Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(Mark one)

 

x

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

 

 

For the quarterly period ended March 31, 2012

 

or

 

 

o

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

 

 

For the transition period from                to                

 

Commission file number 1-14023

 

Corporate Office Properties Trust

(Exact name of registrant as specified in its charter)

 

Maryland

 

23-2947217

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

6711 Columbia Gateway Drive, Suite 300, Columbia, MD

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

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

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  o Yes  x No

 

As of April 18, 2012, 72,040,863 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

 

 

 



Table of Contents

 

EXPLANATORY NOTE

 

This amendment to the Quarterly Report on Form 10-Q/A (“Amendment No. 1”) is being filed in order to include disclosure regarding previously undisclosed out-of-period adjustments to the consolidated financial statements that were included in Part I, Items 1 and 2 of the original Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 previously filed on April 27, 2012 (the “Original Filing”).

 

During the second quarter of 2012, we identified an error in the consolidated financial statements for the year ended December 31, 2011 and the quarter ended March, 31, 2012.  The error was attributable to the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012.  During the first quarter of 2012, we identified an error that impacted the above referenced periods.  The error was an over-accrual of incentive compensation cost.  We have determined that the errors were not material in 2011 and are not material to our expected annual results for the year ending December 31, 2012.  Accordingly, the cumulative change is reported as an out-of-period adjustment in the three months ended March 31, 2012 on our consolidated statement of operations.

 

This Amendment No. 1 amends only Part I, Items 1 and 2 of the Original Filing solely to reflect the revision of the notes to the consolidated financial statements and to add disclosure to Part I, Item 2 relating to such revision.  The remaining items contained within this Amendment No. 1 consist of all other items originally contained in the Original Filing.  These remaining items are not amended hereby, but are included for the convenience of the reader.  Except for the foregoing amended information, this Amendment No. 1 continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.  We are also updating the signature page and certifications of our Chief Executive and Financial Officers contained in Exhibits 31.1, 31.2, 32.1 and 32.2.

 



Table of Contents

 

TABLE OF CONTENTS

 

FORM 10-Q

 

 

 

PAGE

PART I:  FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

Financial Statements:

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (unaudited)

 

3

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited)

 

4

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (unaudited)

 

5

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2012 and 2011 (unaudited)

 

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)

 

7

 

Notes to Consolidated Financial Statements (unaudited)

 

9

Item 2:

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

 

28

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4:

Controls and Procedures

 

39

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

Item 1:

Legal Proceedings

 

40

Item 1A:

Risk Factors

 

40

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 3:

Defaults Upon Senior Securities

 

40

Item 4:

Mine Safety Disclosures

 

40

Item 5:

Other Information

 

40

Item 6:

Exhibits

 

40

 

 

 

SIGNATURES

 

42

 

2



Table of Contents

 

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,704,323

 

$

2,714,056

 

Projects in development or held for future development

 

633,968

 

638,919

 

Total properties, net

 

3,338,291

 

3,352,975

 

Assets held for sale, net

 

81,352

 

116,616

 

Cash and cash equivalents

 

7,987

 

5,559

 

Restricted cash and marketable securities

 

21,711

 

36,232

 

Accounts receivable (net of allowance for doubtful accounts of $3,796 and $3,546, respectively)

 

11,231

 

26,032

 

Deferred rent receivable

 

89,337

 

86,856

 

Intangible assets on real estate acquisitions, net

 

83,940

 

89,120

 

Deferred leasing and financing costs, net

 

66,987

 

66,515

 

Prepaid expenses and other assets

 

96,532

 

87,619

 

Total assets

 

$

3,797,368

 

$

3,867,524

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

2,418,078

 

$

2,426,303

 

Accounts payable and accrued expenses

 

93,156

 

96,425

 

Rents received in advance and security deposits

 

27,647

 

29,548

 

Dividends and distributions payable

 

24,544

 

35,038

 

Deferred revenue associated with operating leases

 

15,258

 

