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, 2011

 

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 April 18, 2011, 67,104,034 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, 2011 and December 31, 2010 (unaudited)

3

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited)

4

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2011 and 2010 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)

6

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4:

Controls and Procedures

37

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

Item 1:

Legal Proceedings

37

Item 1A:

Risk Factors

38

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3:

Defaults Upon Senior Securities

38

Item 4:

Removed and Reserved

38

Item 5:

Other Information

38

Item 6:

Exhibits

39

 

 

 

 

SIGNATURES

40

 

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,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,819,096

 

$

2,802,773

 

Properties under construction or development

 

649,675

 

642,682

 

Total properties, net

 

3,468,771

 

3,445,455

 

Cash and cash equivalents

 

12,606

 

10,102

 

Restricted cash and marketable securities

 

24,094

 

22,582

 

Accounts receivable (net of allowance for doubtful accounts of $2,752 and $2,796, respectively)

 

19,765

 

18,938

 

Deferred rent receivable

 

82,901

 

79,160

 

Intangible assets on real estate acquisitions, net

 

106,444

 

113,735

 

Deferred leasing and financing costs, net

 

60,479

 

60,649

 

Prepaid expenses and other assets

 

90,749

 

93,896

 

Total assets

 

$

3,865,809

 

$

3,844,517

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

2,396,795

 

$

2,323,681

 

Accounts payable and accrued expenses

 

103,043

 

99,699

 

Rents received in advance and security deposits

 

29,427

 

31,603

 

Dividends and distributions payable

 

33,048

 

32,986

 

Deferred revenue associated with operating leases

 

13,897

 

14,802

 

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

 

5,686

 

5,545

 

Other liabilities

 

12,255

 

13,063

 

Total liabilities

 

2,594,151

 

2,521,379

 

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 shares issued and outstanding at March 31, 2011 and December 31, 2010)

 

81

 

81

 

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 67,103,918 at March 31, 2011 and 66,931,582 at December 31, 2010)

 

671

 

669

 

Additional paid-in capital

 

1,511,638

 

1,511,844

 

Cumulative distributions in excess of net income

 

(331,313

)

(281,794

)

Accumulated other comprehensive loss

 

(3,197

)

(4,163

)

Total Corporate Office Properties Trust’s shareholders’ equity

 

1,177,880

 

1,226,637

 

Noncontrolling interests in subsidiaries:

 

 

 

 

 

Common units in the Operating Partnership

 

66,016

 

69,337

 

Preferred units in the Operating Partnership

 

8,800

 

8,800

 

Other consolidated entities

 

18,962

 

18,364

 

Noncontrolling interests in subsidiaries

 

93,778

 

96,501

 

Total equity

 

1,271,658

 

1,323,138

 

Total liabilities and equity

 

$

3,865,809

 

$

3,844,517

 

 

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,

 

 

 

2011

 

2010

 

Revenues

 

 

 

 

 

Rental revenue

 

$

99,426

 

$

91,010

 

Tenant recoveries and other real estate operations revenue

 

22,941

 

21,218

 

Construction contract and other service revenues

 

21,028

 

37,365

 

Total revenues

 

143,395

 

149,593

 

Expenses

 

 

 

 

 

Property operating expenses

 

50,905

 

48,135

 

Depreciation and amortization associated with real estate operations

 

33,020

 

27,596

 

Construction contract and other service expenses

 

20,618

 

36,399

 

Impairment loss

 

27,742

 

 

General and administrative expenses

 

6,777

 

5,900

 

Business development expenses

 

488

 

155

 

Total operating expenses

 

139,550

 

118,185

 

Operating income

 

3,845

 

31,408

 

Interest expense

 

(26,928

)

(22,638

)

Interest and other income

 

1,168

 

1,302

 

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

 

(21,915

)

10,072

 

Equity in income (loss) of unconsolidated entities

 

30

 

(205

)

Income tax benefit (expense)

 

544

 

(41

)

(Loss) income from continuing operations

 

(21,341

)

9,826

 

Discontinued operations

 

74

 

832

 

(Loss) income before gain on sales of real estate

 

(21,267

)

10,658

 

Gain on sales of real estate, net of income taxes

 

2,701

 

17

 

Net (loss) income

 

(18,566

)

10,675

 

Less net (loss) income attributable to noncontrolling interests:

 

 

 

 

 

Common units in the Operating Partnership

 

1,479

 

(527

)

