properties, net |
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2,809,412 |
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2,778,466 |
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Cash and cash equivalents |
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12,702 |
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6,775 |
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Restricted cash |
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15,408 |
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13,745 |
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Accounts receivable, net |
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12,737 |
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13,684 |
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Deferred rent receivable |
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65,346 |
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64,131 |
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Intangible assets on real estate acquisitions, net |
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85,774 |
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91,848 |
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Deferred charges, net |
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47,350 |
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51,801 |
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Prepaid and other assets |
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88,561 |
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93,789 |
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Total assets |
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$ |
3,137,290 |
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$ |
3,114,239 |
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Liabilities and equity |
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Liabilities: |
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Mortgage and other loans payable |
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$ |
1,715,144 |
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$ |
1,704,123 |
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3.5% Exchangeable Senior Notes |
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153,488 |
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152,628 |
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Accounts payable and accrued expenses |
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111,135 |
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93,625 |
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Rents received in advance and security deposits |
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31,524 |
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30,464 |
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Dividends and distributions payable |
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25,891 |
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25,794 |
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Deferred revenue associated with acquired operating leases |
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9,880 |
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10,816 |
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Distributions in excess of investment in unconsolidated real estate joint venture |
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4,809 |
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4,770 |
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Other liabilities |
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8,793 |
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9,596 |
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Total liabilities |
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2,060,664 |
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2,031,816 |
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Commitments and contingencies (Note 17) |
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Equity: |
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Corporate Office Properties Trusts shareholders equity: |
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Preferred Shares of beneficial interest with an aggregate liquidation preference of $216,333 ($0.01 par value; 15,000,000 shares authorized and 8,121,667 issued and outstanding at March 31, 2009 and December 31, 2008) |
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81 |
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81 |
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Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 54,370,547 at March 31, 2009 and 51,790,442 at December 31, 2008) |
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544 |
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518 |
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Additional paid-in capital |
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1,148,424 |
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1,112,734 |
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Cumulative distributions in excess of net income |
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(170,714 |
) |
(162,572 |
) |
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Accumulated other comprehensive loss |
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(3,256 |
) |
(4,749 |
) |
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Total Corporate Office Properties Trusts shareholders equity |
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975,079 |
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946,012 |
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Noncontrolling interests in subsidiaries: |
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Common units in the Operating Partnership |
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81,793 |
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117,356 |
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Preferred units in the Operating Partnership |
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8,800 |
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8,800 |
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Other consolidated real estate joint ventures |
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10,954 |
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10,255 |
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Noncontrolling interests in subsidiaries |
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101,547 |
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136,411 |
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Total equity |
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1,076,626 |
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1,082,423 |
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Total liabilities and equity |
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$ |
3,137,290 |
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$ |
3,114,239 |
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See accompanying notes to consolidated financial statements.
3
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
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For the Three Months |
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2009 |
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2008 |
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Revenues |
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Rental revenue |
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$ |
89,522 |
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$ |
81,710 |
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Tenant recoveries and other real estate operations revenue |
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17,322 |
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15,292 |
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Construction contract revenues |
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74,539 |
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10,136 |
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Other service operations revenues |
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350 |
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478 |
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Total revenues |
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181,733 |
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107,616 |
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Expenses |
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Property operating expenses |
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39,033 |
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34,542 |
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Depreciation and other amortization associated with real estate operations |
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26,491 |
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24,892 |
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Construction contract expenses |
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72,898 |
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9,905 |
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Other service operations expenses |
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425 |
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602 |
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General and administrative expenses |
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6,189 |
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5,933 |
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Total operating expenses |
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145,036 |
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75,874 |
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Operating income |
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36,697 |
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31,742 |
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Interest expense |
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(19,424 |
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(21,915 |
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Interest and other income |
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1,078 |
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195 |
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Income from continuing operations before equity in loss of unconsolidated entities and income taxes |
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18,351 |
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10,022 |
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Equity in loss of unconsolidated entities |
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(115 |
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(54 |
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Income tax expense |
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(70 |
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(112 |
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Income from continuing operations |
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18,166 |
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9,856 |
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Discontinued operations |
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1,266 |
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Income before gain on sales of real estate |
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18,166 |
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11,122 |
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Gain on sales of real estate, net of income taxes |
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1,059 |
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Net income |
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18,166 |
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12,181 |
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Less net income attributable to noncontrolling interests: |
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Common units in the Operating Partnership |
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(1,804 |
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(1,202 |
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Preferred units in the Operating Partnership |
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(165 |
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(165 |
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Other |
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(50 |
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(100 |
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Net income attributable to Corporate Office Properties Trust |
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16,147 |
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10,714 |
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Preferred share dividends |
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(4,025 |
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(4,025 |
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Net income attributable to Corporate Office Properties Trust common shareholders |
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$ |
12,122 |
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$ |
6,689 |
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Net income attributable to Corporate Office Properties Trust |
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Income from continuing operations |
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$ |
16,147 |
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$ |
9,642 |
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Discontinued operations |
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1,072 |
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Net income attributable to Corporate Office Properties Trust |
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$ |
16,147 |
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$ |
10,714 |
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Basic earnings per common share (1) |
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Income from continuing operations |
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$ |
0.23 |
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$ |
0.12 |
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Discontinued operations |
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0.02 |
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Net income |
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$ |
0.23 |
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$ |
0.14 |
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Diluted earnings per common share (1) |
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Income from continuing operations |
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$ |
0.23 |
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$ |
0.12 |
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Discontinued operations |
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0.02 |
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Net income |
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$ |
0.23 |
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$ |
0.14 |
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Dividends declared per common share |
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$ |
0.3725 |
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$ |
0.3400 |
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(1) |
Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust. |
See accompanying notes to consolidated financial statements.
