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 September 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.

 

 

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 October 23, 2009, 58,248,932 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 September 30, 2009 and December 31, 2008 (unaudited)		3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)		4
	Consolidated Statements of Equity for the nine months ended September 30, 2009 and 2008 (unaudited)		5
	Consolidated Statements of Cash Flows for the nine months ended September 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		25
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4:	Controls and Procedures		37
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings		37
Item 1A:	Risk Factors		37
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)

 

		September 30,			December 31,
		2009			2008
Assets
Properties, net:
Operating properties, net		$	2,388,443		$	2,283,870
Projects under construction or development		480,264			494,596
Total properties, net		2,868,707			2,778,466
Cash and cash equivalents		9,981			6,775
Restricted cash		16,779			13,745
Accounts receivable, net		14,004			13,684
Deferred rent receivable		69,816			64,131
Intangible assets on real estate acquisitions, net		75,506			91,848
Deferred charges, net		52,551			51,801
Prepaid expenses and other assets		123,303			93,789
Total assets		$	3,230,647		$	3,114,239
Liabilities and equity
Liabilities:
Mortgage and other loans payable		$	1,742,604		$	1,704,123
3.5% Exchangeable Senior Notes, net		155,248			152,628
Accounts payable and accrued expenses		113,416			93,625
Rents received in advance and security deposits		33,322			30,464
Dividends and distributions payable		28,411			25,794
Deferred revenue associated with acquired operating leases		8,044			10,816
Distributions in excess of investment in unconsolidated real estate joint venture		4,966			4,770
Other liabilities		8,453			9,596
Total liabilities		2,094,464			2,031,816
Commitments and contingencies (Note 16)
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 September 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 58,250,295 at September 30, 2009 and 51,790,442 at December 31, 2008)		583			518
Additional paid-in capital		1,234,910			1,112,734
Cumulative distributions in excess of net income		(192,119		)	(162,572		)
Accumulated other comprehensive loss		(2,291		)	(4,749		)
Total Corporate Office Properties Trust’s shareholders’ equity		1,041,164			946,012
Noncontrolling interests in subsidiaries:
Common units in the Operating Partnership		75,657			117,356
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		10,562			10,255
Noncontrolling interests in subsidiaries		95,019			136,411
Total equity		1,136,183			1,082,423
Total liabilities and equity		$	3,230,647		$	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 Nine Months
		Ended September 30,						Ended September 30,
		2009			2008			2009			2008
Revenues
Rental revenue		$	87,653		$	85,060		$	265,501		$	249,924
Tenant recoveries and other real estate operations revenue		17,190			16,026			51,904			46,110
Construction contract revenues		94,962			89,653			272,254			121,688
Other service operations revenues		359			349			1,280			1,352
Total revenues		200,164			191,088			590,939			419,074
Expenses
Property operating expenses		38,583			35,854			114,778			104,353
Depreciation and amortization associated with real estate operations		26,712			25,583			81,911			75,430
Construction contract expenses		93,450			87,111			266,995			118,488
Other service operations expenses		355			546			1,294			1,602
General and administrative expenses		5,898			5,904			17,275			17,608
Business development expenses		458			199			1,550			464
Total operating expenses		165,456			155,197			483,803			317,945
Operating income		34,708			35,891			107,136			101,129
Interest expense		(20,986		)	(22,503		)	(59,088		)	(65,580		)
Interest and other income		2,619			559			4,949			924
Income from continuing operations before equity in loss of unconsolidated entities and income taxes		16,341			13,947			52,997			36,473
Equity in loss of unconsolidated entities		(758		)	(57		)	(1,075		)	(167		)
Income tax expense		(47		)	(97		)	(169		)	(102		)
Income from continuing operations		15,536			13,793			51,753			36,204
Discontinued operations		—			(9		)	—			2,571
Income before gain on sales of real estate		15,536			13,784			51,753			38,775
Gain on sales of real estate, net of income taxes		—			4			—			1,104
Net income		15,536			13,788			51,753			39,879
Less net income attributable to noncontrolling interests:
Common units in the Operating Partnership		(956		)	(1,467		)	(4,032		)	(4,130		)
Preferred units in the Operating Partnership		(165		)	(165		)	(495		)	(495		)
Other		40			90			15			(132		)
Net income attributable to Corporate Office Properties Trust		14,455			12,246			47,241			35,122
Preferred share dividends		(4,025		)	(4,025		)	(12,076		)	(12,076		)
Net income attributable to Corporate Office Properties Trust common shareholders		$	10,430		$	8,221		$	35,165		$	23,046
Net income attributable to Corporate Office Properties Trust
Income from continuing operations		$	14,455		$	12,254		$	47,241		$	32,943
Discontinued operations		—			(8		)	—			2,179
Net income attributable to Corporate Office Properties Trust		$	14,455		$	12,246		$	47,241		$	35,122
Basic earnings per common share (1)
Income from continuing operations		$	0.18		$	0.17		$	0.62		$	0.43
Discontinued operations		—			—			—			0.05
Net income		$	0.18		$	0.17		$	0.62		$	0.48
Diluted earnings per common share (1)
Income from continuing operations		$	0.18		$	0.17		$	0.62		$	0.42
Discontinued operations		—			—			—			0.05
Net income		$	0.18		$	0.17		$	0.62		$	0.47
Dividends declared per common share		$	0.3925		$	0.3725		$	1.1375		$	1.0525