Preferred units in the Operating Partnership

 

(165

)

(165

)

Other consolidated entities

 

(538

)

(45

)

Net (loss) income attributable to Corporate Office Properties Trust

 

(17,790

)

9,938

 

Preferred share dividends

 

(4,025

)

(4,025

)

Net (loss) income attributable to Corporate Office Properties Trust common shareholders

 

$

(21,815

)

$

5,913

 

Net (loss) income attributable to Corporate Office Properties Trust:

 

 

 

 

 

(Loss) income from continuing operations

 

$

(17,859

)

$

9,174

 

Discontinued operations, net

 

69

 

764

 

Net (loss) income attributable to Corporate Office Properties Trust

 

$

(17,790

)

$

9,938

 

Basic earnings per common share (1)

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

$

0.08

 

Discontinued operations

 

 

0.02

 

Net (loss) income attributable to COPT common shareholders

 

$

(0.33

)

$

0.10

 

Diluted earnings per common share (1)

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

$

0.08

 

Discontinued operations

 

 

0.02

 

Net (loss) income attributable to COPT common shareholders

 

$

(0.33

)

$

0.10

 


(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 entities

 

 

 

 

 

 

9,247

 

9,247

 

Acquisition of noncontrolling interests in other consolidated entities

 

 

 

(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, 2010 (66,931,582 common shares outstanding)

 

$

81

 

$

669

 

$

1,511,844

 

$

(281,794

)

$

(4,163

)

$

96,501

 

$

1,323,138

 

Conversion of common units to common shares (16,725 shares)

 

 

 

263

 

 

 

(263

)

 

Costs associated with common shares issued to the public

 

 

 

(117

)

 

 

 

(117

)

Exercise of share options (24,667 shares)

 

 

 

346

 

 

 

 

346

 

Share-based compensation

 

 

2

 

3,201

 

 

 

 

3,203

 

Restricted common share redemptions (104,592 shares)

 

 

 

(3,713

)

 

 

 

(3,713

)

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

 

 

 

(163

)

 

 

163

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

966

 

2

 

968

 

Net loss

 

 

 

 

(17,790

)

 

(776

)

(18,566

)

Dividends

 

 

 

 

(31,729

)

 

 

(31,729

)

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

 

 

 

 

 

 

(1,974

)

(1,974

)

Contributions from noncontrolling interests in other consolidated entities

 

 

 

(23

)

 

 

125

 

102

 

Balance at March 31, 2011 (67,103,918 common shares outstanding)

 

$

81

 

$

671

 

$

1,511,638

 

$

(331,313

)

$

(3,197

)

$

93,778

 

$

1,271,658

 

 

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 Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Revenues from real estate operations received

 

$

114,303

 

$

112,328

 

Construction contract and other service revenues received

 

21,405

 

54,915

 

Property operating expenses paid

 

(45,267

)

(46,733

)

Construction contract and other service expenses paid

 

(28,315

)

(55,834

)

General and administrative and business development expenses paid

 

(6,860

)

(7,565

)

Interest expense paid

 

(22,252

)

(21,844

)

Interest and other income received

 

108

 

466

 

Income taxes paid

 

(170

)

 

Net cash provided by operating activities

 

32,952

 

35,733

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to properties

 

 

 

 

 

Construction, development and redevelopment

 

(46,676

)

(44,032

)

Tenant improvements on operating properties

 

(8,778

)

(2,971

)

Capital improvements on operating properties

 

(4,064

)

(2,735

)

Proceeds from sales of properties

 

3,149

 

2,952

 

Mortgage and other loan receivables funded or acquired

 

(1,181

)

(321

)

Leasing costs paid

 

(2,894

)

(3,038

)

Investment in unconsolidated entities

 

(250

)

(4,500

)

Other

 

(670

)

(707

)

Net cash used in investing activities

 

(61,364

)

(55,352

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt, including issuance of exchangeable senior notes

 

97,273

 

135,892

 

Repayments of debt

 

 

 

 

 

Scheduled principal amortization

 

(3,798

)

(3,469

)

Other repayments

 

(25,050

)

(80,050

)

Net proceeds from issuance of common shares

 

(117

)

2,038

 

Dividends paid

 

(31,664

)

(26,948

)

Distributions paid

 

(1,981

)

(2,154

)

Restricted share redemptions

 

(3,713

)

(3,610

)

Other

 

(34

)

(162

)

Net cash provided by financing activities

 

