Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark one)

 

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

 

For the quarterly period ended September 30, 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). x 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 October 21, 2010, 59,419,001 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

FORM 10-Q

 

 

 

PAGE

PART I:  FINANCIAL INFORMATION

 

 

 

 

Item 1:

Financial Statements:

 

 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)

3

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)

4

 

Consolidated Statements of Equity for the three and nine months ended September 30, 2010 and 2009 (unaudited)

5

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 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

27

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4: 

Controls and Procedures

41

 

 

 

PART II:  OTHER INFORMATION

 

 

 

 

Item 1:

Legal Proceedings

42

Item 1A:

Risk Factors

42

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3:

Defaults Upon Senior Securities

42

Item 4:

Removed and Reserved

42

Item 5:

Other Information

42

Item 6:

Exhibits

43

 

 

 

SIGNATURES

45

 

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)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,762,289

 

$

2,510,277

 

Properties held for sale, net

 

 

18,533

 

Projects under construction or development

 

586,861

 

501,090

 

Total properties, net

 

3,349,150

 

3,029,900

 

Cash and cash equivalents

 

11,733

 

8,262

 

Restricted cash and marketable securities

 

21,095

 

16,549

 

Accounts receivable, net

 

18,906

 

17,459

 

Deferred rent receivable

 

76,833

 

71,805

 

Intangible assets on real estate acquisitions, net

 

123,307

 

100,671

 

Deferred leasing and financing costs, net

 

56,568

 

51,570

 

Prepaid expenses and other assets

 

79,780

 

83,806

 

Total assets

 

$

3,737,372

 

$

3,380,022

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

2,468,419

 

$

2,053,841

 

Accounts payable and accrued expenses

 

88,461

 

116,455

 

Rents received in advance and security deposits

 

26,919

 

32,177

 

Dividends and distributions payable

 

29,899

 

28,440

 

Deferred revenue associated with operating leases

 

15,790

 

14,938

 

Distributions received in excess of investment in unconsolidated real estate joint venture

 

5,458

 

5,088

 

Other liabilities

 

12,698

 

8,451

 

Total liabilities

 

2,647,644

 

2,259,390

 

Commitments and contingencies (Note 16)

 

 

 

Equity:

 

 

 

 

 

Corporate Office Properties Trust’s shareholders’ equity:

 

 

 

 

 

Preferred Shares of beneficial interest with an aggregate liquidation preference of $216,333 ($0.01 par value; 15,000,000 shares authorized and 8,121,667 issued and outstanding at September 30, 2010 and December 31, 2009)

 

81

 

81

 

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized and 59,406,247 shares issued and outstanding at September 30, 2010; 75,000,000 shares authorized and 58,342,673 shares issued and outstanding at December 31, 2009)

 

594

 

583

 

Additional paid-in capital

 

1,271,363

 

1,238,704

 

Cumulative distributions in excess of net income

 

(265,695

)

(209,941

)

Accumulated other comprehensive loss

 

(4,861

)

(1,907

)

Total Corporate Office Properties Trust’s shareholders’ equity

 

1,001,482

 

1,027,520

 

Noncontrolling interests in subsidiaries:

 

 

 

 

 

Common units in the Operating Partnership

 

61,867

 

73,892

 

Preferred units in the Operating Partnership

 

8,800

 

8,800

 

Other consolidated entities

 

17,579

 

10,420

 

Noncontrolling interests in subsidiaries

 

88,246

 

93,112

 

Total equity

 

1,089,728

 

1,120,632

 

Total liabilities and equity

 

$

3,737,372

 

$

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

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

93,345

 

$

86,973

 

$

275,528

 

$

263,467

 

Tenant recoveries and other real estate operations revenue

 

21,205

 

17,159

 

60,507

 

51,780

 

Construction contract and other service revenues

 

13,608

 

95,321

 

77,038

 

273,534

 

Total revenues

 

128,158

 

199,453

 

413,073

 

588,781

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

44,260

 

38,523

 

132,400

 

114,587

 

Depreciation and amortization associated with real estate operations

 

30,745

 

26,498

 

87,889

 

81,268

 

Construction contract and other service expenses

 

13,347

 

93,805

 

75,148

 

268,289

 

General and administrative expenses

 

6,079

 

5,898

 

17,905

 

17,275

 

Business development expenses

 

2,886

 

458

 

3,506

 

1,550

 

Total operating expenses

 

97,317

 

165,182

 

316,848

 

482,969

 

Operating income

 

30,841

 

34,271

 

96,225

 

105,812

 

Interest expense

 

(26,537

)

