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, 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 October 17, 2011, 71,986,146 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, 2011 and December 31, 2010 (unaudited)

3

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)

4

 

Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

28

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4:

Controls and Procedures

45

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

Item 1:

Legal Proceedings

45

Item 1A:

Risk Factors

45

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3:

Defaults Upon Senior Securities

46

Item 4:

Removed and Reserved

46

Item 5:

Other Information

46

Item 6:

Exhibits

47

 

 

SIGNATURES

49

 

2



Table of Contents

 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,772,303

 

$

2,802,773

 

Properties under construction or development

 

696,914

 

642,682

 

Total properties, net

 

3,469,217

 

3,445,455

 

Assets held for sale, net

 

72,767

 

 

Cash and cash equivalents

 

11,504

 

10,102

 

Restricted cash and marketable securities

 

39,232

 

22,582

 

Accounts receivable (net of allowance for doubtful accounts of $3,404 and $2,796, respectively)

 

20,991

 

18,938

 

Deferred rent receivable

 

87,148

 

79,160

 

Intangible assets on real estate acquisitions, net

 

97,954

 

113,735

 

Deferred leasing and financing costs, net

 

70,791

 

60,649

 

Prepaid expenses and other assets

 

95,788

 

93,896

 

Total assets

 

$

3,965,392

 

$

3,844,517

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

2,420,073

 

$

2,323,681

 

Accounts payable and accrued expenses

 

114,834

 

99,699

 

Rents received in advance and security deposits

 

28,241

 

31,603

 

Dividends and distributions payable

 

35,029

 

32,986

 

Deferred revenue associated with operating leases

 

15,621

 

14,802

 

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

 

5,953

 

5,545

 

Interest rate derivatives

 

30,629

 

4,226

 

Other liabilities

 

7,389

 

8,837

 

Total liabilities

 

2,657,769

 

2,521,379

 

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 shares issued and outstanding at September 30, 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 71,986,936 at September 30, 2011 and 66,931,582 at December 31, 2010)

 

720

 

669

 

Additional paid-in capital

 

1,663,850

 

1,511,844

 

Cumulative distributions in excess of net income

 

(416,342

)

(281,794

)

Accumulated other comprehensive loss

 

(28,618

)

(4,163

)

Total Corporate Office Properties Trust’s shareholders’ equity

 

1,219,691

 

1,226,637

 

Noncontrolling interests in subsidiaries:

 

 

 

 

 

Common units in the Operating Partnership

 

60,583

 

69,337

 

Preferred units in the Operating Partnership

 

8,800

 

8,800

 

Other consolidated entities

 

18,549

 

18,364

 

Noncontrolling interests in subsidiaries

 

87,932

 

96,501

 

Total equity

 

1,307,623

 

1,323,138

 

Total liabilities and equity

 

$

3,965,392

 

$

3,844,517

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

99,068

 

$

90,264

 

$

293,547

 

$

266,334

 

Tenant recoveries and other real estate operations revenue

 

22,825

 

20,810

 

65,395

 

59,337

 

Construction contract and other service revenues

 

18,729

 

13,608

 

67,854

 

77,038

 

Total revenues

 

140,622

 

124,682

 

426,796

 

402,709

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

47,655

 

43,013

 

141,287

 

128,331

 

Depreciation and amortization associated with real estate operations

 

35,719

 

29,503

 

97,720

 

84,368

 

Construction contract and other service expenses

 

18,171

 

13,347

 

65,698

 

75,148

 

Impairment losses

 

 

 

57,824

 

 

General and administrative expenses

 

6,154

 

6,079

 

19,251

 

17,905

 

Business development expenses

 

1,050

 

2,886

 

2,126

 

3,506

 

Total operating expenses

 

108,749

 

94,828

 

383,906

 

309,258

 

Operating income

 

31,873

 

29,854

 

42,890

 

93,451

 

Interest expense

 

(25,381

)

(26,174

)

(78,412

)

(74,042

)

Interest and other (loss) income

 

(242

)

395

 

3,682

 

1,942

 

Loss on early extinguishment of debt

 

(1,655

)

 

(1,680

)

 

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

 

4,595

 

4,075

 

(33,520

)

21,351

 

Equity in (loss) income of unconsolidated entities

 

(159

)

648

 

(223

)

371

 

Income tax benefit (expense)

 

457

 

(27

)

6,043

 

(75

)

Income (loss) from continuing operations

 

4,893

 

4,696

 