30,916

 

21,537

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

2,504

 

1,918

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

10,102

 

8,262

 

End of period

 

$

12,606

 

$

10,180

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Reconciliation of net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Net (loss) income

 

$

(18,566

)

$

10,675

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and other amortization

 

33,645

 

28,253

 

Impairment loss

 

27,742

 

 

Amortization of deferred financing costs

 

1,759

 

1,126

 

Increase in deferred rent receivable

 

(4,240

)

(2,555

)

Amortization of above or below market leases

 

(207

)

(607

)

Amortization of net debt discounts

 

1,649

 

917

 

Gain on sales of real estate

 

(2,701

)

(325

)

Share-based compensation

 

2,917

 

2,611

 

Other

 

(719

)

(329

)

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(827

)

3,274

 

Decrease in restricted cash and marketable securities and prepaid expenses and other assets

 

4,701

 

16,870

 

Decrease in accounts payable, accrued expenses and other liabilities

 

(10,025

)

(24,575

)

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

 

(2,176

)

398

 

Net cash provided by operating activities

 

32,952

 

35,733

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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

 

$

13,171

 

$

(1,313

)

Increase in property and debt in connection with loan assumption

 

$

3,040

 

$

 

Increase in property and noncontrolling interests in connection with property contribution by a noncontrolling interest in a joint venture

 

$

 

$

9,000

 

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

 

$

662

 

$

1,490

 

Dividends/distribution payable

 

$

33,048

 

$

28,556

 

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

 

$

263

 

$

4,515

 

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

 

$

163

 

$

180

 

 

See accompanying notes to consolidated financial statements.

 

7



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 and defense information technology sectors and data centers serving such 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 strong markets that we believe possess growth opportunities.  As of March 31, 2011, our investments in real estate included the following:

 

·                  252 wholly owned operating office properties totaling 20.2 million square feet;

 

·                  20 wholly owned office properties under construction, development or redevelopment that we estimate will total approximately 2.9 million square feet upon completion, including four partially operational properties included above;

 

·                  wholly owned land parcels totaling 1,496 acres that we believe are potentially developable into approximately 14.3 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 construction or 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 March 31, 2011 follows:

 

Common Units

 

94

%

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 5% of the Operating Partnership’s common units (“common units”) as of March 31, 2011.

 

In addition to owning  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.

 

8



Table of Contents

 

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.

 

These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2010 included in our 2010 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 2010 Annual Report on Form 10-K.

 

3.                                      Fair Value Measurements

 

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2010 Annual Report on 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 March 31, 2011 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

 

 

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 in deferred compensation plan (1)

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

6,248

 

$

 

$

 

$

6,248

 

Common stocks

 

1,141

 

 

 

1,141

 

Preferred stocks

 

322

 

 

 

322

 

Cash and cash equivalents

 

431

 

 

 

431

 

Other

 

200

 

 

 

200

 

Common stock (1)

 

801

 

 

 

801

 

Interest rate derivative (2)

 

 

935

 

 

935

 

Warrants to purchase common shares in KEYW (2)

 

 

337

 

 

337

 

Assets

 

$

9,143

 

$

1,272

 

$

 

$

10,415

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability (3)

 

$

8,342

 

$

 

$

 

$

8,342

 

Interest rate derivatives (3)

 

 

3,564

 

 

3,564

 

Liabilities

 

$

8,342

 

$

3,564

 

$

 

$

11,906

 


(1)   Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.

(2)          Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet.  We own warrants to purchase common shares in The KEYW Holding Corporation (“KEYW”), an equity method investee (see Note 6).

(3)   Included in the line entitled “other liabilities” on our consolidated balance sheet.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  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.

 

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For additional fair value information, please refer to Note 6 for mortgage loans receivable, Note 7 for debt and Note 8 for interest rate derivatives.