(20,931

)

(74,987

)

(58,914

)

Interest and other income

 

395

 

2,619

 

1,942

 

4,949

 

Income from continuing operations before equity in income (loss) of unconsolidated entities and income taxes

 

4,699

 

15,959

 

23,180

 

51,847

 

Equity in income (loss) of unconsolidated entities

 

648

 

(758

)

371

 

(1,075

)

Income tax expense

 

(27

)

(47

)

(75

)

(169

)

Income from continuing operations

 

5,320

 

15,154

 

23,476

 

50,603

 

Discontinued operations

 

1,129

 

382

 

2,447

 

1,150

 

Income before gain on sales of real estate

 

6,449

 

15,536

 

25,923

 

51,753

 

Gain on sales of real estate, net of income taxes

 

2,477

 

 

2,829

 

 

Net income

 

8,926

 

15,536

 

28,752

 

51,753

 

Less net income attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Common units in the Operating Partnership

 

(363

)

(956

)

(1,254

)

(4,032

)

Preferred units in the Operating Partnership

 

(165

)

(165

)

(495

)

(495

)

Other consolidated entities

 

434

 

40

 

233

 

15

 

Net income attributable to Corporate Office Properties Trust

 

8,832

 

14,455

 

27,236

 

47,241

 

Preferred share dividends

 

(4,025

)

(4,025

)

(12,076

)

(12,076

)

Net income attributable to Corporate Office Properties Trust common shareholders

 

$

4,807

 

$

10,430

 

$

15,160

 

$

35,165

 

Net income attributable to Corporate Office Properties Trust:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

7,785

 

$

14,106

 

$

24,975

 

$

46,207

 

Discontinued operations, net

 

1,047

 

349

 

2,261

 

1,034

 

Net income attributable to Corporate Office Properties Trust

 

$

8,832

 

$

14,455

 

$

27,236

 

$

47,241

 

Basic earnings per common share (1)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.06

 

$

0.17

 

$

0.21

 

$

0.60

 

Discontinued operations

 

0.02

 

0.01

 

0.04

 

0.02

 

Net income attributable to COPT common shareholders

 

$

0.08

 

$

0.18

 

$

0.25

 

$

0.62

 

Diluted earnings per common share (1)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.06

 

$

0.17

 

$

0.20

 

$

0.60

 

Discontinued operations

 

0.02

 

0.01

 

0.04

 

0.02

 

Net income attributable to COPT common shareholders

 

$

0.08

 

$

0.18

 

$

0.24

 

$

0.62

 

 


(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, 2008 (51,790,442 common shares outstanding)

 

$

81

 

$

518

 

$

1,112,734

 

$

(162,572

)

$

(4,749

)

$

136,411

 

$

1,082,423

 

Conversion of common units to common shares (2,824,000 shares)

 

 

28

 

61,368

 

 

 

(61,396

)

 

Common shares issued to the public (2,990,000 shares)

 

 

30

 

71,795

 

 

 

 

71,825

 

Exercise of share options (388,487 common shares)

 

 

4

 

4,280

 

 

 

 

4,284

 

Share-based compensation

 

 

3

 

7,905

 

 

 

 

7,908

 

Restricted common share redemptions (76,090 shares)

 

 

 

(1,930

)

 

 

 

(1,930

)

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

 

 

 

(21,090

)

 

 

21,090

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

2,458

 

549

 

3,007

 

Decrease in tax benefit from share-based compensation

 

 

 

(152

)

 

 

 

(152

)

Net income

 

 

 

 

47,241

 

 

4,512

 

51,753

 

Dividends

 

 

 

 

(76,788

)

 

 

(76,788

)

Distributions to owners of common and preferred units in the Operating Partnership

 

 

 

 

 

 

(6,469

)

(6,469

)

Contributions from noncontrolling interests in other consolidated entities

 

 

 

 

 

 

757

 

757

 

Distributions to noncontrolling interests in other consolidated entities

 

 

 

 

 

 

(435

)

(435

)

Balance at September 30, 2009 (58,250,295 common shares outstanding)

 

$

81

 

$

583

 

$

1,234,910

 

$

(192,119

)

$

(2,291

)

$

95,019

 

$

1,136,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009 (58,342,673 common shares outstanding)

 

$

81

 

$

583

 

$

1,238,704

 

$

(209,941

)

$

(1,907

)

$

93,112

 

$

1,120,632

 

Issuance of 4.25% Exchangeable Senior Notes

 

 

 

18,149

 

 

 

 

18,149

 

Conversion of common units to common shares (620,598 shares)