(27,700

)

21,647

 

Discontinued operations

 

2,577

 

1,753

 

(12,120

)

4,276

 

Income (loss) before gain on sales of real estate

 

7,470

 

6,449

 

(39,820

)

25,923

 

Gain on sales of real estate, net of income taxes

 

 

2,477

 

2,717

 

2,829

 

Net income (loss)

 

7,470

 

8,926

 

(37,103

)

28,752

 

Net (income) loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

Common units in the Operating Partnership

 

(178

)

(363

)

3,188

 

(1,254

)

Preferred units in the Operating Partnership

 

(165

)

(165

)

(495

)

(495

)

Other consolidated entities

 

(561

)

434

 

(1,038

)

233

 

Net income (loss) attributable to Corporate Office Properties Trust

 

6,566

 

8,832

 

(35,448

)

27,236

 

Preferred share dividends

 

(4,025

)

(4,025

)

(12,076

)

(12,076

)

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

 

$

2,541

 

$

4,807

 

$

(47,524

)

$

15,160

 

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

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

4,138

 

$

7,206

 

$

(24,106

)

$

23,284

 

Discontinued operations, net

 

2,428

 

1,626

 

(11,342

)

3,952

 

Net income (loss) attributable to Corporate Office Properties Trust

 

$

6,566

 

$

8,832

 

$

(35,448

)

$

27,236

 

Basic earnings per common share (1)

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

 

$

0.05

 

$

(0.54

)

$

0.18

 

Discontinued operations

 

0.03

 

0.03

 

(0.16

)

0.07

 

Net income (loss) attributable to COPT common shareholders

 

$

0.03

 

$

0.08

 

$

(0.70

)

$

0.25

 

Diluted earnings per common share (1)

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

 

$

0.05

 

$

(0.54

)

$

0.17

 

Discontinued operations

 

0.03

 

0.03

 

(0.16

)

0.07

 

Net income (loss) attributable to COPT common shareholders

 

$

0.03

 

$

0.08

 

$

(0.70

)

$

0.24

 

 


(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

(in thousands, except share data)

(unaudited)

 

 

 

Preferred
Shares

 

Common
Shares

 

Additional
Paid-in
Capital

 

Cumulative
Distributions in
Excess of Net
Income (Loss)

 

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

 

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 noncontrolling 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (83,506 shares)

 

 

1

 

1,275

 

 

 

(1,276

)

 

Common shares issued to the public (4,600,000 shares)

 

 

46

 

145,315

 

 

 

 

145,361

 

Exercise of share options (185,714 shares)

 

 

2

 

2,393

 

 

 

 

2,395

 

Share-based compensation

 

 

2

 

9,536

 

 

 

 

9,538

 

Restricted common share redemptions (112,683 shares)

 

 

 

(3,948

)

 

 

 

(3,948

)

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

 

 

 

(2,542

)

 

 

2,542

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

(24,455

)

(2,562

)

(27,017

)

Net loss

 

 

 

 

(35,448

)

 

(1,655

)

(37,103

)

Dividends

 

 

 

 

(99,100

)

 

 

(99,100

)

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

 

 

 

 

 

 

(5,894

)

(5,894

)

Contributions from noncontrolling interests in other consolidated entities

 

 

 

(23

)

 

 

284

 

261

 

Distributions to noncontrolling interests in other consolidated entities

 

 

 

 

 

 

(8

)

(8

)

Balance at September 30, 2011 (71,986,936 common shares outstanding)

 

$

81

 

$

 720

 

$

 1,663,850

 

$

(416,342

)

$

(28,618

)

$

  87,932

 

$

  1,307,623

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Revenues from real estate operations received

 

$

350,593

 

$

324,445

 

Construction contract and other service revenues received

 

73,382

 

92,817

 

Property operating expenses paid

 

(143,481

)

(138,379

)

Construction contract and other service expenses paid

 

(73,009

)

(107,016

)

General and administrative and business development expenses paid

 

(15,921

)

(13,726

)

Interest expense paid

 

(69,237

)

(63,298

)

Previously accreted interest expense paid

 

(17,314

)

 

Interest and other income received

 

377

 

709

 

Payments in connection with early extinguishment of debt

 

(350

)

 

Income taxes paid

 

(174

)

 

Net cash provided by operating activities

 

104,866

 

95,552

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to properties

 

 

 

 

 

Construction, development and redevelopment

 

(169,873

)

(240,092

)

Acquisitions of operating properties

 