 

4.                                      Properties, net

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Land

 

$

502,048

 

$

501,210

 

Buildings and improvements

 

2,843,873

 

2,804,595

 

 

 

3,345,921

 

3,305,805

 

Less: accumulated depreciation

 

(526,825

)

(503,032

)

 

 

$

2,819,096

 

$

2,802,773

 

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Land

 

$

253,505

 

$

256,487

 

Construction in progress, excluding land

 

396,170

 

386,195

 

 

 

$

649,675

 

$

642,682

 

 

As discussed further in Note 15, on February 15 and 17, 2011, the United States Army (the “Army”) provided us disclosures regarding the past testing and use of tactical defoliants/herbicides at our property in Cascade, Maryland that was formerly an Army base known as Fort Ritchie (“Fort Ritchie”).  Upon receipt of these disclosures, we commenced a review of our development plans and prospects for the property.  We believe that these disclosures by the Army are likely to cause further delays in the resolution of certain existing litigation related to the property (also discussed in Note 15), and that they also increase the level of uncertainty as to our ultimate development rights at the property and future residential and commercial demand for the property.  We analyzed various possible outcomes and resulting cash flows expected from the operations and ultimate disposition of the property.  After determining that the carrying amount of the property will not likely be recovered from those cash flows, we recognized a non-cash impairment loss of $27.7 million in the three months ended March 31, 2011 for the amount by which the carrying value of the property exceeded its estimated fair value.

 

2011 Construction, Development and Redevelopment Activities

 

During the three months ended March 31, 2011, we had one newly constructed office property in the Baltimore/Washington Corridor totaling 151,000 square feet become fully operational (31,000 of these square feet were placed into service in 2010) and placed into service 6,000 square feet in one partially operational office property.

 

As of March 31, 2011, we had construction underway on 11 office properties totaling 1.2 million square feet, including four in the Baltimore/Washington Corridor, three in Greater Baltimore, one in San Antonio, one in Northern Virginia, one in Huntsville, Alabama and one in St. Mary’s and King George Counties.  We also had development activities underway on seven office properties totaling 991,000 square feet, including three in the Baltimore/Washington Corridor, two in San Antonio, one in Huntsville and one in Greater Baltimore.  In addition, we had redevelopment underway on four office properties totaling 868,000 square feet, including two in Greater Philadelphia, one in the Baltimore/Washington Corridor and one in Northern Virginia.

 

5.                                      Real Estate Joint Ventures

 

During the three months ended March 31, 2011, 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):

 

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Investment Balance at (1)

 

 

 

 

 

 

 

Maximum

March 31,

 

December 31,

 

Date

 

 

 

Nature of

 

Exposure

2011

 

2010

 

Acquired

 

Ownership

 

Activity

 

to Loss (2)

 

 

 

 

 

 

 

 

 

 

 

$

 (5,686)

 

$

(5,545)

 

9/29/2005

 

20%

 

Operates 16 buildings

 

$

  —


(1)          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 March 31, 2011 and December 31, 2010 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.

(2)          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).

 

The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Properties, net

 

$

61,101

 

$

61,521

 

Other assets

 

4,060

 

4,174

 

Total assets

 

$

65,161

 

$

65,695

 

 

 

 

 

 

 

Liabilities (primarily debt)

 

$

67,626

 

$

67,454

 

Owners’ equity

 

(2,465

)

(1,759

)

Total liabilities and owners’ equity

 

$

65,161

 

$

65,695

 

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Revenues

 

$

1,924

 

$

2,100

 

Property operating expenses

 

(986

)

(994

)

Interest expense

 

(1,011

)

(981

)

Depreciation and amortization expense

 

(608

)

(878

)

Net loss

 

$

(681

)

$

(753

)

 

 

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at March 31, 2011 (dollars in thousands):

 

 

 

 

 

Ownership

 

 

 

March 31, 2011 (1)

 

 

 

Date

 

% at

 

Nature of

 

Total

 

Pledged

 

Total

 

 

 

Acquired

 

3/31/2011

 

Activity

 

Assets

 

Assets

 

Liabilities

 

M Square Associates, LLC

 

6/26/2007

 

50.0%

 

Operating two buildings and developing others (2)

 

$

60,458

 

$

49,042

 

$

44,319

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50.0%

 

Operating one building (3)

 

29,521

 

28,735

 

16,815

 

LW Redstone Company, LLC

 

3/23/2010

 

85.0%

 

Developing land parcel (4)

 

21,070

 

 

46

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75.0%

 

Developing land parcel (5)

 

7,486

 

 

17

 

MOR Forbes 2 LLC

 

12/24/2002

 

50.0%

 

Operating one building (6)

 

4,003

 

 

60

 

 

 

 

 

 

 

 

 

$

122,538

 

$

77,777

 

$

61,257

 


(1) Excludes amounts eliminated in consolidation.

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

(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).

