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 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)

 

Maryland

 

23-2947217

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

6711 Columbia Gateway Drive, Suite 300, Columbia, MD

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

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

 


 

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

x Yes  o No

 

Indicate by check mark whether the registrant 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

 

2



Table of Contents

 

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.

 

3



Table of Contents

 

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.

 

4



Table of Contents

 

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.

 

5



Table of Contents

 

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.

 

6



Table of Contents

 

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.

 

7



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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

 

8



Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

At December 31, 2009, we had a 92.5% ownership interest in COPT Opportunity Invest I, LLC, an entity which is redeveloping a property in Hanover, Maryland.  In February 2010, we acquired the remaining 7.5% ownership interest in this entity.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 15.

 

6.                                      Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

Prepaid expenses

 

$

14,791

 

$

19,769

 

Equity method investment in unconsolidated entity

 

14,605

 

9,461

 

Mortgage loans receivable (1)

 

13,453

 

12,773

 

Furniture, fixtures and equipment, net

 

12,362

 

12,633

 

Other assets

 

7,659

 

7,763

 

Construction contract costs incurred in excess of billings

 

5,542

 

19,556

 

Prepaid expenses and other assets

 

$

68,412

 

$

81,955

 

 


(1)          The fair value of our mortgage loans receivable totaled $15,525 at March 31, 2010 and $15,126 at December 31, 2009.

 

7.                                      Debt

 

Our debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Scheduled

 

 

 

Maximum

 

Carrying Value at

 

 

 

Maturity

 

 

 

Availability at

 

March 31,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

March 31, 2010

 

2010

 

2009

 

at March 31, 2010

 

March 31, 2010

 

Mortgage and other loans payable:

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

$

600,000

 

$

397,000

 

$

365,000

 

LIBOR + 0.75% to 1.25% (1)

 

September 30, 2011 (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and Other Secured Loans

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (3)

 

N/A

 

1,163,072

 

1,166,443

 

5.20% - 7.94% (4)

 

2010 - 2034 (5)

 

Revolving Construction Facility

 

225,000

 

100,225

 

76,333

 

LIBOR + 1.60% to 2.00% (6)

 

May 2, 2011 (2)

 

Other variable rate secured loans

 

N/A

 

271,019

 

271,146

 

LIBOR + 2.25% to 3.00% (7)

 

2012-2014 (2)

 

Other construction loan facilities

 

23,400

 

16,753

 

16,753

 

LIBOR + 2.75% (8)

 

2011 (2)

 

Total mortgage and other secured loans

 

 

 

1,551,069

 

1,530,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured notes payable (9)

 

N/A

 

2,001

 

2,019

 

0.00%

 

2026

 

Total mortgage and other loans payable

 

 

 

1,950,070

 

1,897,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.5% Exchangeable Senior Notes

 

N/A

 

157,061

 

156,147

 

3.50%

 

September 2026 (10)

 

Total debt

 

 

 

$

 2,107,131

 

$

 2,053,841

 

 

 

 

 

 


(1)          The interest rate on the Revolving Credit Facility was 1.03% at March 31, 2010.

(2)          Includes loans that may be extended for a one-year period at our option, subject to certain conditions.

(3)          Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates.  The carrying values of these loans reflect unamortized premiums totaling $342 at March 31, 2010 and $371 at December 31, 2009.

(4)          The weighted average interest rate on these loans was 6.0% at March 31, 2010.

(5)          A loan with a balance of $4,637 at March 31, 2010 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(6)          The weighted average interest rate on this loan was 1.83% at March 31, 2010.

(7)          The loans in this category at March 31, 2010 are subject to floor interest rates ranging from 4.25% to 5.5%.

(8)          The interest rate on this loan was 3.0% at March 31, 2010.

(9)          The carrying value of these notes reflects unamortized discount totaling $1,210 at March 31, 2010 and $1,242 at December 31, 2009.

