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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

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

 

For the quarterly period ended March 31, 2010

 

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.

 

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

 

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

 

As of April 16, 2010, 58,929,245 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 March 31, 2010 and December 31, 2009 (unaudited)		3
	Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited)		4
	Consolidated Statements of Equity for the three months ended March 31, 2010 and 2009 (unaudited)		5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (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		35
Item 4:	Controls and Procedures		35
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		36
Item 3:	Defaults Upon Senior Securities		36
Item 4:	Removed and Reserved		36
Item 5:	Other Information		36
Item 6:	Exhibits		37
SIGNATURES			38

 

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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)

 

		March 31,			December 31,
		2010			2009
Assets
Properties, net:
Operating properties, net		$	2,493,891		$	2,510,277
Properties held for sale, net		18,546			18,533
Projects under construction or development		552,525			501,090
Total properties, net		3,064,962			3,029,900
Cash and cash equivalents		10,180			8,262
Restricted cash and marketable securities		18,981			16,549
Accounts receivable, net		13,982			17,459
Deferred rent receivable		74,113			71,805
Intangible assets on real estate acquisitions, net		94,925			100,671
Deferred charges, net		52,797			53,421
Prepaid expenses and other assets		68,412			81,955
Total assets		$	3,398,352		$	3,380,022
Liabilities and equity
Liabilities:
Mortgage and other loans payable, net		$	1,950,070		$	1,897,694
3.5% Exchangeable Senior Notes, net		157,061			156,147
Accounts payable and accrued expenses		86,650			116,455
Rents received in advance and security deposits		32,575			32,177
Dividends and distributions payable		28,556			28,440
Deferred revenue associated with operating leases		13,827			14,938
Distributions in excess of investment in unconsolidated real estate joint venture		5,238			5,088
Other liabilities		13,836			8,451
Total liabilities		2,287,813			2,259,390
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 March 31, 2010 and December 31, 2009)		81			81
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 58,927,117 at March 31, 2010 and 58,342,673 at December 31, 2009)		589			583
Additional paid-in capital		1,244,046			1,238,704
Cumulative distributions in excess of net income		(227,189		)	(209,941		)
Accumulated other comprehensive loss		(3,278		)	(1,907		)
Total Corporate Office Properties Trust’s shareholders’ equity		1,014,249			1,027,520
Noncontrolling interests in subsidiaries:
Common units in the Operating Partnership		68,113			73,892
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		19,377			10,420
Noncontrolling interests in subsidiaries		96,290			93,112
Total equity		1,110,539			1,120,632
Total liabilities and equity		$	3,398,352		$	3,380,022

 

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
		Ended March 31,
		2010			2009
Revenues
Rental revenue		$	91,010		$	88,845
Tenant recoveries and other real estate operations revenue		21,218			17,263
Construction contract and other service revenues		37,365			74,889
Total revenues		149,593			180,997
Expenses
Property operating expenses		48,135			38,964
Depreciation and amortization associated with real estate operations		27,596			26,277
Construction contract and other service expenses		36,399			73,323
General and administrative expenses		5,900			5,543
Business development expenses		155			646
Total operating expenses		118,185			144,753
Operating income		31,408			36,244
Interest expense		(22,638		)	(19,363		)
Interest and other income		1,302			1,078
Income from continuing operations before equity in loss of unconsolidated entities and income taxes		10,072			17,959
Equity in loss of unconsolidated entities		(205		)	(115		)
Income tax expense		(41		)	(70		)
Income from continuing operations		9,826			17,774
Discontinued operations		832			392
Income before gain on sales of real estate		10,658			18,166
Gain on sales of real estate, net of income taxes		17			—
Net income		10,675			18,166
Less net income attributable to noncontrolling interests:
Common units in the Operating Partnership		(527		)	(1,804		)
Preferred units in the Operating Partnership		(165		)	(165		)
Other		(45		)	(50		)
Net income attributable to Corporate Office Properties Trust		9,938			16,147
Preferred share dividends		(4,025		)	(4,025		)
Net income attributable to Corporate Office Properties Trust common shareholders		$	5,913		$	12,122
Net income attributable to Corporate Office Properties Trust:
Income from continuing operations		$	9,174		$	15,804
Discontinued operations, net		764			343
Net income attributable to Corporate Office Properties Trust		$	9,938		$	16,147
Basic earnings per common share (1)
Income from continuing operations		$	0.08		$	0.22
Discontinued operations		0.02			0.01
Net income attributable to COPT common shareholders		$	0.10		$	0.23
Diluted earnings per common share (1)
Income from continuing operations		$	0.08		$	0.22
Discontinued operations		0.02			0.01
Net income attributable to COPT common shareholders		$	0.10		$	0.23