4
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
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For the Three Months Ended |
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2009 |
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2008 |
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Cash flows from operating activities |
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Net income |
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$ |
18,166 |
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$ |
12,181 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and other amortization |
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27,030 |
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25,328 |
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Amortization of deferred financing costs |
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1,024 |
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777 |
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Amortization of deferred market rental revenue |
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(380 |
) |
(445 |
) |
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Amortization of net debt discounts |
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827 |
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958 |
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Gain on sales of real estate |
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(2,908 |
) |
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Share-based compensation |
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2,745 |
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2,160 |
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Excess income tax shortfall (benefit) from share-based compensation |
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152 |
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(1,041 |
) |
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Other |
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(895 |
) |
179 |
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Changes in operating assets and liabilities: |
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Increase in deferred rent receivable |
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(1,215 |
) |
(2,711 |
) |
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Decrease in accounts receivable |
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947 |
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4,999 |
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Decrease in restricted cash and prepaid and other assets |
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4,672 |
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1,040 |
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Increase in accounts payable, accrued expenses and other liabilities |
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13,977 |
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807 |
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Increase in rents received in advance and security deposits |
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1,060 |
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1,935 |
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Net cash provided by operating activities |
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68,110 |
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43,259 |
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Cash flows from investing activities |
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Purchases of and additions to properties |
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(43,036 |
) |
(49,671 |
) |
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Proceeds from sales of properties |
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25,270 |
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Leasing costs paid |
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(1,833 |
) |
(1,703 |
) |
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Other |
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(847 |
) |
(1,048 |
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Net cash used in investing activities |
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(45,716 |
) |
(27,152 |
) |
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Cash flows from financing activities |
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|
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Proceeds from mortgage and other loans payable |
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136,536 |
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56,000 |
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Repayments of mortgage and other loans payable |
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(125,482 |
) |
(35,847 |
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Net proceeds from issuance of common shares |
|
112 |
|
392 |
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Dividends paid |
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(23,331 |
) |
(20,114 |
) |
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Distributions paid |
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(3,111 |
) |
(2,942 |
) |
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Excess income tax (shortfall) benefit from share-based compensation |
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(152 |
) |
1,041 |
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Restricted share redemptions |
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(1,696 |
) |
(1,149 |
) |
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Other |
|
657 |
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(519 |
) |
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Net cash used in financing activities |
|
(16,467 |
) |
(3,138 |
) |
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|
|
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Net increase in cash and cash equivalents |
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5,927 |
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12,969 |
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Cash and cash equivalents |
|
|
|
|
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Beginning of period |
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6,775 |
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24,638 |
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End of period |
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$ |
12,702 |
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$ |
37,607 |
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See accompanying notes to consolidated financial statements.
5
Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated
Financial Statements
(Dollars in thousands, except per share data)
(unaudited)
Corporate Office Properties Trust (COPT) and subsidiaries (collectively, the Company) is a fully-integrated and self-managed real estate investment trust (REIT) that focuses primarily 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 that 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, 2009, our investments in real estate included the following:
· 240 wholly owned operating properties totaling 18.5 million square feet;
· 16 wholly owned properties under construction or development that we estimate will total approximately 1.8 million square feet upon completion;
· wholly owned land parcels totaling 1,584 acres that we believe are potentially developable into approximately 13.8 million square feet; and
· partial ownership interests in a number of other real estate projects in operation, under development or redevelopment or held for future development.
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the Operating Partnership), for which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (LLCs). A summary of our Operating Partnerships forms of ownership and the percentage of those securities owned by COPT as of March 31, 2009 follows:
Common Units |
|
90 |
% |
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, 8% of the Operating Partnerships common units at that date.
In addition to owning interests in real estate, the Operating Partnership also owns 100% of a number of entities that provide real estate services such as property management, construction and development and heating and air conditioning services primarily for our properties but also for third parties.
The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which we have a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (variable interest entities or VIEs) if we are deemed to be the primary beneficiary of such entities. We eliminate all significant intercompany balances and transactions in consolidation. We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entitys operations but cannot control the entitys operations. We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.
The unaudited consolidated financial statements include all adjustments which are necessary, in the opinion of Management, to fairly present our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in our Annual Report on Form 10-K except for the accounting changes discussed in Notes 3 and 4.
6
We compute basic EPS by dividing net income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted 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.
Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (dollars and shares in thousands, except per share data):
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For the Three Months Ended |
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||||
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2009 |
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2008 |
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Numerator: |
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|
|
|
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Income from continuing operations |
|
$ |
18,166 |
|
$ |
9,856 |
|
Add: Gain on sales of real estate, net |
|
|
|
1,059 |
|
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Less: Preferred share dividends |
|
(4,025 |
) |
(4,025 |
) |
||
Less: Income from continuing operations attributable to noncontrolling interests |
|
(2,019 |
) |
(1,273 |
) |
||
Less: Income from continuing operations attributable to restricted shares |
|
(268 |
) |
(170 |
) |
||
Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders |
|
11,854 |
|
5,447 |
|
||
Add: Income from discontinued operations |
|
|
|
1,266 |
|
||
Less: Income from discontinued operations attributable to noncontrolling interests |
|
|
|
(194 |
) |
||
Numerator for basic and diluted EPS on net income attributable to COPT common shareholders |
|
$ |
11,854 |
|
$ |
6,519 |
|
Denominator (all weighted averages): |
|
|
|
|
|
||
Denominator for basic EPS (common shares) |
|
51,930 |
|
47,001 |
|
||
Dilutive effect of stock option awards |
|
498 |
|
704 |
|
||
Denominator for diluted EPS |
|
52,428 |
|
47,705 |
|
||
|
|
|
|
|
|
||
Basic EPS: |
|
|
|
|
|
||
Income from continuing operations attributable to COPT common shareholders |
|
$ |
0.23 |
|
$ |
0.12 |
|
Income from discontinued operations attributable to COPT common shareholders |
|
|
|
0.02 |
|
||
Net income attributable to COPT common shareholders |
|
$ |
0.23 |
|
$ |
0.14 |
|
Diluted EPS: |
|
|
|
|
|
||
Income from continuing operations attributable to COPT common shareholders |
|
$ |
0.23 |
|
$ |
0.12 |
|
Income from discontinued operations attributable to COPT common shareholders |
|
|
|
0.02 |
|
||
Net income attributable to COPT common shareholders |
|
$ |
0.23 |
|
$ |
0.14 |
|
7
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods:
|
|
Weighted Average Shares |
|
||
|
|
2009 |
|
2008 |
|
Conversion of common units |
|
7,253 |
|
8,154 |
|
Conversion of convertible preferred units |
|
176 |
|
176 |
|
Conversion of convertible preferred shares |
|
434 |
|
434 |
|
Anti-dilutive share-based compensation awards |
|
908 |
|
507 |
|
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 each of the periods was less than the exchange price per common share applicable for such periods.
We adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160) effective January 1, 2009. SFAS 160 establishes accounting and reporting standards for noncontrolling interests in subsidiaries and for deconsolidation of subsidiaries. It requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 also requires that consolidated net income be adjusted to include net income attributable to noncontrolling interests. In addition, SFAS 160 requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions. The presentation and disclosure requirements under SFAS 160 are being applied retrospectively for all periods presented. SFAS 160 primarily affected how we present noncontrolling interests on our consolidated balance sheets, statements of operations and cash flows but did not otherwise have a material effect on our financial position, results of operations or cash flows.