 

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

 

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6.             Prepaid Expenses and Other Assets

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Investment in KEYW

 

$

23,019

 

$

22,779

 

Mortgage and other investing receivables

 

20,573

 

18,870

 

Prepaid expenses

 

14,823

 

19,995

 

Furniture, fixtures and equipment, net

 

11,120

 

11,504

 

Construction contract costs incurred in excess of billings

 

8,247

 

9,372

 

Other assets

 

12,967

 

11,376

 

Prepaid expenses and other assets

 

$

90,749

 

$

93,896

 

 

Investment in The KEYW Holding Corporation

 

Our investment in KEYW reflected above consists of common stock and warrants to purchase additional shares of common stock of KEYW.  At March 31, 2011 and December 31, 2010, we owned 3.1 million shares, or approximately 12%, of KEYW’s common stock.  We use the equity method of accounting for our investment in the common stock.  The carrying value of our equity method investment in these common shares was $22.7 million at March 31, 2011 and $22.3 million at December 31, 2010.  Our investment in these common shares had a fair value of $37.7 million at March 31, 2011 based on the closing price of KEYW’s common stock on the NASDAQ Stock Market on that date.  In March 2011, we entered into a sales plan, which complies with the requirements of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended, to sell up to 1.6 million shares of our KEYW common stock in 2011.

 

At March 31, 2011 and December 31, 2010, we owned warrants to purchase 50,000 additional shares of KEYW common stock at an exercise price of $9.25 per share.  We account for these warrants as derivatives reported at fair value using the Black-Scholes option-pricing model.  The estimated fair value of these warrants was $337,000, or $6.74 per warrant, at March 31, 2011 and $466,000, or $9.32 per warrant, at December 31, 2010.

 

Mortgage and Other Investing Receivables

 

Mortgage and other investing receivables consisted of the following (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Mortgage loans receivable

 

$

14,822

 

$

14,227

 

Note receivable from City of Huntsville

 

5,751

 

4,643

 

 

 

$

20,573

 

$

18,870

 

 

Our mortgage loans receivable reflected above consist of two loans secured by properties in the Baltimore/Washington Corridor.  Our note receivable from the City of Huntsville was to fund infrastructure costs in connection with our LW Redstone Company, LLC joint venture.  We do not have an allowance for credit losses in connection with theses receivables at March 31, 2011 or December 31, 2010.  The fair value of our mortgage and other investing receivables totaled $20.6 million at March 31, 2011 and $18.8 million at December 31, 2010.

 

Operating Notes Receivable

 

We had operating notes receivables due from tenants with terms exceeding one year totaling $596,000 at March 31, 2011 and $655,000 at December 31, 2010.  We carried allowances for estimated losses for most of these balances.

 

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7.             Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

Scheduled

 

 

 

Maximum

 

Carrying Value at

 

 

 

Maturity

 

 

 

Availability at

 

March 31,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

March 31, 2011

 

2011

 

2010

 

at March 31, 2011

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (1)

 

N/A

 

$

1,169,688

 

$

1,173,358

 

5.20% - 7.87% (2)

 

2011 - 2034 (3)

 

Revolving Construction Facility

 

$

225,000

 

161,612

 

142,339

 

LIBOR + 1.60% to 2.00% (4)

 

May 2, 2012

 

Variable rate secured loans

 

N/A

 

310,236

 

310,555

 

LIBOR + 2.25% to 3.00% (5)

 

2012-2014 (6)

 

Other construction loan facility

 

23,400

 

16,753

 

16,753

 

LIBOR + 2.75% (7)

 

2011 (8)

 

Total mortgage and other secured loans

 

 

 

1,658,289

 

1,643,005

 

 

 

 

 

Revolving Credit Facility

 

800,000

 

348,000

 

295,000

 

LIBOR + 0.75% to 1.25% (9)

 

September 30, 2011 (8)

 

Unsecured notes payable

 

N/A

 

4,968

 

1,947

 

0% (10)

 

2015-2026

 

Exchangeable Senior Notes:

 

 

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

N/A

 

224,686

 

223,846

 

4.25%

 

April 2030 (11)

 

3.5% Exchangeable Senior Notes

 

N/A

 

160,852

 

159,883

 

3.50%

 

September 2026 (12)

 

Total debt

 

 

 

$

2,396,795

 

$

2,323,681

 

 

 

 

 


(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 net unamortized premiums totaling $2.9 million at March 31, 2011 and $3.2 million at December 31, 2010.

(2)          The weighted average interest rate on these loans was 5.97% at March 31, 2011.

