Table of Contents

 

 

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 June 30, 2009

 

or

 

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

 

For the transition period from                to                

 

Commission file number 1-14023

 

Corporate Office Properties Trust

(Exact name of registrant as specified in its charter)

 

 

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

 

 

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

 

Indicate by check mark whether the registrant 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. (Check one):

 

 

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

 

As of July 22, 2009, 58,016,093 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

FORM 10-Q

 

		PAGE
PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements:
	Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 (unaudited)	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)	4
	Consolidated Statements of Equity for the six months ended June 30, 2009 and 2008 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4:	Controls and Procedures	36
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	36
Item 1A:	Risk Factors	36
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3:	Defaults Upon Senior Securities	37
Item 4:	Submission of Matters to a Vote of Security Holders	37
Item 5:	Other Information	38
Item 6:	Exhibits	38
SIGNATURES		39

 

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PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)

 

		June 30,			December 31,
		2009			2008
Assets
Properties, net:
Operating properties, net		$	2,340,574		$	2,283,870
Projects under construction or development		513,562			494,596
Total properties, net		2,854,136			2,778,466
Cash and cash equivalents		11,931			6,775
Restricted cash		17,879			13,745
Accounts receivable, net		13,776			13,684
Deferred rent receivable		67,137			64,131
Intangible assets on real estate acquisitions, net		81,090			91,848
Deferred charges, net		48,812			51,801
Prepaid expenses and other assets		103,914			93,789
Total assets		$	3,198,675		$	3,114,239
Liabilities and equity
Liabilities:
Mortgage and other loans payable		$	1,677,351		$	1,704,123
3.5% Exchangeable Senior Notes, net		154,362			152,628
Accounts payable and accrued expenses		142,734			93,625
Rents received in advance and security deposits		29,936			30,464
Dividends and distributions payable		27,057			25,794
Deferred revenue associated with acquired operating leases		8,926			10,816
Distributions in excess of investment in unconsolidated real estate joint venture		4,873			4,770
Other liabilities		7,029			9,596
Total liabilities		2,052,268			2,031,816
Commitments and contingencies (Note 15)
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
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 June 30, 2009 and December 31, 2008)		81			81
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 58,016,683 at June 30, 2009 and 51,790,442 at December 31, 2008)		580			518
Additional paid-in capital		1,229,931			1,112,734
Cumulative distributions in excess of net income		(179,698		)	(162,572		)
Accumulated other comprehensive loss		(1,176		)	(4,749		)
Total Corporate Office Properties Trust’s shareholders’ equity		1,049,718			946,012
Noncontrolling interests in subsidiaries:
Common units in the Operating Partnership		76,873			117,356
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		11,016			10,255
Noncontrolling interests in subsidiaries		96,689			136,411
Total equity		1,146,407			1,082,423
Total liabilities and equity		$	3,198,675		$	3,114,239

 

See accompanying notes to consolidated financial statements.

 

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(unaudited)

 

		For the Three Months						For the Six Months
		Ended June 30,						Ended June 30,
		2009			2008			2009			2008
Revenues
Rental revenue		$	88,326		$	83,154		$	177,848		$	164,864
Tenant recoveries and other real estate operations revenue		17,392			14,792			34,714			30,084
Construction contract revenues		102,753			21,899			177,292			32,035
Other service operations revenues		571			525			921			1,003
Total revenues		209,042			120,370			390,775			227,986
Expenses
Property operating expenses		37,162			33,957			76,195			68,499
Depreciation and other amortization associated with real estate operations		28,708			24,955			55,199			49,847
Construction contract expenses		100,647			21,472			173,545			31,377
Other service operations expenses		514			454			939			1,056
General and administrative expenses		5,834			5,934			11,377			11,704
Business development expenses		446			102			1,092			265
Total operating expenses		173,311			86,874			318,347			162,748
Operating income		35,731			33,496			72,428			65,238
Interest expense		(18,678		)	(21,162		)	(38,102		)	(43,077		)
Interest and other income		1,252			170			2,330			365
Income from continuing operations before equity in loss of unconsolidated entities and income taxes		18,305			12,504			36,656			22,526
Equity in loss of unconsolidated entities		(202		)	(56		)	(317		)	(110		)
Income tax (expense) benefit		(52		)	107			(122		)	(5		)
Income from continuing operations		18,051			12,555			36,217			22,411
Discontinued operations		—			1,314			—			2,580
Income before gain on sales of real estate		18,051			13,869			36,217			24,991
Gain on sales of real estate, net of income taxes		—			41			—			1,100
Net income		18,051			13,910			36,217			26,091
Less net income attributable to noncontrolling interests:
Common units in the Operating Partnership		(1,272		)	(1,461		)	(3,076		)	(2,663		)
Preferred units in the Operating Partnership		(165		)	(165		)	(330		)	(330		)
Other		25			(122		)	(25		)	(222		)
Net income attributable to Corporate Office Properties Trust		16,639			12,162			32,786			22,876
Preferred share dividends		(4,026		)	(4,026		)	(8,051		)	(8,051		)
Net income attributable to Corporate Office Properties Trust common shareholders		$	12,613		$	8,136		$	24,735		$	14,825
Net income attributable to Corporate Office Properties Trust
Income from continuing operations		$	16,639		$	11,047		$	32,786		$	20,689
Discontinued operations		—			1,115			—			2,187
Net income attributable to Corporate Office Properties Trust		$	16,639		$	12,162		$	32,786		$	22,876
Basic earnings per common share (1)
Income from continuing operations		$	0.22		$	0.15		$	0.45		$	0.26
Discontinued operations		—			0.02			—			0.05
Net income		$	0.22		$	0.17		$	0.45		$	0.31
Diluted earnings per common share (1)
Income from continuing operations		$	0.22		$	0.15		$	0.44		$	0.26
Discontinued operations		—			0.02			—			0.04
Net income		$	0.22		$	0.17		$	0.44		$	0.30
Dividends declared per common share		$	0.3725		$	0.3400		$	0.7450		$	0.6800