15,554

 

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

 

6,178

 

6,071

 

Interest rate derivatives

 

2,673

 

30,863

 

Other liabilities

 

9,038

 

9,657

 

Total liabilities

 

2,596,572

 

2,649,459

 

Commitments and contingencies (Note 15)

 

 

 

Equity:

 

 

 

 

 

Corporate Office Properties Trust’s shareholders’ equity:

 

 

 

 

 

Preferred Shares of beneficial interest with an aggregate liquidation preference of $216,333 ($0.01 par value; 15,000,000 shares authorized and 8,121,667 shares issued and outstanding at March 31, 2012 and December 31, 2011)

 

81

 

81

 

Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 72,037,627 at March 31, 2012 and 72,011,324 at December 31, 2011)

 

720

 

720

 

Additional paid-in capital

 

1,670,451

 

1,668,645

 

Cumulative distributions in excess of net income

 

(549,456

)

(532,288

)

Accumulated other comprehensive loss

 

(2,201

)

(1,733

)

Total Corporate Office Properties Trust’s shareholders’ equity

 

1,119,595

 

1,135,425

 

Noncontrolling interests in subsidiaries:

 

 

 

 

 

Common units in the Operating Partnership

 

53,883

 

55,281

 

Preferred units in the Operating Partnership

 

8,800

 

8,800

 

Other consolidated entities

 

18,518

 

18,559

 

Noncontrolling interests in subsidiaries

 

81,201

 

82,640

 

Total equity

 

1,200,796

 

1,218,065

 

Total liabilities and equity

 

$

3,797,368

 

$

3,867,524

 

 

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

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

Revenues

 

 

 

 

 

Rental revenue

 

$

99,144

 

$

94,249

 

Tenant recoveries and other real estate operations revenue

 

22,795

 

22,212

 

Construction contract and other service revenues

 

21,534

 

21,028

 

Total revenues

 

143,473

 

137,489

 

Expenses

 

 

 

 

 

Property operating expenses

 

47,202

 

47,061

 

Depreciation and amortization associated with real estate operations

 

31,066

 

30,043

 

Construction contract and other service expenses

 

20,607

 

20,618

 

Impairment losses

 

5,126

 

27,742

 

General and administrative expenses

 

7,017

 

6,777

 

Business development expenses and land carry costs

 

1,594

 

1,241

 

Total operating expenses

 

112,612

 

133,482

 

Operating income

 

30,861

 

4,007

 

Interest expense

 

(25,224

)

(26,115

)

Interest and other income

 

1,217

 

1,168

 

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

 

6,854

 

(20,940

)

Equity in (loss) income of unconsolidated entities

 

(89

)

30

 

Income tax (expense) benefit

 

(4,173

)

544

 

Income (loss) from continuing operations

 

2,592

 

(20,366

)

Discontinued operations

 

4,385

 

(901

)

Income (loss) before gain on sales of real estate

 

6,977

 

(21,267

)

Gain on sales of real estate, net of income taxes

 

 

2,701

 

Net income (loss)

 

6,977

 

(18,566

)

Net (income) loss attributable to noncontrolling interests:

 

 

 

 

 

Common units in the Operating Partnership

 

(159

)

1,479

 

Preferred units in the Operating Partnership

 

(165

)

(165

)

Other consolidated entities

 

24

 

(538

)

Net income (loss) attributable to Corporate Office Properties Trust

 

6,677

 

(17,790

)

Preferred share dividends

 

(4,025

)

(4,025

)

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

 

$

2,652

 

$

(21,815

)

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

 

 

 

 

 

Income (loss) from continuing operations

 

$

2,539

 

$

(16,946

)

Discontinued operations, net

 

4,138

 

(844

)

Net income (loss) attributable to Corporate Office Properties Trust

 

$

6,677

 

$

(17,790

)

 

 

 

 

 

 

Basic earnings per common share (1)

 

 

 

 

 

Loss from continuing operations

 

$

(0.02

)