(32,806

)

(103,277

)

Tenant improvements on operating properties

 

(27,421

)

(11,259

)

Other capital improvements on operating properties

 

(11,575

)

(5,870

)

Proceeds from sales of properties

 

27,312

 

27,580

 

Proceeds from sale of equity method investment

 

5,773

 

 

Mortgage and other loan receivables funded or acquired

 

(20,401

)

(1,729

)

Mortgage and other loan receivables payments received

 

5,203

 

 

Leasing costs paid

 

(10,357

)

(7,717

)

Investment in unconsolidated entities

 

(250

)

(4,500

)

Other

 

(3,330

)

(2,241

)

Net cash used in investing activities

 

(237,725

)

(349,105

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt, including issuance of exchangeable senior notes

 

1,548,619

 

825,475

 

Repayments of debt

 

 

 

 

 

Scheduled principal amortization

 

(10,647

)

(10,389

)

Other repayments

 

(1,432,050

)

(459,614

)

Deferred financing costs paid

 

(12,771

)

(7,086

)

Net proceeds from issuance of common shares

 

147,781

 

4,378

 

Acquisition of noncontrolling interests in consolidated entities

 

 

(4,462

)

Dividends paid

 

(97,047

)

(81,376

)

Distributions paid

 

(5,937

)

(6,100

)

Restricted share redemptions

 

(3,948

)

(3,862

)

Other

 

261

 

60

 

Net cash provided by financing activities

 

134,261

 

257,024

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,402

 

3,471

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

10,102

 

8,262

 

End of period

 

$

11,504

 

$

11,733

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

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

 

 

 

 

 

Net (loss) income

 

$

(37,103

)

$

28,752

 

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

 

 

 

 

 

Depreciation and other amortization

 

102,963

 

89,830

 

Impairment losses

 

72,347

 

 

Settlement of previously accreted interest expense

 

(17,314

)

 

Amortization of deferred financing costs

 

5,090

 

4,175

 

Increase in deferred rent receivable

 

(7,587

)

(3,295

)

Amortization of net debt discounts

 

4,778

 

4,360

 

Gain on sales of real estate

 

(4,166

)

(3,921

)

Gain on equity method investment

 

(2,452

)

 

Share-based compensation

 

8,156

 

8,726

 

Loss on early extinguishment of debt

 

1,670

 

 

Other

 

18

 

(2,194

)

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(1,311

)

(1,648

)

(Increase) decrease in restricted cash and marketable securities and prepaid expenses and other assets

 

(5,162

)

8,165

 

Decrease in accounts payable, accrued expenses and other liabilities

 

(11,699

)

(31,696

)

Decrease in rents received in advance and security deposits

 

(3,362

)

(5,702

)

Net cash provided by operating activities

 

104,866

 

95,552

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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

 

$

25,314

 

$

4,308

 

Increase in property, debt and other liabilities in connection with acquisitions

 

$

3,040

 

$

74,244

 

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

 

$

 

$

9,000

 

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

 

$

27,064

 

$

3,206

 

Dividends/distribution payable

 

$

35,029

 

$

29,899

 

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

 

$

1,276

 

$

8,970

 

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

 

$

2,542

 

$

1,347

 

 

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 September 30, 2011, our investments in real estate included the following:

 

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

·                  16 wholly owned office properties under construction, development or redevelopment that we estimate will total approximately 2.1  million square feet upon completion, including three partially operational properties included above;

·                  wholly owned land parcels totaling 1,520 acres that we believe are potentially developable into approximately 13.1 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 September 30, 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 September 30, 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.

 

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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.

 

Reclassifications

 

We reclassified certain amounts from 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

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to amend measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards.  This guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011.  We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.

 

In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity.  This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

 

In September 2011, the FASB issued guidance on the testing of goodwill for impairment that will permit us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  This guidance eliminates the requirement to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.

 

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 September 30, 2011 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 in deferred compensation plan (1)

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

5,393

 

$

 

$

 

$

5,393

 

Common stocks

 

845

 

 

 

845

 

Preferred stocks

 

314

 

 

 

314

 

Cash and cash equivalents

 

271

 

 

 

271

 

Other

 

200

 

 

 

200

 

Common stock (1)

 

18,450

 

 

 

18,450

 

Warrants to purchase common shares in KEYW (2)

 

 

121

 

 

121

 

Assets

 

$

25,473

 

$

121

 

$

 

$

25,594

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability (3)

 

$

7,023

 

$

 

$

 

$

7,023

 

Interest rate derivatives

 

 

30,629

 

 

30,629

 

Liabilities

 

$

7,023

 

$

30,629

 

$

 

$

37,652

 

 


(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”).