 

(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 (388,487 common shares)		—			4			4,280			—			—			—			4,284
Share-based compensation		—			3			7,905			—			—			—			7,908
Restricted common share redemptions (76,090 shares)		—			—			(1,930		)	—			—			—			(1,930		)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(21,090		)	—			—			21,090			—
Adjustments related to derivatives designated as cash flow hedges		—			—			—			—			2,458			549			3,007
Decrease in tax benefit from share-based compensation		—			—			(152		)	—			—			—			(152		)
Net income		—			—			—			47,241			—			4,512			51,753
Dividends		—			—			—			(76,788		)	—			—			(76,788		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(6,469		)	(6,469		)
Net contributions and distributions to noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			322			322
Balance at September 30, 2009 (58,250,295) common shares outstanding)		$	81		$	583		$	1,234,910		$	(192,119	)	$	(2,291	)	$	95,019		$	1,136,183
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 (55,242 shares)		—			1			1,981			—			—			(1,982		)	—
Common shares issued to the public (3,737,500 shares)		—			37			138,883			—			—			—			138,920
Exercise of share options (145,059 common shares)		—			2			2,505			—			—			—			2,507
Share-based compensation		—			1			6,811			—			—			—			6,812
Restricted common share redemptions (41,242 shares)		—			—			(1,316		)	—			—			—			(1,316		)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(14,323		)	—			—			14,323			—
Adjustments related to derivatives designated as cash flow hedges		—			—			—			—			696			152			848
Increase in tax benefit from share-based compensation		—			—			1,053			—			—			—			1,053
Net income		—			—			—			35,122			—			4,757			39,879
Dividends		—			—			—			(63,629		)	—			—			(63,629		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(9,059		)	(9,059		)
Net contributions and distributions to noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			2,869			2,869
Balance at September 30, 2008 (51,530,162 common shares outstanding)		$	81		$	515		$	1,107,053		$	(158,106	)	$	(1,676	)	$	140,497		$	1,088,364

 