We adopted FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) effective January 1, 2009. FSP APB 14-1 requires that the initial proceeds from convertible debt instruments that may be settled in cash, including partial cash settlements, be allocated between a liability component and an equity component associated with the embedded conversion option. This pronouncements objective is to require the liability and equity components of convertible debt to be separately accounted for in order to enable interest expense to be recorded at a rate that would reflect the issuers conventional debt borrowing rate (previously, interest expense on such debt was recorded based on the contractual rate of interest under the debt). Under this pronouncement, the liability component is recorded at its fair value, as calculated based on the present value of its cash flows discounted using the issuers conventional debt borrowing rate. The equity component is recorded based on the difference between the debt proceeds and the fair value of the liability. The difference between the liabilitys principal amount and fair value is reported as a debt discount and amortized as interest expense over the debts expected life using the effective interest method. The provisions of FSP APB 14-1 are being applied retrospectively to all periods presented. FSP APB 14-1 affected the accounting for our 3.5% Exchangeable Senior Notes (the Exchangeable Notes), resulting in our retroactive reclassification from debt to equity of $21,309, representing the debt discount, effective upon the origination of the Exchangeable Notes in September 2006. This debt discount was subsequently amortized. In addition, we reclassified $465 of the original finance fees incurred in relation to the Exchangeable Notes to equity effective September 2006. For the three months ended March 31, 2009, we recognized $698 in amortization of the discount on the Exchangeable Notes as interest expense, net of amounts capitalized, and we expect to amortize the remaining unamortized discount as of March 31, 2009 of $9,012 into interest expense
8
through September 2011, net of amounts capitalized. The tables below set forth the changes to our net income for the three months ended March 31, 2008 and our balance sheet as of December 31, 2008 resulting from our adoption of FSP APB 14-1 and SFAS 160:
|
|
For the Three |
|
|
Net income as previously reported |
|
$ |
11,395 |
|
Add: Net income attributable to noncontrolling interests related to adoption of SFAS 160 |
|
1,589 |
|
|
Less: Adjustment to interest expense related to adoption of FSP APB 14-1 |
|
(803 |
) |
|
Net income, as adjusted |
|
$ |
12,181 |
|
Balance Sheet line item |
|
December 31, |
|
Adjustments |
|
Adjustments |
|
December 31, |
|
||||
Properties, net |
|
$ |
2,776,889 |
|
$ |
1,577 |
|
$ |
|
|
$ |
2,778,466 |
|
Deferred charges, net |
|
52,006 |
|
(205 |
) |
|
|
51,801 |
|
||||
3.5% Exchangeable Senior Notes |
|
162,500 |
|
(9,872 |
) |
|
|
152,628 |
|
||||
Minority interest |
|
137,865 |
|
(1,454 |
) |
(136,411 |
) |
|
|
||||
Equity |
|
933,314 |
|
12,698 |
|
136,411 |
|
1,082,423 |
|
||||
We adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) effective January 1, 2008. FASB Staff Position SFAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2) amended 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, 2009, we adopted SFAS 157 for our non-financial assets and non-financial liabilities; this adoption did not have a material effect on our financial position, results of operations or cash flows.
We adopted FASB Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)) effective January 1, 2009. SFAS 141(R) requires the acquiring entity in a business combination to recognize 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) requires us now to expense transaction costs associated with property acquisitions occurring subsequent to the pronouncements effective date, which is a significant change since our prior practice was to capitalize such costs into the cost of the acquisitions. Other than the effect this change will have in connection with future acquisitions, our adoption of SFAS 141(R) did not have a material effect on our financial position, results of operations or cash flows.
We adopted FASB Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161) effective January 1, 2009. This new standard expanded 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 Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and its related interpretations; and (3) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161 requires additional disclosure regarding derivatives in our notes to future financial statements but did not otherwise affect our financial position, results of operations or cash flows.
On April 9, 2009, the FASB issued FASB Staff Position SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP SFAS 157-4). FSP SFAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 states, which is that the objective of fair value measurement is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP SFAS 157-4 will be effective for interim and
9
annual periods ending after June 15, 2009 and will be applied prospectively. We are evaluating FSP SFAS 157-4 but currently believe that its adoption will not have a material effect on our financial statements.
On April 9, 2009, the FASB also issued FASB Staff Position SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP SFAS 107-1 and APB 28-1), which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. FSP SFAS 107-1 and APB 28-1 now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP SFAS 107-1 and APB 28-1 will be effective for interim periods ending after June 15, 2009. We believe the adoption of FSP SFAS 107-1 and APB 28-1 will not have a material effect on our financial statements.
Operating properties consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
Land |
|
$ |
423,985 |
|
$ |
423,985 |
|
Buildings and improvements |
|
2,229,817 |
|
2,202,995 |
|
||
|
|
2,653,802 |
|
2,626,980 |
|
||
Less: accumulated depreciation |
|
(362,318 |
) |
(343,110 |
) |
||
|
|
$ |
2,291,484 |
|
$ |
2,283,870 |
|
Projects we had under construction or development consisted of the following:
|
|
March 31, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
Land |
|
$ |
222,242 |
|
$ |
220,863 |
|
Construction in progress |
|
295,686 |
|
273,733 |
|
||
|
|
$ |
517,928 |
|
$ |
494,596 |
|
2009 Construction, Development and Redevelopment Activities
During the three months ended March 31, 2009, we had one property located in Suburban Maryland totaling 116,000 square feet become fully operational (42,000 of these square feet were placed into service in 2008). We also placed into service 9,000 square feet in one partially operational property located in the Baltimore/Washington Corridor.
As of March 31, 2009, we had construction activities underway on five properties in the Baltimore/Washington Corridor (including one through a joint venture), four in Colorado Springs, Colorado (Colorado Springs), two in San Antonio, Texas (San Antonio) and one each in Suburban Baltimore and Suburban Maryland (including one through a joint venture). We also had development activities underway on three office properties in the Baltimore/Washington Corridor and one each in San Antonio and Suburban Baltimore. In addition, we had redevelopment underway on one property located in the Baltimore/Washington Corridor owned through a joint venture.