$

(0.32

)

Discontinued operations

 

0.06

 

(0.01

)

Net income (loss) attributable to COPT common shareholders

 

$

0.04

 

$

(0.33

)

Diluted earnings per common share (1)

 

 

 

 

 

Loss from continuing operations

 

$

(0.02

)

$

(0.32

)

Discontinued operations

 

0.06

 

(0.01

)

Net income (loss) attributable to COPT common shareholders

 

$

0.04

 

$

(0.33

)

 


(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 Comprehensive Income

(Dollars in thousands)

(unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

Net income (loss)

 

$

6,977

 

$

(18,566

)

Other comprehensive income

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

(1,987

)

(136

)

Losses on interest rate derivatives included in net income

 

1,474

 

1,104

 

Other comprehensive (loss) income

 

(513

)

968

 

Comprehensive income (loss)

 

6,464

 

(17,598

)

Comprehensive (income) loss attributable to noncontrolling interests

 

(271

)

714

 

Comprehensive income (loss) attributable to COPT

 

$

6,193

 

$

(16,884

)

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)

 

 

 

Preferred 
Shares

 

Common 
Shares

 

Additional 
Paid-in 
Capital

 

Cumulative 
Distributions in 
Excess of Net 
Income (Loss)

 

Accumulated 
Other 
Comprehensive 
Loss

 

Noncontrolling 
Interests

 

Total

 

Balance at December 31, 2010 (66,931,582 common shares outstanding)

 

$

81

 

$

669

 

$

1,511,844

 

$

(281,794

)

$

(4,163

)

$

96,501

 

$

1,323,138

 

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

 

 

 

263

 

 

 

(263

)

 

Costs associated with common shares issued to the public

 

 

 

(117

)

 

 

 

(117

)

Exercise of share options (24,667 shares)

 

 

 

346

 

 

 

 

346

 

Share-based compensation

 

 

2

 

3,201

 

 

 

 

3,203

 

Restricted common share redemptions (104,592 shares)

 

 

 

(3,713

)

 

 

 

(3,713

)

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

 

 

 

(163

)

 

 

163

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

966

 

2

 

968

 

Net loss

 

 

 

 

(17,790

)

 

(776

)

(18,566

)

Dividends

 

 

 

 

(31,729

)

 

 

(31,729

)

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

 

 

 

 

 

 

(1,974

)

(1,974

)

Contributions from noncontrolling interests in other consolidated entities

 

 

 

(23

)

 

 

125

 

102

 

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

 

$

81

 

$

671

 

$

1,511,638

 

$

(331,313

)

$

(3,197

)

$

93,778

 

$

1,271,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011 (72,011,324 common shares outstanding)

 

$

81

 

$

720

 

$

1,668,645

 

$

(532,288

)

$

(1,733

)

$

82,640

 

$

1,218,065

 

Conversion of common units to common shares (34,550 shares)

 

 

 

444

 

 

 

(444

)

 

Costs associated with common shares issued to the public

 

 

 

(5

)

 

 

 

(5

)

Exercise of share options (5,667 shares)

 

 

 

82

 

 

 

 

82

 

Share-based compensation

 

 

 

3,746

 

 

 

 

3,746

 

Restricted common share redemptions (97,094 shares)

 

 

 

(2,373

)

 

 

 

(2,373

)

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

 

 

 

(88

)

 

 

88

 

 

Adjustments related to derivatives designated as cash flow hedges

 

 

 

 

 

(468

)

(45

)

(513

)

Net income

 

 

 

 

6,677

 

 

300

 

6,977

 

Dividends

 

 

 

 

(23,845

)

 

 

(23,845

)

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

 

 

 

 

 

 

(1,338

)

(1,338

)

Balance at March 31, 2012 (72,037,627 common shares outstanding)

 

$

81

 

$

720

 

$

1,670,451

 

$

(549,456

)

$

(2,201

)

$

81,201

 

$

1,200,796

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Revenues from real estate operations received

 