 

(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.

 

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

 

		Preferred Shares			Common Shares			Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Noncontrolling Interests in Subsidiaries			Total
Balance at December 31, 2008 (51,790,442 common shares outstanding)		$	81		$	518		$	1,112,734		$	(162,572	)	$	(4,749	)	$	136,411		$	1,082,423
Conversion of common units to common shares (2,824,000 shares)		—			28			61,368			—			—			(61,396		)	—
Common shares issued to the public (2,990,000 shares)		—			30			71,795			—			—			—			71,825
Exercise of share options (153,177 shares)		—			2			1,855			—			—			—			1,857
Share-based compensation		—			2			5,248			—			—			—			5,250
Restricted common share redemptions (71,267 shares)		—			—			(1,752		)	—			—			—			(1,752		)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(21,165		)	—			—			21,165			—
Increase in fair value of derivatives		—			—			—			—			3,573			650			4,223
Decrease in tax benefit from share-based compensation		—			—			(152		)	—			—			—			(152		)
Net income		—			—			—			32,786			—			3,431			36,217
Dividends		—			—			—			(49,912		)	—			—			(49,912		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(4,308		)	(4,308		)
Net contributions and distributions to noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			736			736
Balance at June 30, 2009 (58,016,683 common shares outstanding)		$	81		$	580		$	1,229,931		$	(179,698	)	$	(1,176	)	$	96,689		$	1,146,407
Balance at December 31, 2007 (47,366,475 common shares outstanding)		$	81		$	474		$	971,459		$	(129,599	)	$	(2,372	)	$	129,437		$	969,480
Conversion of common units to common shares (15,242 shares)		—			1			419			—			—			(420		)	—
Exercise of share options (90,209 shares)		—			1			1,346			—			—			—			1,347
Share-based compensation		—			1			4,555			—			—			—			4,556
Restricted common share redemptions (40,892 shares)		—			—			(1,304		)	—			—			—			(1,304		)
Decrease in fair value of derivatives		—			—			—			—			(243		)	(41		)	(284		)
Increase in tax benefit from share-based compensation		—			—			1,053			—			—			—			1,053
Net income		—			—			—			22,876			—			3,215			26,091
Dividends		—			—			—			(40,422		)	—			—			(40,422		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(5,872		)	(5,872		)
Net contributions and distributions to noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			2,868			2,868
Balance at June 30, 2008 (47,701,812 common shares outstanding)		$	81		$	477		$	977,528		$	(147,145	)	$	(2,615	)	$	129,187		$	957,513

 

See accompanying notes to consolidated financial statements.

 

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Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