 

(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			Total
Balance at December 31, 2009 (58,342,673 common shares outstanding)		$	81		$	583		$	1,238,704		$	(209,941	)	$	(1,907	)	$	93,112		$	1,120,632
Conversion of common units to common shares (309,497 shares)		—			3			4,512			—			—			(4,515		)	—
Costs associated with common shares issued to the public		—			—			(18		)	—			—			—			(18		)
Exercise of share options (128,461 shares)		—			1			2,055			—			—			—			2,056
Share-based compensation		—			2			2,609			—			—			—			2,611
Restricted common share redemptions (96,970 shares)		—			—			(3,610		)	—			—			—			(3,610		)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(180		)	—			—			180			—
Adjustments related to derivatives designated as cash flow hedges		—			—						—			(1,371		)	(103		)	(1,474		)
Net income		—			—						9,938			—			737			10,675
Dividends		—			—			—			(27,186		)	—			—			(27,186		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(2,032		)	(2,032		)
Contributions from noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			9,247			9,247
Distributions to noncontrolling interests in other consolidated real estate joint ventures		—			—			(26		)	—			—			(336		)	(362		)
Balance at March 31, 2010 (58,927,117 common shares outstanding)		$	81		$	589		$	1,244,046		$	(227,189	)	$	(3,278	)	$	96,290		$	1,110,539
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 (2,310,000 shares)		—			23			53,785			—			—			(53,808		)	—
Costs associated with common shares issued to the public		—			—			(14		)	—			—			—			(14		)
Exercise of share options (12,300 common shares)		—			1			125			—			—			—			126
Share-based compensation		—			2			2,743			—			—			—			2,745
Restricted common share redemptions (69,455 shares)		—			—			(1,696		)	—			—			—			(1,696		)
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(19,101		)	—			—			19,101			—
Adjustments related to derivatives designated as cash flow hedges		—			—			—			—			1,493			(575		)	918
Decrease in tax benefit from share-based compensation		—			—			(152		)	—			—			—			(152		)
Net income		—			—			—			16,147			—			2,019			18,166
Dividends		—			—			—			(24,289		)	—			—			(24,289		)
Distributions to owners of common and preferred units in the Operating Partnership		—			—			—			—			—			(2,250		)	(2,250		)
Contributions from noncontrolling interests in other consolidated real estate joint ventures		—			—			—			—			—			649			649
Balance at March 31, 2009 (54,370,547 common shares outstanding)		$	81		$	544		$	1,148,424		$	(170,714	)	$	(3,256	)	$	101,547		$	1,076,626

 

See accompanying notes to consolidated financial statements.

 

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Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