 

 

6

 

8,964

 

 

 

(8,970

)

 

Costs associated with common shares issued to the public

 

 

 

(19

)

 

 

 

(19

)

Exercise of share options (271,242 shares)

 

 

3

 

4,394

 

 

 

 

4,397

 

Share-based compensation

 

 

2

 

8,724

 

 

 

 

8,726

 

Restricted common share redemptions (103,721 shares)

 

 

 

(3,862

)

 

 

 

(3,862

)

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

 

 

 

(1,347

)

 

 

1,347

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

(2,954

)

(206

)

(3,160

)

Net income

 

 

 

 

27,236

 

 

1,516

 

28,752

 

Dividends

 

 

 

 

(82,990

)

 

 

(82,990

)

Distributions to owners of common and preferred units in the Operating Partnership

 

 

 

 

 

 

(5,945

)

(5,945

)

Contributions from noncontrolling interests in other consolidated entities

 

 

 

 

 

 

9,510

 

9,510

 

Acquisition of nontrolling interests in other consolidated entities

 

 

 

(2,344

)

 

 

(2,118

)

(4,462

)

Balance at September 30, 2010 (59,406,247 common shares outstanding)

 

$

81

 

$

594

 

$

1,271,363

 

$

(265,695

)

$

(4,861

)

$

88,246

 

$

1,089,728

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

28,752

 

$

51,753

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and other amortization

 

89,830

 

83,660

 

Amortization of deferred financing costs

 

4,175

 

3,089

 

Increase in deferred rent receivable

 

(3,295

)

(5,685

)

Amortization of above or below market leases

 

(1,470

)

(1,448

)

Amortization of net debt discounts

 

4,360

 

2,520

 

Gain on sales of real estate

 

(3,921

)

 

Share-based compensation

 

8,726

 

7,908

 

Other

 

(724

)

(3,558

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(1,648

)

(320

)

Decrease (increase) in restricted cash and marketable securities and prepaid expenses and other assets

 

8,165

 

(18,059

)

(Decrease) increase in accounts payable, accrued expenses and other liabilities

 

(31,696

)

15,311

 

(Decrease) increase in rents received in advance and security deposits

 

(5,702

)

2,858

 

Net cash provided by operating activities

 

95,552

 

138,029

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to properties

 

(360,498

)

(146,120

)

Proceeds from sales of properties

 

27,580

 

65

 

Mortgage and other loan receivables funded

 

(1,729

)

(1,995

)

Leasing costs paid

 

(7,717

)

(6,778

)

Investment in unconsolidated entity

 

(4,500

)

(3,000

)

Other

 

(2,241

)

(3,118

)

Net cash used in investing activities

 

(349,105

)

(160,946

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt, including issuance of exchangeable senior notes

 

825,475

 

775,147

 

Repayments of debt

 

 

 

 

 

Scheduled principal amortization

 

(10,389

)

(8,200

)

Other repayments

 

(459,614

)

(728,366

)

Deferred financing costs paid

 

(7,086

)

(1,830

)

Net proceeds from issuance of common shares

 

4,378

 

76,109

 

Acquisition of noncontrolling interests in consolidated entities

 

(4,462

)

 

Dividends paid

 

(81,376

)

(73,220

)

Distributions paid

 

(6,100

)

(7,420

)

Restricted share redemptions

 

(3,862

)

(1,930

)

Other

 

60

 

(4,167

)

Net cash provided by financing activities

 

257,024

 

26,123

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

3,471

 

3,206

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

8,262

 

6,775

 

End of period

 

$

11,733

 

$

9,981

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Debt and other liabilities assumed in connection with acquisitions

 

$

74,244

 

$

 

Increase in accrued capital improvements, leasing and other investing activity costs

 

$

4,308

 

$

6,297

 

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

 

$

3,206

 

$

2,962

 

Dividends/distribution payable

 

$

29,899

 

$

28,411

 

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

 

$

8,970

 

$

61,396

 

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

 

$

1,347

 

$

21,090

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

 

Notes to Consolidated Financial Statements

(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 office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in demographically strong markets possessing growth opportunities.  As of September 30, 2010, our investments in real estate included the following:

 

·                  249 wholly owned operating office properties totaling 19.9 million square feet;

·                  18 wholly owned office properties under construction, development or redevelopment that we estimate will total approximately 2.6 million square feet upon completion, including two partially operational properties included above;

·                  wholly owned land parcels totaling 1,559 acres that we believe are potentially developable into approximately 14.4 million square feet;

·                  a wholly owned, partially operational, wholesale data center which upon completion is expected to have an initial stabilization critical load of 18 megawatts; 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”), of 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 September 30, 2010 follows:

 

Common Units

 

93

%

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

 

7



Table of Contents

 

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.