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 Nine Months Ended September 30,
		2009			2008
Cash flows from operating activities
Net income		$	51,753		$	39,879
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization		83,660			76,659
Amortization of deferred financing costs		3,089			2,805
Amortization of deferred market rental revenue		(1,448		)	(1,457		)
Amortization of net debt discounts		2,520			2,929
Gain on sales of real estate		—			(4,208		)
Share-based compensation		7,908			6,812
Excess income tax shortfall (benefit) from share-based compensation		152			(1,053		)
Other		(3,710		)	628
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(5,685		)	(8,600		)
(Increase) decrease in accounts receivable		(320		)	11,787
Increase in restricted cash and prepaid expenses and other assets		(18,059		)	(26,864		)
Increase in accounts payable, accrued expenses and other liabilities		15,311			31,521
Increase (decrease) in rents received in advance and security deposits		2,858			(4,862		)
Net cash provided by operating activities		138,029			125,976
Cash flows from investing activities
Purchases of and additions to properties		(146,120		)	(220,907		)
Proceeds from sales of properties		65			33,412
Mortgage loan receivable funded		(1,995		)	(24,836		)
Leasing costs paid		(6,778		)	(4,497		)
Other		(6,118		)	(7,964		)
Net cash used in investing activities		(160,946		)	(224,792		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		775,147			684,763
Repayments of mortgage and other loans payable		(736,566		)	(654,255		)
Deferred financing costs paid		(1,830		)	(6,347		)
Net proceeds from issuance of common shares		76,109			141,432
Dividends paid		(73,220		)	(60,541		)
Distributions paid		(7,420		)	(8,815		)
Excess income tax (shortfall) benefit from share-based compensation		(152		)	1,053
Restricted share redemptions		(1,930		)	(1,316		)
Other		(4,015		)	(480		)
Net cash provided by financing activities		26,123			95,494
Net increase (decrease) in cash and cash equivalents		3,206			(3,322		)
Cash and cash equivalents
Beginning of period		6,775			24,638
End of period		$	9,981		$	21,316

 

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 September 30, 2009, our investments in real estate included the following:

 

·      246 wholly owned operating properties totaling 18.4 million square feet;

·      16 wholly owned properties under construction, development or redevelopment that we estimate will total approximately 2.0 million square feet upon completion;

·      wholly owned land parcels totaling 1,524 acres that we believe are potentially developable into approximately 12.9 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 September 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.

 

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In preparing the consolidated financial statements, we evaluated subsequent events occurring through October 30, 2009, the date the financial statements were issued.

 

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, on January 1, 2009, we retrospectively adopted newly issued accounting standards that affected our accounting for noncontrolling interests and convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) and our determination of whether instruments granted in share-based payment transactions should be included in the calculation of earnings per share.  This resulted in 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 guidance 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.  The guidance explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative Generally Accepted Accounting Principles for SEC registrants.  The guidance became effective for us on July 1, 2009 and did not have a material effect on our consolidated financial statements.

 

In June 2009, the FASB issued amended guidance related to the accounting and disclosure requirements for the consolidation of entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”).  This guidance requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE based primarily on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.  The standard also requires an enterprise to continuously reassess whether it must consolidate a VIE.  Additionally, the standard requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements.  The standard will become effective on January 1, 2010.  We are currently evaluating the impact of the standard on our consolidated financial statements.

 

Fair Value of Financial Instruments

 

Authoritative guidance provided by the FASB Accounting Standards Codification defines fair value 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.  The guidance 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

 

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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 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 on 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 warrants to acquire additional common stock of an equity method investee is determined using the Flexible Monte Carlo valuation technique.  This technique factors in the price and volatility of the underlying common stock, the exercise price of the warrant agreements, the risk-free rate of return, the probability of exercise and the effect of sub-optimal exercise behaviors.  The various inputs used in the valuation of the warrants fall within each of the three levels of the fair value hierarchy.  After considering the weighted effect of the various inputs on the valuations of the warrants as of September 30, 2009, we determined that these valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

The valuation of our interest rate 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 interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default.  However, as of September 30, 2009, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our interest rate derivatives and determined that these adjustments are not significant.  As a result, we determined that our interest rate 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 September 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)		$	6,427		$	—		$	—		$	6,427
Warrants to acquire common stock of equity method investee (2)					2,676						2,676
Assets		$	6,427		$	2,676		$	—		$	9,103
											$	—
Liabilities:
Deferred compensation plan liability (3)		$	6,427		$	—		$	—		$	6,427
Interest rate derivatives (3)		—			2,147			—			2,147
Liabilities		$	6,427		$	2,147		$	—		$	8,574

 

(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 (see Note 6).