10
6. Real Estate Joint Ventures
During the three months ended March 31, 2009, 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 |
|
Ownership |
|
Nature of |
|
|
|||||||
Harrisburg Corporate Gateway Partners, L.P. |
|
$ |
(4,809 |
)(2) |
$ |
(4,770 |
)(2) |
9/29/2005 |
|
20 |
% |
Operates 16 buildings (3) |
|
$ |
69,489 |
|
$ |
|
|
(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, 2009 and December 31, 2008 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same. |
(3) |
This joint ventures properties are located in Greater Harrisburg, Pennsylvania. |
The following table sets forth condensed balance sheets for Harrisburg Corporate Gateway Partners, L.P.:
|
|
March 31, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
Properties, net |
|
$ |
62,060 |
|
$ |
62,308 |
|
Other assets |
|
7,429 |
|
7,530 |
|
||
Total assets |
|
$ |
69,489 |
|
$ |
69,838 |
|
|
|
|
|
|
|
||
Liabilities (primarily debt) |
|
$ |
67,721 |
|
$ |
67,725 |
|
Owners equity |
|
1,768 |
|
2,113 |
|
||
Total liabilities and owners equity |
|
$ |
69,489 |
|
$ |
69,838 |
|
The following table sets forth condensed statements of operations for Harrisburg Corporate Gateway Partners, L.P.:
|
|
For the Three Months |
|
||||
|
|
2009 |
|
2008 |
|
||
Revenues |
|
$ |
2,420 |
|
$ |
2,383 |
|
Property operating expenses |
|
(835 |
) |
(825 |
) |
||
Interest expense |
|
(969 |
) |
(980 |
) |
||
Depreciation and amortization expense |
|
(811 |
) |
(830 |
) |
||
Net loss |
|
$ |
(195 |
) |
$ |
(252 |
) |
The table below sets forth information pertaining to our investments in consolidated joint ventures at March 31, 2009:
11
|
|
|
|
Ownership |
|
|
|
Total |
|
Collateralized |
|
||
|
|
Date |
|
% at |
|
Nature of |
|
Assets at |
|
Assets at |
|
||
|
|
Acquired |
|
3/31/2009 |
|
Activity |
|
3/31/2009 |
|
3/31/2009 |
|
||
M Square Associates, LLC |
|
6/26/2007 |
|
45.0 |
% |
Developing land parcels (1) |
|
$ |
36,208 |
|
$ |
|
|
Arundel Preserve #5, LLC |
|
7/2/2007 |
|
50.0 |
% |
Developing land parcel (2) |
|
28,696 |
|
|
|
||
COPT Opportunity Invest I, LLC |
|
12/20/2005 |
|
92.5 |
% |
Redeveloping one property (3) |
|
28,461 |
|
|
|
||
COPT-FD Indian Head, LLC |
|
10/23/2006 |
|
75.0 |
% |
Developing land parcel (4) |
|
6,808 |
|
|
|
||
MOR Forbes 2 LLC |
|
12/24/2002 |
|
50.0 |
% |
Operates one building (5) |
|
4,605 |
|
|
|
||
|
|
|
|
|
|
|
|
$ |
104,778 |
|
$ |
|
|
(1) |
|
This joint venture is developing land parcels located in College Park, Maryland. We own a 90% interest in Enterprise Campus Developer, LLC, which in turn owns a 50% interest in M Square. |
(2) |
|
This joint venture is developing a land parcel located in Hanover, Maryland. |
(3) |
|
This joint venture owns a property in the Baltimore/Washington Corridor region. |
(4) |
|
This joint ventures property is located in Charles County, Maryland (located in our Other business segment). |
(5) |
|
This joint ventures property is located in Lanham, Maryland (located in the Suburban Maryland region). |
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 17.
Our debt consisted of the following:
|
|
Maximum |
|
|
|
|
|
|
|
Scheduled |
|
|||
|
|
Principal |
|
Carrying Value at |
|
|
|
Maturity |
|
|||||
|
|
Amount at |
|
March 31, |
|
December 31, |
|
Stated Interest Rates |
|
Dates at |
|
|||
|
|
March 31, 2009 |
|
2009 |
|
2008 |
|
at March 31, 2009 |
|
March 31, 2009 |
|
|||
Mortgage and other loans payable: |
|
|
|
|
|
|
|
|
|
|
|
|||
Revolving Credit Facility |
|
$ |
600,000 |
|
$ |
424,000 |
|
$ |
392,500 |
|
LIBOR + 0.75% to 1.25% (1) |
|
September 30, 2011 (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage and Other Secured Loans |
|
|
|
|
|
|
|
|
|
|
|
|||
Fixed rate mortgage loans (3) |
|
N/A |
|
935,102 |
|
967,617 |
|
5.20% - 8.63% (4) |
|
2009 - 2034 (5) |
|
|||
Revolving Construction Facility (6) |
|
225,000 |
|
93,303 |
|
81,267 |
|
LIBOR + 1.60% to 2.00% |
|
May 2, 2011 (2) |
|
|||
Other variable rate secured loans |
|
N/A |
|
221,400 |
|
221,400 |
|
LIBOR + 2.25% (7) |
|
August 1, 2012 (2) |
|
|||
Other construction loan facilities |
|
48,000 |
|
40,589 |
|
40,589 |
|
LIBOR + 1.50% (8) |
|
2009 |
|
|||
Total mortgage and other secured loans |
|
|
|
1,290,394 |
|
1,310,873 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Note payable |
|
|
|
|
|
|
|
|
|
|
|
|||
Unsecured seller note |
|
N/A |
|
750 |
|
750 |
|
5.95% |
|
2016 |
|
|||
Total mortgage and other loans payable |
|
|
|
1,715,144 |
|
1,704,123 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
3.5% Exchangeable Senior Notes |
|
N/A |
|
153,488 |
|
152,628 |
|
3.50% |
|
September 2026 (9) |
|
|||
Total debt |
|
|
|
$ |
1,868,632 |
|
$ |
1,856,751 |
|
|
|
|
|
|
(1) |
|
The interest rate on the Revolving Credit Facility was 1.33% at March 31, 2009. |
(2) |
|
These loans may be extended for a one-year period at our option, subject to certain conditions. |
(3) |
|
Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net premiums totaling $468 at March 31, 2009 and $501 at December 31, 2008. |
(4) |
|
The weighted average interest rate on these loans was 5.68% at March 31, 2009. |
(5) |
|
A loan with a balance of $4,721 at March 31, 2009 that matures in 2034 may be repaid in March 2014, subject to certain conditions. |
(6) |
|
The weighted average interest rate on this loan was 2.19% at March 31, 2009. |
(7) |
|
The one loan in this category at March 31, 2009 is subject to a floor of 4.25%, which was the interest rate in effect at March 31, 2009. |
(8) |
|
The weighted average interest rate on these loans was 1.93% at March 31, 2009. |
(9) |
|
As described further in our 2008 Annual Report on Form 10-K, the notes have an exchange settlement feature that provides that they may, under certain circumstances, be exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, may be exchangeable into (at our option) cash, our common shares or a combination of cash and our common shares at an exchange rate (subject to adjustment) of 18.7661 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2009 and is equivalent to an exchange price of $53.29 per common share). The carrying value of these notes included a principal amount of $162,500 and an unamortized discount totaling $9,012 at March 31, 2009 and $9,872 at December 31, 2008. The effective interest rate under the notes, including amortization of the discount, was 5.97%. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized: |
12
|
|
For the Three Months |
|
||||
|
|
2009 |
|
2008 |
|
||
Interest expense on effective interest rate |
|
$ |
1,422 |
|
$ |
1,750 |
|
Interest expense associated with amortization of discount |
|
860 |
|
998 |
|
||
Total |
|
$ |
2,282 |
|
$ |
2,748 |
|
We capitalized interest costs of $4,499 in the three months ended March 31, 2009 and $4,765 in the three months ended March 31, 2008.