(3)          A loan with a balance of $4.5 million at March 31, 2011 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(4)          The weighted average interest rate on this loan was 1.87% at March 31, 2011.

(5)          Certain of the loans in this category at March 31, 2011 were subject to floor interest rates ranging from 4.25% to 5.50%.

(6)          Includes $221.4 million maturing in 2012 that may be extended for a one-year period at our option, subject to certain conditions.

(7)          The interest rate on this loan was 3.02% at March 31, 2011.

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

(9)          The weighted average interest rate on the Revolving Credit Facility was 1.12% at March 31, 2011.

(10)    These notes may carry interest rates that were below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates.  The carrying value of these notes reflects an unamortized discount totaling $2.0 million at March 31, 2011 and $1.1 million at December 31, 2010.

(11)    As described further in our 2010 Annual Report on Form 10-K, these 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 20.8011 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2011 and is equivalent to an exchange price of $48.07 per common share).  The carrying value of these notes included a principal amount of $240.0 million and an unamortized discount totaling $15.3 million at March 31, 2011 and $16.2 million at December 31, 2010.  The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%.  Because the closing price of our common shares at March 31, 2011 and December 31, 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

 

 

 

Months Ended

 

 

 

March 31, 2011

 

Interest expense at stated interest rate

 

$

2,550

 

Interest expense associated with amortization of discount

 

840

 

Total

 

$

3,390

 

 

(12)    As described further in our 2010 Annual Report on Form 10-K, these notes have an exchange settlement feature that provides that the notes 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 19.2648 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2011 and is equivalent to an exchange price of $51.91 per common share).  The carrying value of these notes included a principal amount of $162.5 million and an unamortized discount totaling $1.6 million at March 31, 2011 and $2.6 million at December 31, 2010.  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 March 31, 2011 and December 31, 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):

 

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For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Interest expense at stated interest rate

 

$

1,422

 

$

1,422

 

Interest expense associated with amortization of discount

 

969

 

913

 

Total

 

$

2,391

 

$

2,335

 

 

We capitalized interest costs of $4.3 million in the three months ended March 31, 2011 and $3.9 million in the three months ended March 31, 2010.

 

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

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Fixed-rate debt

 

$

1,560,194

 

$

1,574,532

 

$

1,559,034

 

$

1,579,022

 

Variable-rate debt

 

836,601

 

840,203

 

764,647

 

769,247

 

 

 

$

2,396,795

 

$

2,414,735

 

$

2,323,681

 

$

2,348,269

 

 

8.             Interest Rate Derivatives

 

The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):

 

 

 

 

 

 

 

 

 

Fair Value at

 

Notional

 

One-Month

 

Effective

 

Expiration

 

March 31,

 

December 31,

 

Amount

 

LIBOR Base

 

Date

 

Date

 

2011

 

2010

 

$ 120,000

 

1.7600

%

1/2/2009

 

5/1/2012

 

$

(1,730

)

$

(2,062

)

100,000

 

1.9750

%

1/1/2010

 

5/1/2012

 

(1,675

)

(2,002

)

50,000

 

0.5025

%

1/3/2011

 

1/3/2012

 

(61

)

(64

)

50,000

 

0.5025

%

1/3/2011

 

1/3/2012

 

(61

)

(64

)

50,000

 

0.4400

%

1/4/2011

 

1/3/2012

 

(37

)

(34

)

40,000

(1)

3.8300

%

11/2/2010

 

11/2/2015

 

935

 

644

 

 

 

 

 

 

 

 

 

$

(2,629

)

$

(3,582

)


(1) The notional amount of this instrument is scheduled to amortize to $36.2 million.

 

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 (in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

Derivatives Designated as 
Hedging Instruments

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps

 

Prepaid expenses and other assets

 

$

  935

 

Prepaid expenses and other assets

 

$

  644

 

Interest rate swaps

 

Other liabilities

 

(3,564

)

Other liabilities

 

(4,226

)

 

The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Amount of loss recognized in AOCL (effective portion)

 

$

(136

)

$

(2,385

)

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

 

(1,104

)

(911

)

 

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Over the next 12 months, we estimate that approximately $3.9 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 March 31, 2011, the fair value of interest rate derivatives in a liability position related to these agreements was $3.6 million, excluding the effects of accrued interest. As of March 31, 2011, 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 $3.9 million.

 

9.             Shareholders’ Equity

 

Common Shares

 

During the three months ended March 31, 2011, holders of 16,725 common units in our Operating Partnership converted their units into common shares on the basis of one common share for each common unit.