(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.

 

For additional fair value information, please refer to Note 7 for mortgage loans receivable, Note 8 for debt and Note 9 for interest rate derivatives.

 

4.                                      Properties, net

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Land

 

$

486,538

 

$

501,210

 

Buildings and improvements

 

2,839,071

 

2,804,595

 

Less: accumulated depreciation

 

(553,306

)

(503,032

)

Operating properties, net

 

$

2,772,303

 

$

2,802,773

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Land

 

$

248,945

 

$

256,487

 

Construction in progress, excluding land

 

447,969

 

386,195

 

Properties under construction or development

 

$

696,914

 

$

642,682

 

 

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Table of Contents

 

Strategic Reallocation Plan and Impairment Losses

 

In April 2011, we completed a review of our portfolio and identified a number of properties that are no longer closely aligned with our strategy, and our Board of Trustees approved a plan by management to dispose of some of these properties during the next three years (the “Strategic Reallocation Plan”).  We subsequently identified additional properties with an increased likelihood of a shortened holding period.  While we expect to recognize gains on the dispositions of some of these properties, we also determined that the carrying amounts of certain of these properties (the “Impaired Properties”) will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods.  Accordingly, during the second quarter of 2011, we recognized aggregate non-cash impairment losses of $44.6 million (including $14.5 million classified as discontinued operations and excluding $4.6 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values.

 

The properties to be disposed of pursuant to the Strategic Reallocation Plan consist primarily of office properties in certain submarkets in the Greater Baltimore, Suburban Maryland and St. Mary’s County regions that no longer fit our strategic focus.  We expect that net proceeds from the execution of the Strategic Reallocation Plan after the repayment of debt secured by the properties will approximate $200 million.  We expect to invest the proceeds in properties that will serve customers in the United States Government, defense information technology and related data sectors.  We completed the sale of the following properties under the Strategic Reallocation Plan during the nine months ended September 30, 2011 (dollars in thousands):

 

 

 

 

 

 

 

Number

 

Total

 

 

 

 

 

 

 

 

 

Date of

 

of

 

Rentable

 

 

 

Gain on

 

Project Name

 

Location

 

Sale

 

Buildings

 

Square Feet

 

Sale Price

 

Sale

 

1344 & 1348 Ashton Road and 1350 Dorsey Road

 

Hanover, Maryland

 

5/24/2011

 

3

 

39,000

 

$

3,800

 

$

150

 

216 Schilling Circle

 

Hunt Valley, Maryland

 

8/23/2011

 

1

 

36,000

 

4,700

 

175

 

Towson Portfolio

 

Towson, Maryland

 

9/29/2011

 

4

 

179,000

 

16,000

 

1,124

 

 

 

 

 

 

 

8

 

254,000

 

$

24,500

 

$

1,449

 

 

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, 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 March 2011 for the amount by which the carrying value of the property exceeded its estimated fair value.

 

2011 Acquisition

 

On August 9, 2011, we acquired 310 The Bridge Street, a 138,000 square foot office property in Huntsville, Alabama that was 100% leased, for $33.4 million.  The table below sets forth the allocation of the acquisition costs of this property (in thousands):

 

Land, operating properties

 

$

251

 

Building and improvements

 

26,824

 

Intangible assets on real estate acquisitions

 

6,338

 

Total assets

 

$

33,413

 

 

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

 

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Weighted

 

 

 

 

 

Average

 

 

 

 

 

Amortization

 

 

 

 

 

Period

 

 

 

 

 

(in Years)

 

Tenant relationship value

 

$

3,072

 

8

 

In-place lease value

 

2,800

 

3

 

Above-market leases

 

466

 

3

 

 

 

$

6,338

 

6

 

 

We expensed $152,000 in the nine months ended September 30, 2011 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations.

 

2011 Construction and Redevelopment Activities

 

During the nine months ended September 30, 2011, we had two newly constructed office properties totaling 228,000 square feet, including one in the Baltimore/Washington Corridor and one in Greater Baltimore, become fully operational (79,000 of these square feet were placed into service in 2010) and placed into service 61,000 square feet in one partially operational office property in the Baltimore/Washington Corridor.