 

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Table of Contents

 

(10)    As described further in our 2009 Annual Report on Form 10-K, the notes have an exchange settlement feature that provides that they may, under certain circumstances, be exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, may be exchangeable into (at our option) cash, our common shares or a combination of cash and our common shares at an exchange rate (subject to adjustment) of 18.9937 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2010 and is equivalent to an exchange price of $52.65 per common share).  The carrying value of these notes included a principal amount of $162,500 and an unamortized discount totaling $5,439 at March 31, 2010 and $6,353 at December 31, 2009.  The effective interest rate under the notes, including amortization of the issuance costs, was 5.97%.  The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2010

 

2009

 

Interest expense at stated interest rate

 

$

1,422

 

$

1,422

 

Interest expense associated with amortization of discount

 

913

 

860

 

Total

 

$

2,335

 

$

2,282

 

 

We capitalized interest costs of $3,936 in the three months ended March 31, 2010 and $4,499 in the three months ended March 31, 2009.

 

The following table sets forth information pertaining to the fair value of our debt:

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Fixed-rate debt

 

$

1,322,134

 

$

1,256,906

 

$

1,324,609

 

$

1,252,126

 

Variable-rate debt

 

784,997

 

761,565

 

729,232

 

704,508

 

 

 

$

2,107,131

 

$

2,018,471

 

$

2,053,841

 

$

1,956,634

 

 

On April 7, 2010, the Operating Partnership issued a $240,000 aggregate principal amount of 4.25% Exchangeable Senior Notes due 2030.  Interest on the notes is payable on April 15 and October 15 of each year.  The notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at the Operating Partnership’s discretion, our common shares at an exchange rate (subject to adjustment) of 20.7658 shares per one thousand dollar principal amount of the notes (exchange rate is as of April 7, 2010 and is equivalent to an exchange price of $48.16 per common share, a 20% premium over the closing price on the NYSE on the transaction pricing date).  On or after April 20, 2015, the Operating Partnership may redeem the notes in cash in whole or in part. The holders of the notes have the right to require us to repurchase the notes in cash in whole or in part on each of April 15, 2015, April 15, 2020 and April 15, 2025, or in the event of a “fundamental change,” as defined under the terms of the notes, for a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.  Prior to April 20, 2015, subject to certain exceptions, if (1) a “fundamental change” occurs as a result of certain forms of transactions or series of transactions and (2) a holder elects to exchange its notes in connection with such “fundamental change,” we will increase the applicable exchange rate for the notes surrendered for exchange by a number of additional shares of our common shares as a “make whole premium.”  The notes are general unsecured senior obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership.  The Operating Partnership’s obligations under the notes are fully and unconditionally guaranteed by us.  The initial liability component of this debt issuance is approximately $221,000 and the equity component is approximately $19,000.  The effective interest rate on the liability component, including amortization of the issuance costs, is approximately 6.5%.

 

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Table of Contents

 

8.                                      Interest Rate Derivatives

 

The following table sets forth the key terms and fair values of our interest rate swap derivatives at March 31, 2010 and December 31, 2009, all of which are interest rate swaps:

 

 

 

 

 

 

 

 

 

Fair Value at

 

Notional

 

One-Month

 

Effective

 

Expiration

 

March 31,

 

December 31,

 

Amount

 

LIBOR base

 

Date

 

Date

 

2010

 

2009

 

$

 100,000

 

1.9750

%

1/1/2010

 

5/1/2012

 

$

(1,711

)

$

(1,068

)

 120,000

 

1.7600

%

1/2/2009

 

5/1/2012

 

(1,516

)

(669

)

 

 

 

 

 

 

 

 

$

(3,227

)

$

(1,737

)

 

Each of these interest rate swaps were designated as cash flow hedges of interest rate risk. The table below sets forth the fair value of our interest rate derivatives as well as their classification on our Consolidated Balance Sheet as of March 31, 2010 and December 31, 2009:

 

Derivatives Designated as

 