$

129,184

 

$

114,303

 

Construction contract and other service revenues received

 

18,170

 

21,405

 

Property operating expenses paid

 

(42,608

)

(45,267

)

Construction contract and other service expenses paid

 

(12,454

)

(28,315

)

General and administrative and business development expenses paid

 

(6,156

)

(6,860

)

Interest expense paid

 

(19,896

)

(22,252

)

Cash settlement of interest rate derivatives

 

(29,738

)

 

Proceeds from sale of trading marketable securities

 

7,041

 

 

Interest and other income received

 

252

 

108

 

Income taxes paid

 

(8

)

(170

)

Net cash provided by operating activities

 

43,787

 

32,952

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to properties

 

 

 

 

 

Construction, development and redevelopment

 

(35,476

)

(46,676

)

Tenant improvements on operating properties

 

(7,934

)

(8,778

)

Other capital improvements on operating properties

 

(3,360

)

(4,064

)

Proceeds from sales of properties

 

61,230

 

3,149

 

Mortgage and other loan receivables funded or acquired

 

(3,506

)

(1,181

)

Leasing costs paid

 

(2,853

)

(2,894

)

Other

 

(310

)

(920

)

Net cash provided by (used in) investing activities

 

7,791

 

(61,364

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt

 

331,097

 

97,273

 

Repayments of debt

 

 

 

 

 

Scheduled principal amortization

 

(3,207

)

(3,798

)

Other repayments

 

(337,050

)

(25,050

)

Deferred financing costs paid

 

(2,044

)

(482

)

Dividends paid

 

(33,711

)

(31,664

)

Distributions paid

 

(1,939

)

(1,981

)

Restricted share redemptions

 

(2,373

)

(3,713

)

Other

 

77

 

331

 

Net cash (used in) provided by financing activities

 

(49,150

)

30,916

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

2,428

 

2,504

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

5,559

 

10,102

 

End of period

 

$

7,987

 

$

12,606

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

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

 

 

 

 

 

Net income (loss)

 

$

6,977

 

$

(18,566

)

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

 

 

 

 

 

Depreciation and other amortization

 

31,705

 

33,645

 

Impairment losses

 

5,479

 

27,742

 

Amortization of deferred financing costs

 

1,572

 

1,759

 

Increase in deferred rent receivable

 

(2,559

)

(4,240

)

Amortization of net debt discounts

 

775

 

1,649

 

Gain on sales of real estate

 

(4,138

)

(2,701

)

Share-based compensation

 

3,402

 

2,917

 

Other

 

(1,423

)

(926

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

14,792

 

(827

)

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

 

9,448

 

4,701

 

Increase (decrease) in accounts payable, accrued expenses and other liabilities

 

7,661

 

(10,025

)

Decrease in rents received in advance and security deposits

 

(1,901

)

(2,176

)

Decrease in interest rate derivatives in connection with cash settlement

 

(28,003

)

 

Net cash provided by operating activities

 

$

43,787

 

$

32,952

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

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

 

$

11,828

 

$

13,171

 

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

 

$

 

$

3,040

 

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

 

$

528

 

$

662

 

Dividends/distribution payable

 

$

24,544

 

$

33,048

 

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

 

$

444

 

$

263

 

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

 

$

88

 

$

163

 

 

See accompanying notes to consolidated financial statements.

 

8



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 serving the specialized requirements of strategic customers in the United States Government and defense information technology 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 office markets that we believe possess growth opportunities.  As of March 31, 2012, our investments in real estate included the following:

 

·                  231 operating office properties totaling 20.2 million square feet;

·                  seven office properties under construction or redevelopment that we estimate will total approximately 903,000 square feet upon completion, including two partially operational properties included above;

·                  land held or under pre-construction totaling 2,327 acres (including 583 controlled but not owned) that we believe are potentially developable into approximately 20.5 million square feet; and

·                  a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.