 

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.

 

Reclassifications

 

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 Financial Accounting Standards Board (“FASB”) effective January 1, 2010 related to the accounting and disclosure requirements for the consolidation of 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.

 

We adopted guidance issued by the FASB effective January 1, 2010 that requires new disclosures and clarifications to existing disclosures pertaining to transfers in and out of Level 1 and Level 2 fair value measurements, presentation of activity within Level 3 fair value measurements and details of valuation techniques and inputs utilized.  Our adoption of this guidance did not have a material effect on our financial statements or disclosures.

 

3.                                      Fair Value Measurements

 

For a description on how we estimate fair value, see Note 2 to the consolidated financial statements in our 2009 Form 10-K.

 

The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2010 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

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Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Marketable securities (1)

 

$

7,996

 

$

 

$

 

$

7,996

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability (2)

 

$

7,377

 

$

 

$

 

$

7,377

 

Interest rate derivatives (2)

 

 

4,943

 

 

4,943

 

Liabilities

 

$

7,377

 

$

4,943

 

$

 

$

12,320

 

 


(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.  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, see Note 7 for mortgage loans receivable, Note 8 for debt and Note 9 for derivatives.

 

4.                                      Properties, net

 

Operating properties, net consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Land

 

$

493,979

 

$

479,545

 

Buildings and improvements

 

2,747,528

 

2,445,775

 

 

 

3,241,507

 

2,925,320

 

Less: accumulated depreciation

 

(479,218

)

(415,043

)

 

 

$

2,762,289

 

$

2,510,277

 

 

As of December 31, 2009, 431 and 437 Ridge Road, two office properties in Dayton, New Jersey totaling 201,000 square feet, and a contiguous land parcel that we were under contract to sell were classified as held for sale.  We completed the sale of the office properties on September 8, 2010 for $20.9 million and recognized a gain of $784,000.  We also completed the sale of the contiguous land parcel on September 8, 2010 for $3.0 million and recognized a gain of $2.5 million.  The components associated with these properties as of December 31, 2009 included the following (in thousands):

 

Land, operating properties

 

$

3,498

 

 

 

Land, development

 

512

 

 

 

Buildings and improvements

 

21,509

 

 

 

Construction in progress

 

583

 

 

 

 

 

26,102

 

 

 

Less: accumulated depreciation

 

(7,569

)

 

 

 

 

$

18,533

 

 

 

 

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Projects under construction or development consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Land

 

$

241,937

 

$

231,297

 

Construction in progress

 

344,924

 

269,793

 

 

 

$

586,861

 

$

501,090

 

 

2010 Acquisitions

 

Our acquisitions during the nine months ended September 30, 2010 included:

 

·                  1550 Westbranch Drive, a 152,000 square foot office property in McLean, Virginia that was 100% leased, for $40.0 million on June 28, 2010;

·                  9651 Hornbaker Road, a 233,000 square foot wholesale data center known as Power Loft @ Innovation in Manassas, Virginia, for $115.5 million on September 14, 2010.  Rents for this property are based on the amount of megawatts of power made available for the exclusive use of tenants in the property; we refer to this power as critical load.  This property, the shell of which was completed in early 2010, was 17% leased on the date of acquisition to two tenants who have a combined initial critical load of 3 megawatts and further expansion rights of up to a combined 5 megawatts.  We expect to complete the development of the property to an initial stabilization critical load of 18 megawatts for additional development costs estimated at $166 million.  Full critical load of the property is expected to be up to 30 megawatts; and

·                  two office properties totaling 362,000 square feet at 1201 M Street SE and 1220 12th Street SE (known as Maritime Plaza I and II) in Washington, DC that were 100% leased for $122.1 million on September 28, 2010.  The buildings are subject to ground leases that expire in 2099 and 2100.  In connection with this acquisition, we assumed a $70.1 million mortgage loan having a fair value at assumption of $73.3 million with a stated fixed interest rate of 5.35% (effective interest rate of 3.95%) that matures in March 2014.