 

As of September 30, 2011, we had construction underway on ten office properties totaling 1.2 million square feet, including four in the Baltimore/Washington Corridor, two in Greater Baltimore, one in San Antonio, one in Northern Virginia, one in Huntsville, Alabama and one in St. Mary’s County.  We also had redevelopment underway on two office properties totaling 297,000 square feet, including one in Northern Virginia and one in Greater Philadelphia.

 

5.                                      Real Estate Joint Ventures

 

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

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Investment Balance at (1)

 

Date

 

 

 

Nature of

 

Exposure

 

September 30, 2011

 

December 31, 2010

 

Acquired

 

Ownership

 

Activity

 

to Loss (2)

 

$

(5,953

)

$

(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 September 30, 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 16).

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Properties, net

 

$

60,332

 

$

61,521

 

Other assets

 

3,645

 

4,174

 

Total assets

 

$

63,977

 

$

65,695

 

 

 

 

 

 

 

Liabilities (primarily debt)

 

$

67,780

 

$

67,454

 

Owners’ equity

 

(3,803

)

(1,759

)

Total liabilities and owners’ equity

 

$

63,977

 

$

65,695

 

 

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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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

$

1,905

 

$

2,094

 

$

5,719

 

$

6,283

 

Property operating expenses

 

(904

)

(902

)

(2,869

)

(2,728

)

Interest expense

 

(984

)

(899

)

(2,983

)

(2,846

)

Depreciation and amortization expense

 

(578

)

(826

)

(1,753

)

(2,561

)

Net loss

 

$

(561

)

$

(533

)

$

(1,886

)

$

(1,852

)

 

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at September 30, 2011 (dollars in thousands):

 

 

 

 

 

Ownership

 

 

 

September 30, 2011 (1)

 

 

 

Date

 

% at

 

Nature of

 

Total

 

Pledged

 

Total

 

 

 

Acquired

 

9/30/2011

 

Activity

 

Assets

 

Assets

 

Liabilities

 

M Square Associates, LLC

 

6/26/2007

 

50

%

Operating two buildings and developing others (2)

 

$

60,190

 

$

48,435

 

$

44,735

 

LW Redstone Company, LLC

 

3/23/2010

 

85

%

Developing business park (3)

 

38,854

 

 

2,453

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50

%

Operating one building (4)

 

29,552

 

28,590

 

16,908

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75

%

Developing land parcel (5)

 

6,524

 

 

 

MOR Forbes 2 LLC

 

12/24/2002

 

50

%

Operating one building (6)

 

3,988

 

 

44

 

 

 

 

 

 

 

 

 

$

139,108

 

$

77,025

 

$

64,140

 

 


(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 Huntsville, Alabama.

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

(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 16.

 

6.             Intangible Assets on Real Estate Acquisitions

 

Intangible assets on real estate acquisitions consisted of the following (in thousands):

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

In-place lease value

 

$

156,477

 

$

97,818

 

$

58,659

 

$

162,708

 

$

92,380

 

$

70,328

 

Tenant relationship value

 

48,556

 

22,569

 

25,987

 

50,320

 

21,603

 

28,717

 

Above-market cost arrangements

 

12,415

 

2,489

 

9,926

 

12,415

 

1,387

 

11,028

 

Above-market leases

 

10,909

 

8,555

 

2,354

 

10,802

 

8,193

 

2,609

 

Market concentration premium

 

1,333

 

305

 

1,028

 

1,333

 

280

 

1,053

 

 

 

$

229,690

 

$

131,736

 

$

97,954

 

$

237,578

 

$

123,843

 

$

113,735

 

 

Amortization of the intangible asset categories set forth above totaled $20.7 million in the nine months ended September 30, 2011 and $18.8 million in the nine months ended September 30, 2010.  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 cost arrangements: 26 years; above-market leases: five years; and market concentration premium: 31 years.  The approximate weighted average amortization period for all of the categories combined is ten years.  Estimated amortization expense associated with the intangible asset categories set forth above for the next five years is: $5.7 million for the three months ending December 31, 2011; $18.5 million for 2012; $14.3 million for 2013; $12.0 million for 2014; $10.0 million for 2015; and $8.6 million for 2016.