8. Derivatives
We are exposed to certain risks arising from changes in market conditions conditions. These changes in market conditions may adversely affect our financial performance. We use derivative financial instruments to assist in managing our exposure to these changes in market conditions. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments related to our borrowings.
Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2009, these derivatives were used to hedge the variable cash flows associated with both existing and future variable-rate debt. We defer the effective portion of the changes in fair value of the designated cash flow hedges to accumulated other comprehensive loss (AOCL) and reclassify such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions. We recognize directly in interest expense the ineffective portion of the change in fair value of interest rate derivatives. We do not use derivatives for trading or speculative purposes and do not have any derivatives that are not designated as hedges as of March 31, 2009.
As of March 31, 2009, we had six outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk with an aggregate notional value of $420,000. All six derivative instruments were interest rate swaps. Under one of these interest rate derivatives, we are hedging our exposure to the variability in future cash flows for forecasted transactions over the period ending January 1, 2010. The table below sets forth the fair value of our derivative financial instruments as well as their classification on our Consolidated Balance Sheet as of March 31, 2009:
|
|
March 31, 2009 |
|
|||
Derivatives Designated as
Hedging |
|
Balance Sheet |
|
Fair Value |
|
|
Interest Rate Swaps |
|
Other liabilities |
|
$ |
(4,217 |
) |
13
The tables below present the effect of our derivative financial instruments on our Consolidated Statements of Operations and comprehensive income for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
Amount of Loss |
|
|||
|
|
|
|
|
|
|
|
Location of Loss |
|
Recognized in Income |
|
|||
|
|
Amount of Loss |
|
Location of Loss |
|
Amount of Loss |
|
Recognized in Income |
|
(Ineffective Portion |
|
|||
|
|
Recognized in AOCL |
|
Reclassified |
|
Reclassified from AOCL into |
|
(Ineffective Portion |
|
and Amount Excluded From |
|
|||
|
|
(Effective Portion) |
|
from AOCL into |
|
Income (Effective Portion) |
|
and Amount |
|
Effectiveness Testing) |
|
|||
Derivatives in SFAS 133 Cash |
|
for Three Months |
|
Income (Effective |
|
for Three Months Ended |
|
Excluded from |
|
for Three Months Ended |
|
|||
Flow Hedging Relationships |
|
Ended March 31, 2009 |
|
Portion) |
|
March 31, 2009 |
|
Effectiveness Testing) |
|
March 31, 2009 |
|
|||
Interest Rate Swaps |
|
$ |
1,381 |
|
Interest expense |
|
$ |
2,299 |
|
Interest expense |
|
$ |
279 |
|
Over the next 12 months, we estimate that approximately $3,900 will be reclassified from AOCL as an increase to interest expense.
We have agreements with each of our derivative counterparties that contain provisions under which if we default, or are capable of being declared in default, on any of our indebtedness, we could also be declared in default on our derivative obligations.
We have agreements with our derivative counterparties that incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreements.
As of March 31, 2009, the fair value of derivatives in a liability position related to these agreements was $4,217. As of March 31, 2009, we had not posted any collateral related to these agreements. We are not in default with any of these provisions. If we breached any of these provisions, we would be required to settle our obligations under the agreements at their termination value of $5,072.
14
Common Shares
During the three months ended March 31, 2009, we converted 2,310,000 common units in our Operating Partnership into common shares on the basis of one common share for each common unit.
See Note 14 for disclosure of common share activity pertaining to our share-based compensation plans.