		For the Three Months Ended March 31,
		2010			2009
Cash flows from operating activities
Net income		$	10,675		$	18,166
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization		28,253			27,030
Amortization of deferred financing costs		1,126			1,024
Amortization of above or below market leases		(607		)	(380		)
Amortization of net debt discounts		917			827
Gain on sales of real estate		(325		)	—
Share-based compensation		2,611			2,745
Other		(329		)	(743		)
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(2,555		)	(1,215		)
Decrease in accounts receivable		3,274			947
Decrease in restricted cash and marketable securities and prepaid and other assets		16,870			4,672
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(24,575		)	13,977
Increase in rents received in advance and security deposits		398			1,060
Net cash provided by operating activities		35,733			68,110
Cash flows from investing activities
Purchases of and additions to properties		(49,738		)	(43,036		)
Proceeds from sales of properties		2,952			—
Mortgage loan receivable funded		(321		)	—
Leasing costs paid		(3,038		)	(1,833		)
Investment in unconsolidated entity		(4,500		)	—
Other		(707		)	(847		)
Net cash used in investing activities		(55,352		)	(45,716		)
Cash flows from financing activities
Proceeds from debt		135,892			136,536
Repayments of debt
Balloon payments		(80,050		)	(122,635		)
Scheduled principal amortization		(3,469		)	(2,847		)
Net proceeds from issuance of common shares		2,038			112
Dividends paid		(26,948		)	(23,331		)
Distributions paid		(2,154		)	(3,111		)
Restricted share redemptions		(3,610		)	(1,696		)
Other		(162		)	505
Net cash provided (used) by financing activities		21,537			(16,467		)
Net increase in cash and cash equivalents		1,918			5,927
Cash and cash equivalents
Beginning of period		8,262			6,775
End of period		$	10,180		$	12,702

 

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 March 31, 2010, our investments in real estate included the following:

 

·                  248 wholly owned operating properties totaling 18.9 million square feet;

·                  22 wholly owned properties under construction, development or redevelopment that we estimate will total approximately 2.8 million square feet upon completion;

·                  wholly owned land parcels totaling 1,503 acres that we believe are potentially developable into approximately 13.3 million square feet; and

·                  partial ownership interests in a number of other real estate projects in operations, under development 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 ownership forms owned by COPT as of March 31, 2010 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, an additional 6% of the Operating Partnership’s common units.

 

In addition to owning interests in real estate, the Operating Partnership also owns 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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These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2009 included in our 2009 Annual Report on Form 10-K.  The unaudited consolidated financial statements include all adjustments that 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 2009 Annual Report on Form 10-K except for the implementation of recent accounting pronouncements as discussed below.

 

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

 

We adopted amended guidance issued by the FASB effective January 1, 2010 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 guidance 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.  As discussed further in Note 5, the adoption of this guidance did not affect our financial position, results of operations or cash flows.

 

Fair Value of Financial Instruments

 

Accounting standards define 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 standards also establish 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.  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 (comprised primarily of mutual funds and equity securities) 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 the line entitled restricted cash and marketable securities 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 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 March 31, 2010, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our interest

 

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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 March 31, 2010:

 

		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)		$	7,417		$	—		$	—		$	7,417
Liabilities:
Deferred compensation plan liability (2)		$	7,417		$	—		$	—		$	7,417
Interest rate derivatives (2)		—			3,227			—			3,227
Liabilities		$	7,417		$	3,227		$	—		$	10,644

 

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

(2) 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 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 present both basic and diluted 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.

 

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Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):

 

		For the Three Months
		Ended March 31,
		2010			2009
Numerator:
Income from continuing operations		$	9,826		$	17,774
Add: Gain on sales of real estate, net		17			—
Less: Preferred share dividends		(4,025		)	(4,025		)
Less: Income from continuing operations attributable to noncontrolling interests		(669		)	(1,970		)
Less: Income from continuing operations attributable to restricted shares		(290		)	(268		)
Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders		4,859			11,511
Add: Discontinued operations, net		832			392
Less: Discontinued operations, net attributable to noncontrolling interests		(68		)	(49		)
Numerator for basic and diluted EPS on net income attributable to COPT common shareholders		$	5,623		$	11,854
Denominator (all weighted averages):
Denominator for basic EPS (common shares)		57,844			51,930
Dilutive effect of share-based compensation awards		364			498
Denominator for diluted EPS		58,208			52,428
Basic EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.08		$	0.22
Discontinued operations attributable to COPT common shareholders		0.02			0.01
Net income attributable to COPT common shareholders		$	0.10		$	0.23
Diluted EPS:
Income from continuing operations attributable to COPT common shareholders		$	0.08		$	0.22
Discontinued operations attributable to COPT common shareholders		0.02			0.01
Net income attributable to COPT common shareholders		$	0.10		$	0.23