 

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7.             Prepaid Expenses and Other Assets

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Mortgage and other investing receivables

 

$

35,830

 

$

18,870

 

Prepaid expenses

 

24,769

 

19,995

 

Furniture, fixtures and equipment, net

 

10,181

 

11,504

 

Construction contract costs incurred in excess of billings

 

6,579

 

9,372

 

Deferred tax asset

 

5,676

 

276

 

Investment in KEYW

 

121

 

22,779

 

Other assets

 

12,632

 

11,100

 

Prepaid expenses and other assets

 

$

95,788

 

$

93,896

 

 

Investment in The KEYW Holding Corporation

 

Our investment in KEYW consists of common stock and warrants to purchase additional shares of common stock of KEYW.  We owned 2.6 million shares, or approximately 10%, of KEYW’s common stock at September 30, 2011 and 3.1 million shares, or approximately 12%, at December 31, 2010.  The carrying value of our equity method investment in these common shares was $22.3 million at December 31, 2010, which was included in prepaid expenses and other assets on our consolidated balance sheet as of such date.  In March 2011, we entered into a sales plan that 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; we completed the sale of 500,000 shares under this plan in the three months ended June 30, 2011, resulting in $2.1 million in gain recognized.  We subsequently suspended this plan effective June 30, 2011.  We used the equity method of accounting for our investment in the common stock until the resignation of our Chief Executive Officer from the Board of Directors of KEYW effective July 1, 2011, at which time we began accounting for our investment in KEYW’s common stock as a trading marketable equity security to be reported at fair value, with unrealized gains and losses recognized through earnings.  Our investment in these common shares had a fair value of $18.3 million at September 30, 2011 based on the closing price of KEYW’s common stock on the NASDAQ Stock Market on that date and is included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.  We recognized an unrealized loss on our investment in KEYW’s common stock of $883,000 during the three months ended September 30, 2011.

 

At September 30, 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 $121,000, or $2.42 per warrant, at September 30, 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):

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Mortgage loans receivable

 

$

21,065

 

$

14,227

 

Notes receivable from City of Huntsville

 

14,765

 

4,643

 

 

 

$

35,830

 

$

18,870

 

 

Our mortgage loans receivable reflected above consists of three loans secured by properties in the Baltimore/Washington Corridor and Greater Baltimore.  Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture.  We did not have an allowance for credit losses in connection with these receivables at September 30, 2011 or December 31, 2010.  The fair value of our mortgage and other investing receivables totaled $36.0 million at September 30, 2011 and $18.8 million at December 31, 2010.

 

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Operating Notes Receivable

 

We had operating notes receivable due from tenants with terms exceeding one year totaling $628,000 at September 30, 2011 and $655,000 at December 31, 2010.  We carried allowances for estimated losses for most of these balances.

 

8.              Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

Scheduled

 

 

 

Maximum

 

Carrying Value at

 

 

 

Maturity

 

 

 

Availability at

 

September 30,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

September 30, 2011

 

2011

 

2010

 

at September 30, 2011

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (1)

 

N/A

 

$

1,055,540

 

$

1,173,358

 

5.20% - 7.87% (2)

 

2012 - 2034 (3)

 

Revolving Construction Facility (4)

 

N/A

 

 

142,339

 

N/A

 

N/A

 

Variable rate secured loans

 

N/A

 

39,397

 

310,555

 

LIBOR + 2.25% (5)

 

2015

 

Other construction loan facilities

 

104,900

 

22,710

 

16,753

 

LIBOR + 2.75% (6)

 

2012 - 2013

 

Total mortgage and other secured loans

 

 

 

1,117,647

 

1,643,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility (7)

 

$

1,000,000

 

671,000

 

295,000

 

LIBOR + 1.75% to 2.50% (8)

 

September 1, 2014 (9)

 

Term Loan Facility (10)

 

500,000

 

400,000

 

 

LIBOR + 1.65% to 2.40% (11)

 

September 1, 2015 (9)

 

Unsecured notes payable

 

N/A

 

5,022

 

1,947

 

0% (12)

 

2015 - 2026

 

Exchangeable Senior Notes:

 

 

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

N/A

 

226,404

 

223,846

 

4.25%

 

April 2030 (13)

 

3.5% Exchangeable Senior Notes (14)

 

N/A

 

 

159,883

 

N/A

 

N/A

 

Total debt

 

 

 

$

2,420,073

 

$

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 $2.6 million at September 30, 2011 and $3.2 million at December 31, 2010.

(2)             The weighted average interest rate on these loans was 6.01% at September 30, 2011.

(3)             A loan with a balance of $4.5 million at September 30, 2011 that matures in 2034 may be repaid in March 2014, subject to certain conditions.