		For the Six Months Ended June 30,
		2009			2008
Cash flows from operating activities
Net income		$	36,217		$	26,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization		56,311			50,676
Amortization of deferred financing costs		2,033			1,661
Amortization of deferred market rental revenue		(997		)	(903		)
Amortization of net debt discounts		1,663			1,936
Gain on sales of real estate		—			(4,204		)
Share-based compensation		5,250			4,556
Excess income tax shortfall (benefit) from share-based compensation		152			(1,053		)
Other		(1,946		)	402
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(3,006		)	(5,701		)
(Increase) decrease in accounts receivable		(92		)	1,379
(Increase) decrease in restricted cash and prepaid expenses and other assets		(4,681		)	3,380
Increase in accounts payable, accrued expenses and other liabilities		38,055			4,406
(Decrease) increase in rents received in advance and security deposits		(528		)	1,335
Net cash provided by operating activities		128,431			83,961
Cash flows from investing activities
Purchases of and additions to properties		(101,650		)	(149,699		)
Proceeds from sales of properties		65			28,304
Leasing costs paid		(6,282		)	(2,383		)
Other		(4,636		)	(2,504		)
Net cash used in investing activities		(112,503		)	(126,282		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		314,147			227,932
Repayments of mortgage and other loans payable		(340,848		)	(149,374		)
Deferred financing costs paid		(202		)	(2,250		)
Net proceeds from issuance of common shares		73,682			1,350
Dividends paid		(47,596		)	(40,309		)
Distributions paid		(5,361		)	(5,878		)
Excess income tax (shortfall) benefit from share-based compensation		(152		)	1,053
Restricted share redemptions		(1,752		)	(1,304		)
Other		(2,690		)	(680		)
Net cash (used in) provided by financing activities		(10,772		)	30,540
Net increase (decrease) in cash and cash equivalents		5,156			(11,781		)
Cash and cash equivalents
Beginning of period		6,775			24,638
End of period		$	11,931		$	12,857

 

See accompanying notes to consolidated financial statements.

 

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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”, “we” or “us”) 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 June 30, 2009, our investments in real estate included the following:

 

·                  243 wholly owned operating properties totaling 18.7 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 1,530 acres that we believe are potentially developable into approximately 13.1 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 Partnership’s forms of ownership and the percentage of those securities owned by COPT as of June 30, 2009 follows:

 

Common Units		92	%
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, 7% of the Operating Partnership’s 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.

 

2.                                      Summary of Significant Accounting Policies

 

Basis of Presentation

 

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 entity’s operations but cannot control the entity’s operations.  We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.

 

In preparing the consolidated financial statements, we evaluated subsequent events occurring through July 31, 2009, the date the financial statements were issued.

 

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These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2008 included in our Current Report on Form 8-K filed on June 2, 2009.  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 the financial statements included in our Current Report on Form 8-K filed on June 2, 2009.

 

We reclassified certain amounts from the prior periods to conform to the current period presentation of our Consolidated Financial Statements with no effect on previously reported net income or equity.

 

Recent Accounting Pronouncements Resulting in Adjustments

 

As discussed further in our Current Report on Form 8-K dated June 2, 2009, we retrospectively adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), 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”) and EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (EITF 03-6-1”).  This resulted in the recording of certain adjustments to amounts previously reported in our 2008 Annual Report on Form 10-K, including changes that affected our previously reported net income attributable to our common shareholders and earnings per common share.  Our Current Report on Form 8-K dated June 2, 2009 updated our 2008 Annual Report on Form 10-K for the effect of these adjustments.

 

Other Recent Accounting Pronouncements

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which amends FASB Interpretation No. 46 (revised December 2003) to address the elimination of the concept of a qualifying special purpose entity.  SFAS 167 also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity.  Additionally, SFAS 167 provides more timely and useful information about an enterprise’s involvement with a variable interest entity.  SFAS 167 will become effective on January 1, 2010.  We are currently evaluating the impact of this standard on our consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles (as amended)” (“SFAS 168”), which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles for nongovernmental entities.  SFAS 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants.  SFAS 168 became effective on July 1, 2009 and is not expected to have a material effect on our consolidated financial statements.

 

Fair Value of Financial Instruments

 

Under Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“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 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. 

 

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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 June 30, 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.  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 June 30, 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)		$	5,520		$	—		$	—		$	5,520
Interest rate swap contracts (2)		—			789			—			789
Assets		$	5,520		$	789		$	—		$	6,309
Liabilities:
Deferred compensation plan liability (3)		$	5,520		$	—		$	—		$	5,520
Interest rate swap contracts (3)		—			1,666			—			1,666
Liabilities		$	5,520		$	1,666		$	—		$	7,186

 

(1) Included in the line entitled “restricted cash” on our Consolidated Balance Sheet.

(2) Included in the line entitled “prepaid and other assets” on our Consolidated Balance Sheet.

(3) Included in the line entitled “other liabilities” on our Consolidated Balance Sheet.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivables, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  We estimated the fair values of our mortgage loans receivable by using discounted cash flow analyses based on an appropriate market rate for a similar type of instrument.  We estimated fair values of our debt based on quoted market prices for publicly-traded debt and on the discounted estimated future cash payments to be made for other debt; the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

 

Mortgage loans receivable are included in the line entitled prepaid and other assets on our consolidated balance sheets.  The following table sets forth information pertaining to the fair value of our mortgage loans receivable:

 

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		June 30, 2009			December 31, 2008
Carrying Amount		$	31,119		$	29,380
Estimated Fair Value		30,039			28,951

 

For additional fair value information, please refer to Note 6 for debt and Note 7 for derivatives.