 

We declared dividends per common share of $0.4125 in the three months ended March 31, 2011 and $0.3925 in the three months ended March 31, 2010.

 

See Note 11 for disclosure of common share activity pertaining to our share-based compensation plans.

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Beginning balance

 

$

(4,163

)

$

(1,907

)

Amount of loss recognized in AOCL (effective portion)

 

(136

)

(2,385

)

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

 

1,104

 

911

 

Adjustment to AOCL attributable to noncontrolling interests

 

(2

)

103

 

Ending balance

 

$

(3,197

)

$

(3,278

)

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Net (loss) income

 

$

(18,566

)

$

10,675

 

Amount of loss recognized in AOCL

 

(136

)

(2,385

)

Amount of loss reclassified from AOCL to income

 

1,104

 

911

 

Total comprehensive (loss) income

 

(17,598

)

9,201

 

Net loss (income) attributable to noncontrolling interests

 

776

 

(737

)

Other comprehensive (loss) income attributable to noncontrolling interests

 

(62

)

121

 

Total comprehensive (loss) income attributable to COPT

 

$

(16,884

)

$

8,585

 

 

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10.          Information by Business Segment

 

As of March 31, 2011, 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.  We also had 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 March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

 53,252

 

$

 17,612

 

$

 18,274

 

$

 5,920

 

$

 5,609

 

$

 7,663

 

$

 4,590

 

$

 1,939

 

$

 3,534

 

$

 1,210

 

$

 2,838

 

$

 122,441

 

Property operating expenses

 

21,390

 

8,540

 

7,671

 

2,436

 

2,718

 

3,869

 

1,627

 

446

 

1,016

 

706

 

486

 

50,905

 

NOI from real estate operations

 

$

 31,862

 

$

 9,072

 

$

 10,603

 

$

 3,484

 

$

 2,891

 

$

 3,794

 

$

 2,963

 

$

 1,493

 

$

 2,518

 

$

 504

 

$

 2,352

 

$

 71,536

 

Additions to properties, net

 

$

 24,755

 

$

 11,826

 

$

 2,137

 

$

 421

 

$

 1,175

 

$

 2,290

 

$

 63

 

$

 2,233

 

$

 3,250

 

$

 24,070

 

$

 3,131

 

$

 75,351

 

Segment assets at March 31, 2011

 

$

 1,405,746

 

$

 589,750

 

$

 543,677

 

$

 263,548

 

$

 176,866

 

$

 155,928

 

$

 118,407

 

$

 124,971

 

$

 101,370

 

$

 154,245

 

$

 231,301

 

$

 3,865,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

 52,058

 

$

 17,865

 

$

 18,659

 

$

 6,332

 

$

 5,829

 

$

 3,938

 

$

 —

 

$

 1,202

 

$

 3,589

 

$

 —

 

$

 3,524

 

$

 112,996

 

Property operating expenses

 

22,155

 

9,010

 

7,313

 

2,309

 

2,701

 

1,629

 

 

763

 

1,107

 

 

1,309

 

48,296

 

NOI from real estate operations

 

$

 29,903

 

$

 8,855

 

$

 11,346

 

$

 4,023

 

$

 3,128

 

$

 2,309

 

$

 —

 

$

 439

 

$

 2,482

 

$

 —

 

$

 2,215

 

$

 64,700

 

Additions to properties, net

 

$

 15,959

 

$

 7,240

 

$

 4,910

 

$

 813

 

$

 1,541

 

$

 4,939

 

$

 —

 

$

 10,058

 

$

 411

 

$

 —

 

$

 12,476

 

$

 58,347

 

Segment assets at March 31, 2010

 

$

 1,339,080

 

$

 568,361

 

$

 452,105

 

$

 269,338

 

$

 172,971

 

$

 139,977

 

$

 —

 

$

 115,023

 

$

 94,033

 

$

 —

 

$

 247,464

 

$

 3,398,352

 

 

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The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Segment revenues from real estate operations

 

$

122,441

 

$

112,996

 

Construction contract and other service revenues

 

21,028

 

37,365

 

Less: Revenues from discontinued operations (Note 13)

 

(74

)

(768

)

Total revenues

 

$

143,395

 

$

149,593

 

 

The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands):

 

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Segment property operating expenses

 

$

50,905

 

$

48,296

 