Accumulated Other Comprehensive Loss
The table below sets forth activity in the accumulated other comprehensive loss component of shareholders equity:
|
|
For the Three Months |
|
||||
|
|
2009 |
|
2008 |
|
||
Beginning balance |
|
$ |
(4,749 |
) |
$ |
(2,372 |
) |
Amount of loss recognized in AOCL (effective portion) |
|
(1,381 |
) |
(2,680 |
) |
||
Amount of loss reclassified from AOCL to income |
|
2,299 |
|
328 |
|
||
Adjustment to AOCL attributable to noncontrolling interests |
|
575 |
|
356 |
|
||
Ending balance |
|
$ |
(3,256 |
) |
$ |
(4,368 |
) |
The table below sets forth total comprehensive income and total comprehensive income attributable to COPT:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Net income |
|
$ |
18,166 |
|
$ |
12,181 |
|
Amount of loss recognized in AOCL (effective portion) |
|
(1,381 |
) |
(2,680 |
) |
||
Amount of loss reclassified from AOCL to income |
|
2,299 |
|
328 |
|
||
Total comprehensive income |
|
19,084 |
|
9,829 |
|
||
Net income attributable to noncontrolling interests |
|
(2,019 |
) |
(1,467 |
) |
||
Other comprehensive income attributable to noncontrolling interests |
|
(116 |
) |
359 |
|
||
Total comprehensive income attributable to COPT |
|
$ |
16,949 |
|
$ |
8,721 |
|
15
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the three months ended March 31, 2009:
|
|
Record Date |
|
Payable Date |
|
Dividend/ |
|
|
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.5000 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.5000 |
|
|
|
|
|
|
|
|
|
|
Series H Preferred Shares: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.4688 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.4688 |
|
|
|
|
|
|
|
|
|
|
Series J Preferred Shares: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.4766 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.4766 |
|
|
|
|
|
|
|
|
|
|
Series K Preferred Shares: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.7000 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.7000 |
|
|
|
|
|
|
|
|
|
|
Common Shares: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.3725 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.3725 |
|
|
|
|
|
|
|
|
|
|
Series I Preferred Units: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.4688 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.4688 |
|
|
|
|
|
|
|
|
|
|
Common Units: |
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
December 31, 2008 |
|
January 15, 2009 |
|
$ |
0.3725 |
|
First Quarter 2009 |
|
March 31, 2009 |
|
April 15, 2009 |
|
$ |
0.3725 |
|
|
|
For the Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||
|
|
|
|
|
|
||
Increase (decrease) in accrued capital improvements, leasing, and acquisition costs |
|
$ |
3,622 |
|
$ |
(11,089 |
) |
Consolidation of real estate joint venture: |
|
|
|
|
|
||
Real estate assets |
|
$ |
|
|
$ |
14,208 |
|
Prepaid and other assets |
|
|
|
(12,530 |
) |
||
Minority interest |
|
|
|
(1,678 |
) |
||
Net adjustment |
|
$ |
|
|
$ |
|
|
Increase (decrease) in fair value of derivatives applied to AOCL and noncontrolling interests |
|
$ |
885 |
|
$ |
(2,368 |
) |
Dividends/distribution payable |
|
$ |
25,891 |
|
$ |
22,519 |
|
Decrease in noncontrolling interests and increase in shareholders equity in connection with the conversion of common units into common shares |
|
$ |
53,808 |
|
$ |
420 |
|
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT |
|
$ |
19,101 |
|
$ |
|
|
Under SFAS 157, fair value is defined as the exit price, or the amount that would be received upon sale of 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
16
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 (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active and (3) 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, 2009, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these 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, 2009:
|
|
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) |
|
$ |
4,569 |
|
$ |
|
|
$ |
|
|
$ |
4,569 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Deferred compensation plan liability (2) |
|
$ |
4,569 |
|
$ |
|
|
$ |
|
|
$ |
4,569 |
|
Interest rate swap contracts (2) |
|
|
|
4,217 |
|
|
|
4,217 |
|
||||
Liabilities |
|
$ |
4,569 |
|
$ |
4,217 |
|
$ |
|
|
$ |
8,786 |
|
(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.
17
As of March 31, 2009, we had nine primary office property segments: Baltimore/Washington Corridor; Northern Virginia; Suburban Baltimore; Colorado Springs; Suburban Maryland; Greater Philadelphia; St. Marys and King George Counties; San Antonio; and Central New Jersey.
The table below reports segment financial information. Our segment entitled Other includes assets and operations not specifically associated with the other defined segments, including corporate assets and investments in unconsolidated entities. We measure the performance of our segments based on total revenues less property operating expenses, a measure we define as net operating income (NOI). We believe that NOI is an important supplemental measure of operating performance for a REITs operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.
|
|
Baltimore/ |
|
Northern |
|
Suburban |
|
Colorado |
|
Suburban |
|
Greater |
|
St. Marys & |
|
San Antonio |
|
Central New |
|
Other |
|
Intersegment |
|
Total |
|
||||||||||||
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
49,592 |
|
$ |
22,359 |
|
$ |
13,828 |
|
$ |
4,878 |
|
$ |
5,037 |
|
$ |
2,506 |
|
$ |
3,410 |
|
$ |
2,945 |
|
$ |
621 |
|
$ |
2,599 |
|
$ |
(931 |
) |
$ |
106,844 |
|
Property operating expenses |
|
18,642 |
|
7,862 |
|
6,702 |
|
1,313 |
|
2,059 |
|
98 |
|
872 |
|
837 |
|
36 |
|
802 |
|
(190 |
) |
39,033 |
|
||||||||||||
NOI |
|
$ |
30,950 |
|
$ |
14,497 |
|
$ |
7,126 |
|
$ |
3,565 |
|
$ |
2,978 |
|
$ |
2,408 |
|
$ |
2,538 |
|
$ |
2,108 |
|
$ |
585 |
|
$ |
1,797 |
|
$ |
(741 |
) |
$ |
67,811 |
|
Additions to commercial real estate properties |
|
$ |
19,345 |
|
$ |
69 |
|
$ |
3,311 |
|
$ |
5,197 |
|
$ |
4,657 |
|
$ |
2,313 |
|
$ |
347 |
|
$ |
7,379 |
|
$ |
2 |
|
$ |
7,541 |
|
$ |
(7 |
) |
$ |
50,154 |
|
Segment assets at March 31, 2009 |
|
$ |
1,273,523 |
|
$ |
459,721 |
|
$ |
436,805 |
|
$ |
253,764 |
|
$ |
158,442 |
|
$ |
96,267 |
|
$ |
94,798 |
|
$ |
104,284 |
|
$ |
20,988 |
|
$ |
239,693 |
|
$ |
(995 |
) |
$ |
3,137,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Three Months Ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Revenues |
|
$ |
45,577 |
|
$ |
19,004 |
|
$ |
13,910 |
|
$ |
4,172 |
|
$ |
4,584 |
|
$ |
2,506 |
|
$ |
3,160 |
|
$ |
1,908 |
|
$ |
752 |
|
$ |
2,577 |
|
$ |
(878 |
) |
$ |
97,272 |
|
Property operating expenses |
|
16,215 |
|
6,984 |
|
6,323 |
|
1,582 |
|
1,664 |
|
64 |
|
742 |
|
433 |
|
209 |
|
751 |
|
(238 |
) |
34,729 |
|
||||||||||||
NOI |
|
$ |
29,362 |
|
$ |
12,020 |
|
$ |
7,587 |
|
$ |
2,590 |
|
$ |
2,920 |
|
$ |
2,442 |
|
$ |
2,418 |
|
$ |
1,475 |
|
$ |
543 |
|
$ |
1,826 |
|
$ |
