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) |
Registrants 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 Companys Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
FORM 10-Q
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PAGE | |
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Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (unaudited) |
3 |
|
4 | |
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5 | |
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6 | |
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8 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
28 | |
44 | ||
45 | ||
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|
|
| ||
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45 | ||
45 | ||
46 | ||
46 | ||
46 | ||
46 | ||
47 | ||
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| |
49 |
Corporate Office Properties Trust and Subsidiaries
(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: |
|
|
|
|
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Corporate Office Properties Trusts 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 Trusts 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.
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.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(in thousands, except share data)
(unaudited)
|
|
Preferred |
|
Common |
|
Additional |
|
Cumulative |
|
Accumulated |
|
Noncontrolling |
|
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.
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.
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.
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 Partnerships 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 Partnerships 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.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entitys operations but cannot control the entitys 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):
|
|
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 |
|
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. Marys 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):
|
|
|
|
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. Marys 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 |
|
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 ventures properties are in College Park, Maryland (in the Suburban Maryland region).
(3) This joint ventures property is in Huntsville, Alabama.
(4) This joint ventures property is in Hanover, Maryland (in the Baltimore/Washington Corridor).
(5) This joint ventures property is in Charles County, Maryland.
(6) This joint ventures 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.
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 KEYWs 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 KEYWs 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 KEYWs 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 KEYWs 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.
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 Partnerships 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):
|
|
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.
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.
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 |
|