 

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
		Excluded from Denominator
		For the Three Months
		Ended March 31,
		2010		2009
Conversion of common units		5,017		7,253
Conversion of convertible preferred units		176		176
Conversion of convertible preferred shares		434		434

 

The following share-based compensation securities were excluded from the computation of diluted EPS because their effect was antidilutive (in thousands):

 

·                  weighted average restricted shares for the three months ended March 31, 2010 and 2009 of 661 and 606, respectively;

·                  weighted average options to purchase common shares for the three months ended March 31, 2010 and 2009 of 662 and 976, respectively; and

·                  performance share units issued in 2010 described further in Note 12.

 

In addition, the 3.5% Exchangeable Senior Notes, which have an exchange settlement feature, 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.

 

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4.             Properties, net

 

Operating properties, net consisted of the following:

 

		March 31,			December 31,
		2010			2009
Land		$	478,555		$	479,545
Buildings and improvements		2,451,013			2,445,775
		2,929,568			2,925,320
Less: accumulated depreciation		(435,677		)	(415,043		)
		$	2,493,891		$	2,510,277

 

As of March 31, 2010 and December 31, 2009, 431 and 437 Ridge Road, two office properties located in Dayton, New Jersey that we were under contract to sell along with a contiguous land parcel for $23,920, were classified as held for sale. The components associated with these properties included the following:

 

		March 31,			December 31,
		2010			2009
Land, operating properties		$	3,498		$	3,498
Land, development		512			512
Buildings and improvements		21,509			21,509
Construction in progress		596			583
		26,115			26,102
Less: accumulated depreciation		(7,569		)	(7,569		)
		$	18,546		$	18,533

 

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

 

		March 31,			December 31,
		2010			2009
Land		$	235,838		$	231,297
Construction in progress		316,687			269,793
		$	552,525		$	501,090

 

2010 Construction, Development and Redevelopment Activities

 

As of March 31, 2010, we had construction underway on 11 new buildings totaling 1.3 million square feet (four in the Baltimore/Washington Corridor, three in San Antonio, Texas, two in Colorado Springs, Colorado and two in Greater Baltimore) (including 98,000 square feet in partially operational properties placed into service).  We also had development activities underway on 11 new buildings totaling 1.2 million square feet, including two through a consolidated joint venture (four in the Baltimore/Washington Corridor, two in Greater Baltimore, two in San Antonio, two in Huntsville, Alabama and one in St. Mary’s & King George Counties).  In addition, we had redevelopment underway on two properties totaling 567,000 square feet (one in Greater Philadelphia and one in the Baltimore/Washington Corridor).

 

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5.                                      Real Estate Joint Ventures

 

During the three months ended March 31, 2010, 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
March 31,			December 31,			Date				Nature of		Exposure
2010			2009			Acquired		Ownership		Activity		to Loss (1)
$	(5,238	)(2)	$	(5,088	)(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, that 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 March 31, 2010 and December 31, 2009 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:

 

		March 31,			December 31,
		2010			2009
Properties, net		$	62,566		$	62,990
Other assets		4,784			5,148
Total assets		$	67,350		$	68,138
Liabilities (primarily debt)		$	67,576		$	67,611
Owners’ equity		(226		)	527
Total liabilities and owners’ equity		$	67,350		$	68,138

 

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

 

		For the Three Months Ended March 31,
		2010			2009
Revenues		$	2,100		$	2,420
Property operating expenses		(994		)	(835		)
Interest expense		(981		)	(981		)
Depreciation and amortization expense		(878		)	(799		)
Net loss		$	(753	)	$	(195	)

 

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The table below sets forth information pertaining to our investments in consolidated joint ventures at March 31, 2010:

 