(4)             As described further below, this facility was extinguished on September 1, 2011.

(5)             The interest rate on the loan outstanding at September 30, 2011 was 2.47%.

(6)             The weighted average interest rate on these loans was 2.92% at September 30, 2011.

(7)             As described further below, we entered into a credit agreement providing for a new unsecured revolving credit facility effective on September 1, 2011, after which our previously existing facility was extinguished.

(8)             The weighted average interest rate on the Revolving Credit Facility was 2.2% at September 30, 2011.

(9)             This loan may be extended for a one-year period at our option, subject to certain conditions.

(10)        As described further below, this loan was entered into effective on September 1, 2011.

(11)        The interest rate on this loan was 2.13% at September 30, 2011.

(12)        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 $1.9 million at September 30, 2011 and $1.1 million at December 31, 2010.

(13)        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 20.8318 shares per one thousand dollar principal amount of the notes (exchange rate is as of September 30, 2011 and is equivalent to an exchange price of $48.00 per common share).  The carrying value of these notes included a principal amount of $240.0 million and an unamortized discount totaling $13.6 million at September 30, 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 September 30, 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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Table of Contents

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest expense at stated interest rate

 

$

2,550

 

$

2,550

 

$

7,650

 

$

4,930

 

Interest expense associated with amortization of discount

 

866

 

815

 

2,558

 

1,618

 

Total

 

$

3,416

 

$

3,365

 

$

10,208

 

$

6,548

 

 

(14)    On September 15, 2011, we repurchased these notes at 100% of the principal amount of $162.5 million after the holders of such notes surrendered them for repurchase pursuant to the terms of the notes and the related Indenture.  As described further in our 2010 Annual Report on Form 10-K, these notes had an exchange settlement feature that provided that the notes were, under certain circumstances, be exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, were exchangeable into (at our option) cash, our common shares or a combination of cash and our common shares.  The carrying value of these notes at December 31, 2010 included a principal amount of $162.5 million and an unamortized discount totaling $2.6 million.  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, 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

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest expense at stated interest rate

 

$

1,169

 

$

1,421

 

$

4,013

 

$

4,265

 

Interest expense associated with amortization of discount

 

664

 

941

 

2,617

 

2,781

 

Total

 

$

1,833

 

$

2,362

 

$

6,630

 

$

7,046

 

 

Effective September 1, 2011, we entered into a credit agreement providing for an unsecured revolving credit facility (the “Revolving Credit Facility”) with a group of lenders for which J.P. Morgan Securities LLC and KeyBanc Capital Markets acted as joint lead arrangers and joint book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. and Bank of America, N.A. acted as co-syndication agents.  The lenders’ aggregate commitment under the facility is $1.0 billion, including a $100.0 million letter of credit subfacility and a $100.0 million swingline facility (same-day draw requests), with a right for us to increase the lenders’ aggregate commitment to $1.5 billion, provided that there is no default under the facility.  Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement. The facility matures on September 1, 2014, and may be extended by one year at our option, provided that there is no default under the facility and we pay an extension fee of 0.20% of the total availability of the facility.  The variable interest rate on the facility is based on one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.75% to 2.50%, as determined by our leverage levels at different points in time; or (2)(a) the greater of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the Credit Agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.75% to 1.50%, as determined by our leverage levels at different points in time.  The facility also carries a quarterly fee that is based on the unused amount of the facility multiplied by a per annum rate of 0.25% to 0.35%.  As of September 30, 2011, the maximum amount of borrowing capacity under this facility totaled $1.0 billion, of which $323.1 million was available.

 

Effective September 1, 2011, we entered into an unsecured term loan agreement (“Term Loan Agreement”) with the same group of lenders as the Revolving Credit Facility under which we borrowed $400.0 million, with a right for us to borrow an additional $100.0 million, provided that there is no default under the agreement.  The term loan matures on September 1, 2015, and may be extended by one year at our option, provided that there is no default and we pay an extension fee of 0.20% of the total availability of the agreement.  The variable interest rate on the term loan is based on one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels at different points in time; or (2)(a) the greater of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the Term Loan Agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.65% to 1.40%, as determined by our leverage levels at different points in time.  The term loan also carries a quarterly fee that is based on the unused amount of the facility multiplied by a per annum rate of 0.25% to 0.35%.