 

The table below sets forth the allocation of the acquisition costs of these properties (in thousands):

 

Land, operating properties

 

$

6,100

 

 

 

Land, development

 

5,545

 

 

 

Building and improvements

 

138,335

 

 

 

Construction in progress

 

85,525

 

 

 

Intangible assets on real estate acquisitions

 

42,315

 

 

 

Total assets

 

277,820

 

 

 

Below-market leases

 

(231

)

 

 

Total acquisition cost

 

$

277,589

 

 

 

 

Intangible assets recorded in connection with the above acquisitions included the following (dollars in thousands):

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Amortization

 

 

 

 

 

Period

 

 

 

 

 

(in Years)

 

In-place lease value

 

$

21,289

 

4

 

Tenant relationship value

 

14,309

 

10

 

Below-market ground leases

 

6,193

 

40

 

Above-market leases

 

524

 

2

 

 

 

$

42,315

 

6

 

 

2010 Construction, Development and Redevelopment Activities

 

During the nine months ended September 30, 2010, we had six newly constructed office properties totaling 804,000 square feet (two in the Baltimore/Washington Corridor, two in Colorado Springs, Colorado and two in San Antonio, Texas) become fully operational (94,000 of these square feet were placed into service in 2009) and placed into service 42,000 square feet in one partially operational office property in Greater Baltimore.

 

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As of September 30, 2010, we had construction underway on eight office properties totaling 845,000 square feet (three in the Baltimore/Washington Corridor, three in Greater Baltimore, one in San Antonio and one in St. Mary’s and King George Counties) (including 42,000 square feet placed into service in one partially operational property).  We also had development activities underway on ten office properties totaling 1.4 million square feet, including two through a consolidated real estate joint venture (four in the Baltimore/Washington Corridor, two in San Antonio, two in Huntsville, Alabama, one in Greater Baltimore and one in Northern Virginia).  In addition, we had redevelopment underway on two office properties totaling 576,000 square feet (one in the Baltimore/Washington Corridor and one in Greater Philadelphia).

 

5.                                      Real Estate Joint Ventures

 

During the nine months ended September 30, 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 (in thousands):

 

Investment Balance at

 

 

 

 

 

 

 

Maximum

 

September 30,

 

December 31,

 

Date

 

 

 

Nature of

 

Exposure

 

2010

 

2009

 

Acquired

 

Ownership

 

Activity

 

to Loss (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(5,458

)(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 16).

(2)         The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5.2 million at September 30, 2010 and December 31, 2009 due to our deferral of gain on our contribution 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 real estate joint venture (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Properties, net

 

$

61,652

 

$

62,990

 

Other assets

 

4,374

 

5,148

 

Total assets

 

$

66,026

 

$

68,138

 

 

 

 

 

 

 

Liabilities (primarily debt)

 

$

67,351

 

$

67,611

 

Owners’ equity

 

(1,325

)

527

 

Total liabilities and owners’ equity

 

$

66,026

 

$

68,138

 

 

The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands):

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

$

2,094

 

$

2,202

 

$

6,283

 

$

6,935

 

Property operating expenses

 

(902

)

(864

)

(2,728

)

(2,535

)

Interest expense

 

(899

)

(1,002

)

(2,846

)

(2,976

)

Depreciation and amortization expense

 

(826

)

(803

)

(2,561

)

(2,405

)

Net loss

 

$

(533

)

$

(467

)

$

(1,852

)

$

(981

)

 

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The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at September 30, 2010 (dollars in thousands):

 

 

 

 

 

Ownership

 

 

 

September 30, 2010 (1)

 

 

 

Date

 

% at

 

Nature of

 

Total

 

Pledged

 

Total

 

 

 

Acquired

 

9/30/2010

 

Activity

 

Assets

 

Assets

 

Liabilities

 

M Square Associates, LLC

 

6/26/2007

 

50.0

%

Operating two buildings and developing others (2)

 

$

58,805

 

$

 

$

1,085

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50.0

%

Operating one building (3)

 

29,838

 

29,481

 

16,805

 

LW Redstone Company, LLC

 

3/23/2010

 

85.0

%

Developing land parcel (4)

 

14,430

 

 

288

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75.0

%

Developing land parcel (5)

 

7,444

 

 

 

MOR Forbes 2 LLC

 

12/24/2002

 

50.0

%

Operating one building (6)

 

3,926

 

 

69

 

 

 

 

 

 

 

 

 

$

114,443

 

$

29,481

 

$

18,247

 

 


(1) Excludes amounts eliminated in consolidation.

(2) This joint venture’s properties are in College Park, Maryland.

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

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

(5) This joint venture’s property is in Charles County, Maryland.

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

 

We determined that all of our real estate 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 real estate 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 real estate 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; as of September 30, 2010, we had advanced $834,000 to the City to fund such costs.  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 $9.0 million.  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 are responsible for the development, construction, leasing and

 

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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.