Less: Property operating expenses from discontinued operations (Note 13)

 

 

(161

)

Total property operating expenses

 

$

50,905

 

$

48,135

 

 

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.  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 (in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Construction contract and other service revenues

 

$

21,028

 

$

37,365

 

Construction contract and other service expenses

 

(20,618

)

(36,399

)

NOI from service operations

 

$

410

 

$

966

 

 

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The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to (loss) income from continuing operations as reported on our consolidated statements of operations (in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

NOI from real estate operations

 

$

71,536

 

$

64,700

 

NOI from service operations

 

410

 

966

 

Interest and other income

 

1,168

 

1,302

 

Equity in income (loss) of unconsolidated entities

 

30

 

(205

)

Income tax benefit (expense)

 

544

 

(41

)

Other adjustments:

 

 

 

 

 

Depreciation and other amortization associated with real estate operations

 

(33,020

)

(27,596

)

Impairment loss

 

(27,742

)

 

General and administrative expenses

 

(6,777

)

(5,900

)

Business development expenses

 

(488

)

(155

)

Interest expense on continuing operations

 

(26,928

)

(22,638

)

NOI from discontinued operations

 

(74

)

(607

)

(Loss) income from continuing operations

 

$

(21,341

)

$

9,826

 

 

The accounting policies of the segments are the same as those used to prepare our consolidated financial statements, except that discontinued operations are not presented separately for segment purposes.  We did not allocate interest expense, depreciation and amortization and impairment loss to our real estate segments since they are not included in the measure of segment profit reviewed by management.  We also did not allocate general and administrative expenses, business development expenses, interest and other income, equity in income (loss) of unconsolidated entities, income taxes and noncontrolling interests because these items represent general corporate items not attributable to segments.

 

11.          Share-Based Compensation

 

Performance Share Units (“PSUs”)

 

On March 3, 2011, our Board of Trustees granted 56,883 PSUs to executives.  The PSUs have a performance period beginning on the grant date and concluding on the earlier of March 2, 2014 or the date of: (1) termination by the Company without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event.  The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of the Company’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:

 

 

Percentile Rank

 

Earned PSUs Payout %

75th or greater

 

200% of PSUs granted

50th or greater

 

100% of PSUs granted

25th

 

50% of PSUs granted

Below 25th

 

0% of PSUs granted

 

If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles.  At the end of the performance period, we, in settlement of the award, will issue a number of fully-vested common shares equal to the sum of:

 

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·                  the number of earned PSUs in settlement of the award plan; plus

 

·                  the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned PSUs through the date of settlement had such shares been issued on the grant date, divided by the share price on such settlement date, as defined under the terms of the agreement.

 

If a performance period ends due to a sale event or qualified termination, the number of earned PSUs is prorated based on the portion of the three-year performance period that has elapsed.  If employment is terminated by the employee or by the Company for cause, all PSUs are forfeited.  PSUs do not carry voting rights.

 

We computed a grant date fair value of $49.15 per PSU using a Monte Carlo model, which included assumptions of, among other things, the following: baseline common share value of $35.17; expected volatility for our common shares of 61.1%; and risk-free interest rate of 1.32%.  We are recognizing the grant date fair value in connection with these PSU awards over a three-year period that commenced on March 3, 2011.

 

The PSUs granted to our executives on March 4, 2010, as described in our 2010 Annual Report on Form 10-K, were also outstanding at March 31, 2011.

 

Restricted Shares

 

During the three months ended March 31, 2011, certain employees and a member of our Board of Trustees were granted a total of 236,859 restricted shares with a weighted average grant date fair value of $35.37 per share.  Restricted shares granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employees remain employed by us.  The grant of restricted shares to the Trustee vests on the first anniversary of the grant date provided that the Trustee remains in her position.  During the three months ended March 31, 2011, forfeiture restrictions lapsed on 278,351 previously issued common shares; these shares had a weighted average grant date fair value of $31.87 per share, and the aggregate intrinsic value of the shares on the vesting dates was $9.9 million.

 

Options

 

During the three months ended March 31, 2011, 24,667 options to purchase common shares (“options”) were exercised.  The weighted average exercise price of these options was $14.03 per share, and the aggregate intrinsic value of the options exercised was $518,000.

 

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12.          Income Taxes

 

We own a taxable REIT subsidiary (“TRS”) that is subject to Federal and state income taxes.  Our TRS’ provision for income tax consisted of the following (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

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