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

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, 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

 

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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.

 

For additional fair value information, please refer to Note 6 for mortgage loans receivable, Note 7 for debt and Note 8 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						For the Nine Months
		Ended September 30,						Ended September 30,
		2009			2008			2009			2008
Numerator:
Income from continuing operations		$	15,536		$	13,793		$	51,753		$	36,204
Add: Gain on sales of real estate, net		—			4			—			1,104
Less: Preferred share dividends		(4,025		)	(4,025		)	(12,076		)	(12,076		)
Less: Income from continuing operations attributable to noncontrolling interests		(1,081		)	(1,543		)	(4,512		)	(4,365		)
Less: Income from continuing operations attributable to restricted shares		(253		)	(192		)	(763		)	(528		)
Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders		10,177			8,037			34,402			20,339
Add: Income from discontinued operations		—			(9		)	—			2,571
Less: Income from discontinued operations attributable to noncontrolling interests		—			1			—			(392		)
Numerator for basic and diluted EPS on net income attributable to COPT common shareholders		$	10,177		$	8,029		$	34,402		$	22,518
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		57,470			47,273			55,366			47,128
Dilutive effect of stock option awards		485			779			506			765
Denominator for diluted EPS		57,955			48,052			55,872			47,893
Basic EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.18		$	0.17		$	0.62		$	0.43
Income from discontinued operations attributable to COPT common shareholders		—			—			—			0.05
Net income attributable to COPT common shareholders		$	0.18		$	0.17		$	0.62		$	0.48
Diluted EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.18		$	0.17		$	0.62		$	0.42
Income from discontinued operations attributable to COPT common shareholders		—			—			—			0.05
Net income attributable to COPT common shareholders		$	0.18		$	0.17		$	0.62		$	0.47

 

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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				For the Nine Months
		Ended September 30,				Ended September 30,
		2009		2008		2009		2008
Conversion of common units		5,084		8,130		5,932		8,145
Conversion of convertible preferred units		176		176		176		176
Conversion of convertible preferred shares		434		434		434		434
Anti-dilutive share-based compensation awards		427		310		497		345

 

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:

 

		September 30,			December 31,
		2009			2008
Land		$	434,693		$	423,985
Buildings and improvements		2,355,875			2,202,995
		2,790,568			2,626,980
Less: accumulated depreciation		(402,125		)	(343,110		)
		$	2,388,443		$	2,283,870

 

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

 

		September 30,			December 31,
		2009			2008
Land		$	214,147		$	220,863
Construction in progress		266,117			273,733
		$	480,264		$	494,596

 

2009 Construction, Development and Redevelopment Activities

 

During the nine months ended September 30, 2009, we had six properties (three located in the Baltimore/Washington Corridor, two in Colorado Springs, Colorado (“Colorado Springs”) and one in Suburban Maryland) totaling 627,000 square feet become fully operational, including two properties through consolidated joint ventures (85,000 of these square feet were placed into service in 2008).

 

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

 

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5.             Real Estate Joint Ventures

 

During the nine months ended September 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
September 30,			December 31,			Date				Nature of		Exposure
2009			2008			Acquired		Ownership		Activity		to Loss (1)
$	(4,966	)(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 16).

(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 September 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:

 

		September 30,			December 31,
		2009			2008
Properties, net		$	61,333		$	62,308
Other assets		7,420			7,530
Total assets		$	68,753		$	69,838
Liabilities (primarily debt)		$	67,621		$	67,725
Owners’ equity		1,132			2,113
Total liabilities and owners’ equity		$	68,753		$	69,838

 

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

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2009			2008			2009			2008
Revenues		$	2,202		$	2,432		$	6,935		$	7,228
Property operating expenses		(864		)	(870		)	(2,535		)	(2,571		)
Interest expense		(991		)	(991		)	(2,940		)	(2,951		)
Depreciation and amortization expense		(814		)	(824		)	(2,441		)	(2,484		)
Net loss		$	(467	)	$	(253	)	$	(981	)	$	(778	)

 

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