 

At December 31, 2009, we had a 92.5% ownership interest in COPT Opportunity Invest I, LLC, an entity that is redeveloping a property in Hanover, Maryland; in February 2010, we acquired the remaining 7.5% ownership interest in this entity.  At December 31, 2009, we also had a 90% ownership interest in Enterprise Campus Developer, LLC, an entity that owned a 50% interest in M Square Associates, LLC (included in the table above); in July 2010, we acquired the remaining 10% ownership interest in this entity.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.

 

6.             Intangible Assets on Real Estate Acquisitions

 

Intangible assets on real estate acquisitions consisted of the following:

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

In-place lease value

 

$

162,381

 

$

84,315

 

$

78,066

 

$

141,408

 

$

70,659

 

$

70,749

 

Tenant relationship value

 

50,179

 

20,196

 

29,983

 

35,909

 

16,322

 

19,587

 

Above-market leases

 

10,689

 

7,896

 

2,793

 

10,165

 

7,138

 

3,027

 

Acquired real estate tax credit

 

6,222

 

1,011

 

5,211

 

6,222

 

 

6,222

 

Below-market ground leases

 

6,193

 

 

6,193

 

 

 

 

Market concentration premium

 

1,333

 

272

 

1,061

 

1,333

 

247

 

1,086

 

 

 

$

236,997

 

$

113,690

 

$

123,307

 

$

195,037

 

$

94,366

 

$

100,671

 

 

Amortization of the intangible asset categories set forth above totaled $18.8 million in the nine months ended September 30, 2010 and $19.0 million in the nine months ended September 30, 2009.  The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: seven years; tenant relationship value: eight years; above-market leases: five years; acquired real estate tax credit: six years; below-market ground leases: 40 years; and market concentration premium: 32 years.  The approximate weighted average amortization period for all of the categories combined is nine years.  Estimated amortization expense associated with the intangible asset categories set forth above is $7.4 million for the three months ending December 31, 2010; $24.3 million for 2011; $18.8 million for 2012; $13.8 million for 2013; $11.4 million for 2014; and $10.2 million for 2015.

 

7.             Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Prepaid expenses

 

$

24,108

 

$

19,769

 

Equity method investment in unconsolidated entity

 

15,509

 

9,461

 

Mortgage loans receivable (1)

 

14,806

 

12,773

 

Furniture, fixtures and equipment, net

 

12,258

 

12,633

 

Construction contract costs incurred in excess of billings

 

3,022

 

19,556

 

Other assets

 

10,077

 

9,614

 

Prepaid expenses and other assets

 

$

79,780

 

$

83,806

 

 


(1)               The fair value of our mortgage loans receivable totaled $16.3 million at September 30, 2010 and $15.1 million at December 31, 2009.

 

Our investment in unconsolidated entity reflected above consists of common stock and warrants to purchase additional shares of common stock of The KEYW Holding Corporation (“KEYW”), an entity supporting the intelligence community’s operations and transformation to Cyber Age mission by providing engineering services

 

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and integrated platforms that support the intelligence process.  In October 2010, KEYW completed an initial public offering of its common stock.

 

8.             Debt

 

Our debt consisted of the following (dollars in thousands):

 

 

 

Maximum

 

 

 

 

 

 

 

Scheduled

 

 

 

Availability at

 

Carrying Value at

 

 

 

Maturity

 

 

 

September 30,

 

September 30,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

2010

 

2010

 

2009

 

at September 30, 2010

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (1)

 

N/A

 

$

1,177,095

 

$

1,166,443

 

5.20% - 7.87% (2)

 

2010 - 2034 (3)

 

Revolving Construction Facility

 

$

225,000

 

121,903

 

76,333

 

LIBOR+ 1.60% to 2.00% (4)

 

May 2, 2011 (5)

 

Variable rate secured loans

 

N/A

 

270,756

 

271,146

 

LIBOR+ 2.25% to 3.00% (6)

 

2012-2014 (5)

 

Other construction loan facilities

 

23,400

 

16,753

 

16,753

 

LIBOR+ 2.75% (7)

 

2011 (5)

 

Total mortgage and other secured loans

 

 

 

1,586,507

 

1,530,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

700,000

 

498,000

 

365,000

 

LIBOR+ 0.75% to 1.25% (8)

 

September 30, 2011 (5)

 

Unsecured notes payable (9)

 

N/A

 

1,965

 

2,019

 

0.00%

 

2026

 

Exchangeable Senior Notes:

 

 

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

N/A

 

223,019

 

 

4.25%

 

April 2030 (10)

 

3.5% Exchangeable Senior Notes

 

N/A

 

158,928

 

156,147

 

3.50%

 

September 2026 (11)

 

Total debt

 

 

 

$

2,468,419

 

$

2,053,841

 

 

 

 

 

 


(1)

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 $3.5 million at September 30, 2010 and $371,000 at December 31, 2009.