 

3.             Earnings Per Share (“EPS”)

 

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):

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2009			2008			2009			2008
Numerator:
Income from continuing operations		$	18,051		$	12,555		$	36,217		$	22,411
Add: Gain on sales of real estate, net		—			41			—			1,100
Less: Preferred share dividends		(4,026		)	(4,026		)	(8,051		)	(8,051		)
Less: Income from continuing operations attributable to noncontrolling interests		(1,412		)	(1,549		)	(3,431		)	(2,822		)
Less: Income from continuing operations attributable to restricted shares		(242		)	(166		)	(510		)	(336		)
Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders		12,371			6,855			24,225			12,302
Add: Income from discontinued operations		—			1,314			—			2,580
Less: Income from discontinued operations attributable to noncontrolling interests		—			(199		)	—			(393		)
Numerator for basic and diluted EPS on net income attributable to COPT common shareholders		$	12,371		$	7,970		$	24,225		$	14,489
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		56,637			47,110			54,296			47,055
Dilutive effect of stock option awards		546			790			522			746
Denominator for diluted EPS		57,183			47,900			54,818			47,801
Basic EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.22		$	0.15		$	0.45		$	0.26
Income from discontinued operations attributable to COPT common shareholders		—			0.02			—			0.05
Net income attributable to COPT common shareholders		$	0.22		$	0.17		$	0.45		$	0.31
Diluted EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.22		$	0.15		$	0.44		$	0.26
Income from discontinued operations attributable to COPT common shareholders		—			0.02			—			0.04
Net income attributable to COPT common shareholders		$	0.22		$	0.17		$	0.44		$	0.30

 

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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
		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2009		2008		2009		2008
Conversion of common units		5,483		8,151		6,363		8,153
Conversion of convertible preferred units		176		176		176		176
Conversion of convertible preferred shares		434		434		434		434
Anti-dilutive share-based compensation awards		524		348		641		468

 

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.

 

4.             Properties, net

 

Operating properties consisted of the following:

 

		June 30,			December 31,
		2009			2008
Land		$	429,064		$	423,985
Buildings and improvements		2,293,895			2,202,995
		2,722,959			2,626,980
Less: accumulated depreciation		(382,385		)	(343,110		)
		$	2,340,574		$	2,283,870

 

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

 

		June 30,			December 31,
		2009			2008
Land		$	219,775		$	220,863
Construction in progress		293,787			273,733
		$	513,562		$	494,596

 

2009 Construction, Development and Redevelopment Activities

 

During the six months ended June 30, 2009, we had three properties (one each located in the Baltimore/Washington Corridor, Suburban Maryland and Colorado Springs, Colorado (“Colorado Springs”)) totaling 301,000 square feet become fully operational (85,000 of these square feet were placed into service in 2008).  We also placed into service 42,000 square feet in two partially operational properties (one each located in Colorado Springs and the Baltimore/Washington Corridor).

 

As of June 30, 2009, we had construction activities underway on four properties in the Baltimore/Washington Corridor (including one through a consolidated joint venture), three in Colorado Springs, two in San Antonio, Texas (“San Antonio”) and one each in Suburban Baltimore and Suburban Maryland (including one through a consolidated joint venture).  We also had development activities underway on four office properties in the Baltimore/Washington Corridor, two in Suburban Baltimore and one in San Antonio.  In addition, we had redevelopment underway on one property located in the Baltimore/Washington Corridor owned through a consolidated joint venture.

 

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5.                                      Real Estate Joint Ventures

 

During the six months ended June 30, 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												Maximum
June 30,			December 31,			Date				Nature of		Exposure
2009			2008			Acquired		Ownership		Activity		to Loss (1)
$	(4,873	)(2)	$	(4,770	)(2)	9/29/2005		20	%	Operates 16 buildings		$	—

 

(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 (see Note 15).

(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 June 30, 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.

 

The following table sets forth condensed balance sheets for this unconsolidated joint venture:

 

		June 30,			December 31,
		2009			2008
Properties, net		$	61,742		$	62,308
Other assets		7,331			7,530
Total assets		$	69,073		$	69,838
Liabilities (primarily debt)		$	67,473		$	67,725
Owners’ equity		1,600			2,113
Total liabilities and owners’ equity		$	69,073		$	69,838

 

The following table sets forth condensed statements of operations for this unconsolidated joint venture:

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2009			2008			2009			2008
Revenues		$	2,313		$	2,413		$	4,733		$	4,796
Property operating expenses		(836		)	(876		)	(1,671		)	(1,701		)
Interest expense		(980		)	(980		)	(1,949		)	(1,960		)
Depreciation and amortization expense		(816		)	(830		)	(1,627		)	(1,660		)
Net loss		$	(319	)	$	(273	)	$	(514	)	$	(525	)

 

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