(640 |
) |
$ |
62,543 |
|
Additions to commercial real estate properties |
|
$ |
14,189 |
|
$ |
926 |
|
$ |
3,428 |
|
$ |
12,021 |
|
$ |
20,858 |
|
$ |
228 |
|
$ |
562 |
|
$ |
(490 |
) |
$ |
21 |
|
$ |
1,307 |
|
$ |
|
|
$ |
53,050 |
|
Segment assets at March 31, 2008 |
|
$ |
1,214,796 |
|
$ |
472,307 |
|
$ |
445,311 |
|
$ |
192,679 |
|
$ |
138,011 |
|
$ |
95,508 |
|
$ |
95,108 |
|
$ |
59,556 |
|
$ |
25,340 |
|
$ |
199,797 |
|
$ |
(963 |
) |
$ |
2,937,450 |
|
18
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, |
|
||||
|
|
2009 |
|
2008 |
|
||
Segment revenues |
|
$ |
106,844 |
|
$ |
97,272 |
|
Construction contract revenues |
|
74,539 |
|
10,136 |
|
||
Other service operations revenues |
|
350 |
|
478 |
|
||
Less: Revenues from discontinued real estate operations (Note 16) |
|
|
|
(270 |
) |
||
Total revenues |
|
$ |
181,733 |
|
$ |
107,616 |
|
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, |
|
||||
|
|
2009 |
|
2008 |
|
||
Segment property operating expenses |
|
$ |
39,033 |
|
$ |
34,729 |
|
Less: Property operating expenses from discontinued real estate operations (Note 16) |
|
|
|
(187 |
) |
||
Total property operating expenses |
|
$ |
39,033 |
|
$ |
34,542 |
|
As previously discussed, we own 100% of a number of entities that provide real estate services such as property management, construction and development and heating and air conditioning services primarily for our properties but also for third parties. The revenues and costs associated with these services include subcontracted costs that are reimbursed to us by the customer at no mark up. As a result, the operating margins from these operations are small relative to the revenue. We use the net of such revenues and expenses to evaluate the performance of our service operations since we view such service operations to be an ancillary component of our overall operations that we expect to continue to be a small contributor to our operating income relative to our real estate operations. The table below sets forth the computation of our income from service operations:
|
|
For the Three Months |
|
||||
|
|
Ended March 31, |
|
||||
|
|
2009 |
|
2008 |
|
||
Construction contract revenues |
|
$ |
74,539 |
|
$ |
10,136 |
|
Other service operations revenues |
|
350 |
|
478 |
|
||
Construction contract expenses |
|
(72,898 |
) |
(9,905 |
) |
||
Other service operations expenses |
|
(425 |
) |
(602 |
) |
||
Income from service operations |
|
$ |
1,566 |
|
$ |
107 |
|
19
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, |
|
||||
|
|
2009 |
|
2008 |
|
||
NOI for reportable segments |
|
$ |
67,811 |
|
$ |
62,543 |
|
Income from service operations |
|
1,566 |
|
107 |
|
||
Interest and other income |
|
1,078 |
|
195 |
|
||
Equity in loss of unconsolidated entities |
|
(115 |
) |
(54 |
) |
||
Income tax expense |
|
(70 |
) |
(112 |
) |
||
Other adjustments: |
|
|
|
|
|
||
Depreciation and other amortization associated with real estate operations |
|
(26,491 |
) |
(24,892 |
) |
||
General and administrative expenses |
|
(6,189 |
) |
(5,933 |
) |
||
Interest expense on continuing operations |
|
(19,424 |
) |
(21,915 |
) |
||
Net operating income from discontinued operations |
|
|
|
(83 |
) |
||
Income from continuing operations |
|
$ |
18,166 |
|
$ |
9,856 |
|
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 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 revenues, other service operations revenues, construction contract expenses, other service operations expenses, equity in loss of unconsolidated entities, general and administrative expense, interest and other income and income taxes because these items represent general corporate items not attributable to segments.
During the three months ended March 31, 2009, 12,300 options were exercised. The weighted average exercise price of these options was $10.14 per share, and the total intrinsic value of the options exercised was $165.
During the three months ended March 31, 2009, certain employees were granted a total of 327,660 restricted shares with a weighted average grant date fair value of $24.98 per share; these shares are subject to forfeiture restrictions that lapse in equal increments annually over periods of three to five years, beginning on or about the first anniversary of the grant date provided that the employees remain employed by us. During the three months ended March 31, 2009, forfeiture restrictions lapsed on 197,272 common shares previously issued to employees; these shares had a weighted average grant date fair value of $35.85 per share, and the total fair value of the shares on the vesting dates was $4,822.
Share-based compensation expense recognized on our Consolidated Statements of Operations, net of amounts capitalized, totaled $2,546 for the three months ended March 31, 2009 and $2,046 for the three months ended March 31, 2008.
We realized a windfall tax shortfall of $152 in the three months ended March 31, 2009 and 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 own a taxable REIT subsidiary (TRS) that is subject to Federal and state income taxes. Our TRS provision for income tax consisted of the following:
20
|
|
For the Three Months |
|
||||
|
|
2009 |
|
2008 |
|
||
Deferred |
|
|
|
|
|
||
Federal |
|
$ |
54 |
|
$ |
356 |
|
State |
|
12 |
|
79 |
|
||
|
|
66 |
|
435 |
|
||
Current |
|
|
|
|
|
||
Federal |
|
3 |
|
205 |
|
||
State |
|
1 |
|
45 |
|
||
|
|
4 |
|
250 |
|
||
Total income tax expense |
|
$ |
70 |
|
$ |
685 |
|
|
|
|
|
|
|
||
Reported on line entitled income taxes |
|
$ |
70 |
|
$ |
112 |
|
Reported on line entitled gain on sale of real estate, net |
|
|
|
573 |
|
||
Total income tax expense |
|
$ |
70 |
|
$ |
685 |
|
Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation and compensation paid in the form of contributions to a deferred nonqualified compensation plan.
Our TRS combined Federal and state effective tax rate was 39% for the three months ended March 31, 2009 and 2008.
Income from discontinued operations primarily includes revenues and expenses associated with the following:
· 429 Ridge Road property that was sold on January 31, 2008;
· 47 Commerce Drive property that was sold on April 1, 2008; and
· 7253 Ambassador Road property that was sold on June 2, 2008.
The table below sets forth the components of income from discontinued operations:
|
|
For the Three |
|
|
|
|
Months Ended |
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Revenue from real estate operations |
|
$ |
270 |
|
Expenses from real estate operations: |
|
|
|
|
Property operating expenses |
|
187 |
|
|
Depreciation and amortization |
|
52 |
|
|
Interest expense |
|
41 |
|
|
Expenses from real estate operations |
|
280 |
|
|
Loss from discontinued operations before gain on sales of real estate |
|
(10 |
) |
|
Gain on sales of real estate |
|
1,276 |
|
|
Income from discontinued operations |
|
$ |
1,266 |
|
21
In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.