(2)

The weighted average interest rate on these loans was 6.0% at September 30, 2010.

(3)

A loan with a balance of $4.6 million at September 30, 2010 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(4)

The weighted average interest rate on this loan was 1.86% at September 30, 2010.

(5)

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

(6)

The loans in this category at September 30, 2010 were subject to floor interest rates ranging from 4.25% to 5.5%.

(7)

The interest rate on this loan was 3.1% at September 30, 2010.

(8)

The weighted average interest rate on the Revolving Credit Facility was 1.11% at September 30, 2010.

(9)

The carrying value of these notes reflects unamortized discount totaling $1.1 million at September 30, 2010 and $1.2 million at December 31, 2009.

(10)

Refer to the second paragraph below, which discusses the issuance of these notes, for descriptions of provisions for early redemption and repurchase of these notes.

(11)

As described further in our 2009 Annual Report on Form 10-K, these 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 19.1167 shares per one thousand dollar principal amount of the notes (exchange rate is as of September 30, 2010 and is equivalent to an exchange price of $52.31 per common share). The carrying value of these notes included a principal amount of $162.5 million and an unamortized discount totaling $3.6 million at September 30, 2010 and $6.4 million at December 31, 2009. The effective interest rate under the notes, including amortization of the issuance costs, was 5.97%. Because the closing price of our common shares at September 30, 2010 and December 31, 2009 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest expense at stated interest rate

 

$

1,421

 

$

1,421

 

$

4,265

 

$

4,265

 

Interest expense associated with amortization of discount

 

941

 

886

 

2,781

 

2,620

 

Total

 

$

2,362

 

$

2,307

 

$

7,046

 

$

6,885

 

 

In April 2010, we increased the borrowing capacity under our Revolving Credit Facility by $100.0 million, from $600.0 million to $700.0 million.

 

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On April 7, 2010, the Operating Partnership issued a $240.0 million 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 of beneficial interest (“common shares”) at an exchange rate (subject to adjustment) of 20.7769 shares per one thousand dollar principal amount of the notes (exchange rate is as of September 30, 2010 and is equivalent to an exchange price of $48.13 per common share) (the initial exchange rate of the notes was based on 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 was $221.4 million and the equity component was $18.6 million.  In addition, we recognized $450,000 of the financing fees incurred in relation to these notes in equity.  The carrying value of these notes at September 30, 2010 included an unamortized discount totaling $17.0 million at September 30, 2010.  The effective interest rate on the liability component, including amortization of the issuance costs, is 6.05%.  Because the closing price of our common shares at September 30, 2010 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized (in thousands):

 

 

 

For the Three

 

For the Nine

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30, 2010

 

September 30, 2010

 

Interest expense at stated interest rate

 

$

2,550

 

$

4,930

 

Interest expense associated with amortization of discount

 

815

 

1,618

 

Total

 

$

3,365

 

$

6,548

 

 

We capitalized interest costs of $3.9 million in the three months ended September 30, 2010, $3.1 million in the three months ended September 30, 2009, $12.0 million in the nine months ended September 30, 2010 and $11.6 million in the nine months ended September 30, 2009.

 

The following table sets forth information pertaining to the fair value of our debt (in thousands):

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Fixed-rate debt

 

$

1,561,007

 

$

1,565,549

 

$

1,324,609

 

$

1,252,126

 

Variable-rate debt

 

907,412

 

903,024

 

729,232

 

704,508

 

 

 

$

2,468,419

 

$

2,468,573

 

$

2,053,841

 

$

1,956,634

 

 

9.             Interest Rate Derivatives

 

The following table sets forth the key terms and fair values of our interest rate derivatives at September 30, 2010 and December 31, 2009, all of which are interest rate swaps (in thousands):

 

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Fair Value at

 

Notional

 

One-Month

 

Effective

 

Expiration

 

September 30,

 

December 31,

 

Amount

 

LIBOR base

 

Date

 

Date

 

2010

 

2009

 

$

 120,000

 

1.7600

%

1/2/2009

 

5/1/2012

 

$

(2,513

)

$

(669

)

100,000

 

1.9750

%

1/1/2010

 

5/1/2012

 

(2,430

)

(1,068

)

 

 

 

 

 

 

 

 

$

(4,943

)

$

(1,737

)