March 31, 2010

 

December 31, 2009

 

Hedging Instruments

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps

 

Other liabilities

 

$

(3,227

)

Other liabilities

 

$

(1,737

)

 

The table below presents the effect of our interest rate derivatives on our Consolidated Statements of Operations and comprehensive income for the three months ended March 31, 2010 and 2009:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Amount of loss recognized in AOCL (effective portion)

 

$

(2,385

)

$

(1,381

)

Amount of loss reclassified from AOCL into interest expense (effective portion)

 

(911

)

(2,299

)

Amount of loss recognized in interest expense (ineffective portion and amount excluded from effectiveness testing)

 

 

(279

)

 

Over the next 12 months, we estimate that approximately $3,077 will be reclassified from AOCL as an increase to interest expense.

 

We have agreements with each of our interest rate derivative counterparties that contain provisions under which if we default or are capable of being declared in default on any of our indebtedness, we could also be declared in default on our derivative obligations. These agreements also incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparties. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreements. As of March 31, 2010, the fair value of interest rate derivatives in a liability position related to these agreements was $3,227, excluding the effects of accrued interest. As of March 31, 2010, we had not posted any collateral related to these agreements. We are not in default with any of these provisions. If we breached any of these provisions, we would be required to settle our obligations under the agreements at their termination value of $3,580.

 

9.                                      Shareholders’ Equity

 

Common Shares

 

During the three months ended March 31, 2010, we converted 309,497 common units in our Operating Partnership into common shares on the basis of one common share for each common unit.

 

See Note 12 for disclosure of common share activity pertaining to our share-based compensation plans.

 

We declared dividends per common share of $0.3925 in the three months ended March 31, 2010 and $0.3725 in the three months ended March 31, 2009.

 

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Accumulated Other Comprehensive Loss

 

The table below sets forth activity in the accumulated other comprehensive loss component of shareholders’ equity:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2010

 

2009

 

Beginning balance

 

$

(1,907

)

$

(4,749

)

Amount of loss recognized in AOCL

 

(2,385

)

(1,381

)

Amount of loss reclassified from AOCL to income

 

911

 

2,299

 

Adjustment to AOCL attributable to noncontrolling interests

 

103

 

575

 

Ending balance

 

$

(3,278

)

$

(3,256

)

 

The table below sets forth total comprehensive income and total comprehensive income attributable to COPT:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Net income

 

$

10,675

 

$

18,166

 

Amount of loss recognized in AOCL

 

(2,385

)

(1,381

)

Amount of loss reclassified from AOCL to income

 

911

 

2,299

 

Total comprehensive income

 

9,201

 

19,084

 

Net income attributable to noncontrolling interests

 

(737

)

(2,019

)

Other comprehensive loss (income) attributable to noncontrolling interests

 

121

 

(116

)

Total comprehensive income attributable to COPT

 

$

8,585

 

$

16,949

 

 

10.                               Supplemental Information to Statements of Cash Flows

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in accrued capital improvements, leasing and other investing activity costs

 

$

(1,313

)

$

3,622

 

Increase in property and noncontrolling interests in connection with property contribution to joint venture

 

$

9,000

 

$

 

Increase in fair value of derivatives applied to AOCL and noncontrolling interests

 

$

1,490

 

$

885

 

Dividends/distribution payable

 

$

28,556

 

$

25,891

 

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares

 

$

4,515

 

$

53,808

 

Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT

 

$

180

 

$

19,101

 

 

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11.          Information by Business Segment

 

As of March 31, 2010, we had eight primary office property segments: Baltimore/Washington Corridor; Northern Virginia; Greater Baltimore; Colorado Springs; Suburban Maryland; San Antonio; Greater Philadelphia; and St. Mary’s and King George Counties.