Joint Ventures
As part of our obligations under the partnership agreement of Harrisburg Corporate Gateway Partners, LP, we agreed to indemnify the partnerships lender for 80% of losses under standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation) during the period of time in which we manage the partnerships properties; we do not expect to incur any losses under these loan guarantees.
We are party to a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.8 million square feet of office space on 63 acres of land located in Hanover, Maryland. Under the contribution agreement, we agreed to fund up to $2,200 in pre-construction costs associated with the property. As we and the joint venture partner agree to proceed with the construction of buildings in the future, our joint venture partner would contribute land into newly-formed entities and we would make additional cash capital contributions into such entities to fund development and construction activities for which financing is not obtained. We owned a 50% interest in one such joint venture as of March 31, 2009.
We may be required to make our pro rata share of additional investments in our real estate joint ventures (generally based on our percentage ownership) in the event that additional funds are needed. In the event that the other members of these joint ventures do not pay their share of investments when additional funds are needed, we may then deem it appropriate to make even larger investments in these joint ventures.
Environmental Indemnity Agreement
We agreed to provide certain environmental indemnifications in connection with a lease of three properties in our New Jersey region. The prior owner of the properties, a Fortune 100 company that is responsible for groundwater contamination at such properties, previously agreed to indemnify us for (1) direct losses incurred in connection with the contamination and (2) its failure to perform remediation activities required by the State of New Jersey, up to the point that the state declares the remediation to be complete. Under the lease agreement, we agreed to the following:
· to indemnify the tenant against losses covered under the prior owners indemnity agreement if the prior owner fails to indemnify the tenant for such losses. This indemnification is capped at $5,000 in perpetuity after the State of New Jersey declares the remediation to be complete;
· to indemnify the tenant for consequential damages (e.g., business interruption) at one of the buildings in perpetuity and another of the buildings for 15 years after the tenants acquisition of the property from us. This indemnification is capped at $12,500; and
· to pay 50% of additional costs related to construction and environmental regulatory activities incurred by the tenant as a result of the indemnified environmental condition of the properties. This indemnification is capped at $300 annually and $1,500 in the aggregate.
22
18. Subsequent Event
In April 2009, we issued 2.99 million common shares in an underwritten public offering made in conjunction with our inclusion in the S&P MidCap 400 Index effective April 1, 2009. The shares were issued at a public offering price of $24.35 per share for net proceeds of $72,078 after underwriting discounts but before offering expenses.
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a specialty office real estate investment trust (REIT) that focuses primarily 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 that 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, 2009, our investments in real estate included the following:
· 240 wholly owned operating properties totaling 18.5 million square feet;
· 16 wholly owned properties under construction or development that we estimate will total approximately 1.8 million square feet upon completion;
· wholly owned land parcels totaling 1,584 acres that we believe are potentially developable into approximately 13.8 million square feet; and
· partial ownership interests in a number of other real estate projects in operation, under development or redevelopment or held for future development.
During the three months ended March 31, 2009, we:
· experienced significant growth in our revenues from real estate operations in total by amounts that exceeded the growth in our property operating expenses compared to the three months ended March 31, 2008. While much of this increase is attributable to the growth of our portfolio from property additions, we also experienced growth in our revenues from real estate operations by amounts that exceeded the growth in our property operating expenses for properties that were owned and 100% operational since January 1, 2008 (properties that we refer to collectively as Same-Office Properties);
· finished the period with occupancy of our wholly owned portfolio of properties at 92.8%; and
· placed into service an aggregate of 83,000 square feet in newly constructed space located in two properties.
In April 2009, we issued 2.99 million common shares in an underwritten public offering made in conjunction with our inclusion in the S&P MidCap 400 Index effective April 1, 2009. The shares were issued at a public offering price of $24.35 per share for net proceeds of $72.1 million after underwriting discounts but before offering expenses.
As discussed in greater detail in our 2008 Annual Report Form 10-K, the United States and world economies are in the midst of a significant recession that has had devastating effects on the capital markets, reducing stock prices and limiting credit availability. We believe that for much of the office real estate sector, since the core operations tend to be structured as long-term leases and since revenue streams generally remain in place until leases expire or tenants fail to satisfy lease terms, the changes in the overall economy on our operations have not been fully felt to date. As a result, we do not believe that the economic downturn has significantly affected the operations of our real estate properties yet but do expect the effects to become increasingly evident over the remainder of 2009 and 2010, and perhaps beyond. We continue to see signs of increased competition for tenants and downward pressure on rental rates in most of our regions, which we expect, along with an increased intention by certain tenants to reduce costs through job cuts and associated space reductions, could adversely affect our occupancy and renewal rates. In addition, we may also experience higher bad debt expense should tenants be unable to pay their rents. However, we believe that our future real estate operations may be affected to a lesser degree than many of our peers for the following reasons:
· our expectation of continued strength in demand from our customers in the United States Government, defense information technology and data sectors; and
· our high concentration of large, high-quality tenants with a relatively small concentration of revenue from the financial services sector.
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In this section, we discuss our financial condition and results of operations as of and for the three months ended March 31, 2009. This section includes discussions on, among other things:
· our results of operations and why various components of our Consolidated Statements of Operations changed for the three months ended March 31, 2009 compared to the same period in 2008;
· our cash flows;
· how we expect to generate cash for short and long-term capital needs;
· our commitments and contingencies at March 31, 2009; and
· the computation of our Funds from Operations.
You should refer to our Consolidated Financial Statements as you read this section.
This section contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as may, will, should, expect, estimate or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
· our ability to borrow on favorable terms;
· general economic and business conditions, which will, among other things, affect office property demand and rents, tenant creditworthiness, interest rates and financing availability;
· adverse changes in the real estate markets, including, among other things, increased competition with other companies;
· risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development and operating costs may be greater than anticipated;
· risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
· our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;
· governmental actions and initiatives; and
· environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
Results of Operations
Occupancy and Leasing
The table below sets forth leasing information pertaining to our portfolio of wholly owned operating properties:
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|
|
March 31, |
|
December 31, |
|
||
|
|
2009 |
|
2008 |
|
||
Occupancy rates |
|
|
|
|
|
||
Total |
|
92.8 |
% |
93.2 |
% |
||
Baltimore/Washington Corridor |
|
93.3 |
% |
93.4 |
% |
||
Northern Virginia |
|
95.8 |
% |
97.4 |
% |
||
Suburban Baltimore |
|
82.7 |
% |
83.1 |
% |
||
Colorado Springs |
|
94.3 |
% |