 

Upon entry into the Revolving Credit Facility and Term Loan Agreement on September 1, 2011, we repaid and extinguished our previously existing revolving credit facility and Revolving Construction Facility and used most of the remaining proceeds to repay two variable rate secured loans totaling $270.3 million.  Upon the early extinguishment of this debt, we recognized a loss of $1.7 million, representing unamortized issuance costs.

 

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Table of Contents

 

We capitalized interest costs of $4.5 million in the three months ended September 30, 2011, $3.9 million in the three months ended September 30, 2010, $13.1 million in the nine months ended September 30, 2011 and $12.0 million in the nine months ended September 30, 2010.

 

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

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Fixed-rate debt

 

$

1,286,966

 

$

1,290,506

 

$

1,559,034

 

$

1,579,022

 

Variable-rate debt

 

1,133,107

 

1,132,081

 

764,647

 

769,247

 

 

 

$

2,420,073

 

$

2,422,587

 

$

2,323,681

 

$

2,348,269

 

 

9.                                      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

 

Fixed

 

Floating Rate

 

Effective

 

Expiration

 

September 30,

 

December 31,

 

Amount

 

Rate

 

Index

 

Date

 

Date

 

2011

 

2010

 

$

120,000

 

1.7600

%

One-Month LIBOR

 

1/2/2009

 

5/1/2012

 

$

(981

)

$

(2,062

)

100,000

 

1.9750

%

One-Month LIBOR

 

1/1/2010

 

5/1/2012

 

(943

)

(2,002

)

100,000

(1)

3.8415

%

Three-Month LIBOR

 

9/30/2011

 

9/30/2021

 

(15,766

)

N/A

 

75,000

(1)

3.8450

%

Three-Month LIBOR

 

9/30/2011

 

9/30/2021

 

(11,847

)

N/A

 

50,000

 

0.5025

%

One-Month LIBOR

 

1/3/2011

 

1/3/2012

 

(26

)

(64

)

50,000

 

0.5025

%

One-Month LIBOR

 

1/3/2011

 

1/3/2012

 

(26

)

(64

)

50,000

 

0.4400

%

One-Month LIBOR

 

1/4/2011

 

1/3/2012

 

(18

)

(34

)

40,000

(2)

3.8300

%

One-Month LIBOR

 

11/2/2010

 

11/2/2015

 

(1,022

)

644

 

 

 

 

 

 

 

 

 

 

 

$

(30,629

)

$

(3,582

)

 


(1) These instruments have a cash settlement date of March 30, 2012.

(2) 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):

 

Derivatives Designated as 

 

September 30, 2011

 

December 31, 2010

 

Hedging Instruments

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps

 

Prepaid expenses and other assets

 

$

 

Prepaid expenses and other assets

 

$

644

 

Interest rate swaps

 

Interest rate derivatives

 

(30,629

)

Interest rate derivatives

 

(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

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Amount of loss recognized in AOCL (effective portion)

 

$

(21,869

)

$

(1,530

)

$

(30,463

)

$

(5,844

)

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

 

(1,179

)

(887

)

(3,446

)

(2,684

)

 

Over the next 12 months, we estimate that approximately $3.7 million will be reclassified from AOCL as an increase to interest expense.

 

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Table of Contents

 

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, 2011, the fair value of interest rate derivatives in a liability position related to these agreements was $30.6 million, excluding the effects of accrued interest. As of September 30, 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 $31.8 million.

 

10.                               Shareholders’ Equity

 

Common Shares

 

We completed a public offering of 4.6 million common shares in May 2011 at a price of $33.00 per share for net proceeds of $145.7 million after underwriter discounts but before offering expenses.

 

During the nine months ended September 30, 2011, holders of 83,506 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 September 30, 2011 and September 30, 2010, $1.2375 in the nine months ended September 30, 2011 and $1.1975 in the nine months ended September 30, 2010.

 

See Note 12 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 Nine Months

 

 

 

Ended September 30,

 

 

 

2011

 

2010

 

Beginning balance

 

$

(4,163

)

$

(1,907

)

Amount of loss recognized in AOCL (effective portion)

 

(30,463

)

(5,844

)

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

 

3,446

 

2,684

 

Adjustment to AOCL attributable to noncontrolling interests

 

2,562

 

206

 

Ending balance

 

$

(28,618

)

$

(4,861

)

 

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

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net income (loss)

 

$

7,470

 

$

8,926

 

$

(37,103

)

$

28,752

 

Amount of loss recognized in AOCL

 

(21,869

)

(1,530

)

(30,463

)

(5,844

)

Amount of loss reclassified from AOCL to income