 

The table below reports segment financial information for our real estate operations.  Our segment entitled “Other” includes assets and operations not specifically associated with the other defined segments, including corporate assets and investments in unconsolidated entities.  We measure the performance of our segments through a measure we define as net operating income from real estate operations (“NOI from real estate operations”), which is derived by subtracting property expenses from revenues from real estate operations.  We believe that NOI from real estate operations is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.

 

 

 

Baltimore/
Washington
Corridor

 

Northern
Virginia

 

Greater
Baltimore

 

Colorado
Springs

 

Suburban
Maryland

 

San Antonio

 

Greater
Philadelphia

 

St. Mary’s &
King George
Counties

 

Other

 

Intersegment
Elimination

 

Total

 

Three Months Ended March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

52,058

 

$

18,659

 

$

17,865

 

$

6,332

 

$

5,829

 

$

3,938

 

$

1,202

 

$

3,589

 

$

3,524

 

$

 

$

112,996

 

Property operating expenses

 

22,155

 

7,313

 

9,010

 

2,309

 

2,701

 

1,629

 

763

 

1,107

 

1,309

 

 

48,296

 

NOI from real estate operations

 

$

29,903

 

$

11,346

 

$

8,855

 

$

4,023

 

$

3,128

 

$

2,309

 

$

439

 

$

2,482

 

$

2,215

 

$

 

$

64,700

 

Additions to properties, net

 

$

15,959

 

$

4,910

 

$

7,240

 

$

813

 

$

1,541

 

$

4,939

 

$

10,058

 

$

411

 

$

12,476

 

$

 

$

58,347

 

Segment assets at March 31, 2010

 

$

1,339,080

 

$

452,105

 

$

568,361

 

$

269,338

 

$

172,971

 

$

139,977

 

$

115,023

 

$

94,033

 

$

247,551

 

$

(87

)

$

3,398,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

49,004

 

$

22,099

 

$

13,771

 

$

4,877

 

$

5,023

 

$

2,945

 

$

2,506

 

$

3,399

 

$

3,220

 

$

 

$

106,844

 

Property operating expenses

 

18,619

 

7,796

 

6,771

 

1,323

 

2,054

 

836

 

81

 

886

 

667

 

 

39,033

 

NOI from real estate operations

 

$

30,385

 

$

14,303

 

$

7,000

 

$

3,554

 

$

2,969

 

$

2,109

 

$

2,425

 

$

2,513

 

$

2,553

 

$

 

$

67,811

 

Additions to properties, net

 

$

19,179

 

$

69

 

$

3,311

 

$

5,197

 

$

4,609

 

$

7,379

 

$

2,313

 

$

347

 

$

7,757

 

$

(7

)

$

50,154

 

Segment assets at March 31, 2009

 

$

1,270,539

 

$

458,934

 

$

436,862

 

$

253,764

 

$

155,712

 

$

104,284

 

$

96,267

 

$

94,809

 

$

267,108

 

$

(989

)

$

3,137,290

 

 

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The following table reconciles our segment revenues to total revenues as reported on our Consolidated Statements of Operations:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Segment revenues from real estate operations

 

$

112,996

 

$

106,844

 

Construction contract and other service revenues

 

37,365

 

74,889

 

Less: Revenues from discontinued operations (Note 14)

 

(768

)

(736

)

Total revenues

 

$

149,593

 

$

180,997

 

 

The following table reconciles our segment property operating expenses to property operating expenses as reported on our Consolidated Statements of Operations:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Segment property operating expenses

 

$

48,296

 

$

39,033

 

Less: Property operating expenses from discontinued operations (Note 14)

 

(161

)

(69

)

Total property operating expenses

 

$

48,135

 

$

38,964

 

 

As previously discussed, we provide real estate services such as property management, construction and development and heating and air conditioning services primarily for our properties but also for third parties.  The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities.  Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. As a result, we believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Construction contract and other service revenues

 

$

37,365

 

$

74,889

 

Construction contract and other service expenses

 

(36,399

)

(73,323

)

NOI from service operations

 

$

966

 

$

1,566

 

 

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The following table reconciles our NOI fr