 

Each of these interest rate swaps was 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 September 30, 2010 and December 31, 2009 (in thousands):

 

Derivatives Designated as

 

September 30, 2010

 

December 31, 2009

 

Hedging Instruments

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps

 

Other liabilities

 

$

(4,943

)

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 and nine months ended September 30, 2010 and 2009 (in thousands):

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Amount of loss recognized in AOCL (effective portion)

 

$

(1,530

)

$

(2,771

)

$

(5,844

)

$

(2,494

)

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

 

(887

)

(1,555

)

(2,684

)

(5,501

)

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

 

 

(39

)

 

(267

)

 

Over the next 12 months, we estimate that approximately $3.5 million 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 could result in our being declared in default on any derivative instrument obligations covered by the agreements.  As of September 30, 2010, the fair value of interest rate derivatives in a liability position related to these agreements was $4.9 million, excluding the effects of accrued interest. As of September 30, 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 could be required to settle our obligations under the agreements at their termination value of $5.4 million.

 

10.          Shareholders’ Equity

 

Common Shares

 

During the nine months ended September 30, 2010, holders of 620,598 common units in our Operating Partnership converted their units 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 $0.4125 in the three months ended September 30, 2010, $0.3925 in the three months ended September 30, 2009, $1.1975 in the nine months ended September 30, 2010 and $1.1375 in the nine months ended September 30, 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 (in thousands):

 

 

 

For the Nine Months
Ended September 30,

 

 

 

2010

 

2009

 

Beginning balance

 

$

(1,907

)

$

(4,749

)

Amount of loss recognized in AOCL (effective portion)

 

(5,844

)

(2,494

)

Amount of loss reclassified from AOCL to income (effective portion)

 

2,684

 

5,501

 

Adjustment to AOCL attributable to noncontrolling interest

 

206

 

(549

)

Ending balance

 

$

(4,861

)

$

(2,291

)

 

The table below sets forth total comprehensive income and total comprehensive income attributable to COPT (in thousands):

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

8,926

 

$

15,536

 

$

28,752

 

$

51,753

 

Amount of loss recognized in AOCL

 

(1,530

)

(2,771

)

(5,844

)

(2,494

)

Amount of loss reclassified from AOCL to income

 

887

 

1,555

 

2,684

 

5,501

 

Total comprehensive income

 

8,283

 

14,320

 

25,592

 

54,760

 

Net income attributable to noncontrolling interests

 

(94

)

(1,081

)

(1,516

)

(4,512

)

Other comprehensive loss (income) attributable to noncontrolling interests

 

47

 

102

 

245

 

(314

)

Total comprehensive income attributable to COPT

 

$

8,236

 

$

13,341

 

$

24,321

 

$

49,934

 

 

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11.          Information by Business Segment

 

As of September 30, 2010, we had nine primary office property segments (comprised of: the Baltimore/Washington Corridor; Greater Baltimore; Northern Virginia; Colorado Springs; Suburban Maryland; San Antonio; Washington, DC — Capitol Riverfront; Greater Philadelphia; and St. Mary’s and King George Counties) and a wholesale data center segment.

 

The table below reports segment financial information for our real estate operations (in thousands).  Our segment entitled “Other” includes assets and operations not specifically associated with the other defined segments, including certain properties as well as 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

 

Greater
Baltimore

 

Northern
Virginia

 

Colorado
Springs

 

Suburban
Maryland

 

San Antonio

 

Washington,
DC - Capitol
Riverfront

 

Greater
Philadelphia

 

St. Mary’s &
King George
Counties

 

Wholesale
Data Center

 

Other

 

Total

 

Three Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

51,946

 

$

18,288

 

$

18,949

 

$

6,176

 

$

5,243

 

$

5,609

 

$

135

 

$

1,793

 

$

3,431

 

$

162

 

$

3,296

 

$

115,028

 

Property operating expenses

 

18,945

 

7,828

 

7,195

 

2,380

 

2,618

 

2,697

 

50

 

232

 

1,152

 

251

 

956

 

44,304

 

NOI from real estate operations

 

$

33,001

 

$

10,460

 

$

11,754

 

$

3,796

 

$

2,625

 

$

2,912

 

$

85

 

$

1,561

 

$

2,279

 

$

(89

)

$

2,340

 

$

70,724

 

Additions to properties, net

 

$

19,097

 

$

14,578

 

$

7,302

 

$

1,028

 

$

1,373

 

$

5,701

 

$

92,816

 

$

2,187

 

$

3,445

 

$

111,510

 

$

531

 

$

259,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 </