				Ownership				March 31, 2010 (1)
		Date		% at		Nature of		Total			Pledged			Total
		Acquired		3/31/2010		Activity		Assets			Assets			Liabilities
M Square Associates, LLC		6/26/2007		45.0	%	Developing and operating buildings (2)		$	51,749		$	—		$	4,289
Arundel Preserve #5, LLC		7/2/2007		50.0	%	Operates one building (3)		29,698			29,221			16,859
LW Redstone Company, LLC		3/23/2010		85.0	%	Developing land parcel (4)		11,406			—			—
COPT-FD Indian Head, LLC		10/23/2006		75.0	%	Developing land parcel (5)		7,383			—			2
MOR Forbes 2 LLC		12/24/2002		50.0	%	Operates one building (6)		3,923			—			99
								$	104,159		$	29,221		$	21,249

 

(1) Excluding amounts eliminated in consolidation.

(2) This joint venture is developing and operating properties located in College Park, Maryland.

(3) This joint venture’s property is located in Hanover, Maryland (located in the Baltimore/Washington Corridor).

(4) This joint venture’s property is located in Huntsville, Alabama.

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

(6) This joint venture’s property is located in Lanham, Maryland (located in the Suburban Maryland region).

 

We determined that all of our joint ventures were VIEs under applicable accounting standards.  As discussed in Note 2, we adopted amended guidance issued by the FASB effective January 1, 2010 related to the accounting and disclosure requirements for the consolidation of VIEs.  Upon adoption of this standard on January 1, 2010, we re-evaluated our existing:

 

·                  unconsolidated joint venture and determined that we should continue to account for our investment using the equity method of accounting primarily because our partner has: (1) the power to direct the matters that most significantly impact the activities of the joint venture, including the management and operations of the properties and disposal rights with respect to such properties; and (2) the right to receive benefits and absorb losses that could be significant to the VIE through its proportionately larger investment; and

·                  consolidated joint ventures and determined that we should continue to consolidate each of them because we have: (1) the power to direct the matters that most significantly impact the activities of the joint ventures, including development, leasing and management of the properties constructed by the VIEs; and (2) both the obligation to fund the activities of the ventures to the extent that third-party financing is not obtained and the right to receive returns on our fundings, which could be potentially significant to the VIEs.

 

Therefore, the adoption of this guidance did not affect our financial position, results of operations or cash flows.

 

In March 2010, we completed the formation of LW Redstone Company, LLC (“Redstone”), a joint venture created to develop Redstone Gateway, a 468-acre land parcel adjacent to Redstone Arsenal in Huntsville, Alabama.  The land is owned by the U.S. Government and is under a long term master lease to the joint venture.  Through this master lease, the joint venture will create a business park that we expect will total approximately 4.6 million square feet of office and retail space when completed, including approximately 4.4 million square feet of Class A office space.  In addition, the business park will include hotel and other amenities.

 

We anticipate funding certain infrastructure costs that we expect will be reimbursed by the city of Huntsville.  We also expect to fund additional development and construction costs through equity contributions to the extent that third party financing is not obtained.  Our partner is not required to make any future contributions to the joint venture.  Net cash flow distributions to the partners of Redstone vary depending on the source of the funds distributed and the nature of the capital fundings outstanding at the time of distribution.  In the case of all distribution sources, we are first entitled to repayment of operating deficits funded by us and preferred returns on such fundings.  We are also generally entitled to repayment of infrastructure and vertical construction costs funded by us and preferred returns on such fundings before our partner is entitled to receive repayment of its equity contribution of $9,000.  In addition, we will be entitled to 85% of distributable cash in excess of preferred returns.

 

We determined that Redstone is a VIE under applicable accounting standards and that we should consolidate it because: (1) we control the activities that are most significant to the VIE (we hold two of three positions on the joint venture’s management committee, and we will be responsible for the development, construction, leasing and management of the office properties to be constructed by the VIE); and (2) we have both the obligation to provide significant funding for the project, as noted above, and the right to receive returns on our funding.

 

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