 

We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), of which we are the managing general partner.  The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”).  A summary of our Operating Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of March 31, 2012 follows:

 

Common Units

 

94

%

Series G Preferred Units

 

100

%

Series H Preferred Units

 

100

%

Series I Preferred Units

 

0

%

Series J Preferred Units

 

100

%

Series K Preferred Units

 

100

%

 

Three of our trustees also controlled, either directly or through ownership by other entities or family members, an additional 5% of the Operating Partnership’s common units (“common units”) as of March 31, 2012.

 

In addition to owning real estate, the Operating Partnership also owns entities that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties.

 

2.                                      Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which we have a majority voting interest and control.  We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities.  We eliminate all significant intercompany balances and transactions in consolidation.

 

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations.

 

We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.

 

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These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2011 included in our 2011 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 except for the out-of-period adjustment described below.  The consolidated financial statements have been prepared using the accounting policies described in our 2011 Annual Report on Form 10-K.

 

During the second quarter of 2012, we identified an error in the consolidated financial statements for the year ended December 31, 2011 and the quarter ended March, 31, 2012.  The error was attributable to the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012.  The effect of this error was an overstatement of our income tax benefit and an understatement of our net loss for the year ended December 31, 2011 of $4.0 million ($0.05 per share).  During the first quarter of 2012, we identified an error that impacted the above referenced periods.  The error was an over-accrual of incentive compensation cost.  The effect of this error was an overstatement of general and administrative expenses and an overstatement of net loss for the year ended December 31, 2011 of $0.7 million ($0.01 per share). The net impact of these errors was an understatement of our net loss for the year ended December 31, 2011 of $3.3 million ($0.04 per share).  We have determined that the errors were not material in 2011 and are not material to our expected annual results for the year ending December 31, 2012.  Accordingly, this cumulative change is reported as an out-of-period adjustment in the three months ended March 31, 2012 as follows: a reduction in net income of $3.3 million ($0.04 per share); an increase in income tax expense of $4.0 million ($0.05 per share); and a decrease in general and administrative expenses of approximately $0.7 million ($0.01 per share) on our consolidated statement of operations.

 

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.  Included among these reclassifications is a retrospective change in the presentation of costs expensed in connection with properties not in operations; these costs are included in the line on our consolidated statements of operations entitled “business development expenses and land carry costs,” after having been included in property operating expenses in our 2011 Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 related to the presentation of comprehensive income that requires 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.  We adopted this guidance using retrospective application.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity.  Our adoption of this guidance did not affect our financial position, results of operations, cash flows or measurement of comprehensive income but did change the location of our disclosure pertaining to comprehensive income in our consolidated financial statements.

 

We adopted guidance issued by the FASB effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards.  In connection with our adoption of this guidance, we made an accounting policy election to use an exception provided for in the guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to continue to measure the fair value of groups of assets and liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure at the measurement date.  Our adoption of this guidance did not affect our financial position, results of operations or cash flows but did result in additional disclosure pertaining to our fair value measurements.

 

We adopted guidance issued by the FASB effective January 1, 2012 relating to the testing of goodwill for impairment that permits 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.  Our adoption of this guidance did not materially affect our consolidated financial statements or disclosures.

 

3.                                      Fair Value Measurements

 

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2011 Annual Report on Form 10-K.

 

Recurring Fair Value Measurements

 

The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2012 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

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Table of Contents

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Marketable securities in deferred compensation plan (1)

 

 

 

 

 

 

 

 

Mutual funds

 

$

6,121

 

$

 

$

 

$

6,121

 

Common stocks

 

414

 

 

 

414

 

Other

 

238

 

 

 

238

 

Common stock (1)

 

454

 

 

 

454

 

Warrants to purchase common shares in KEYW (2)

 

 

133

 

 

133

 

Assets

 

$

7,227

 

$

133

 

$

 

$

7,360

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred compensation plan liability (3)

 

$

6,773

 

$

 

$

 

$

6,773

 

Interest rate derivatives

 

 

2,673

 

 

2,673

 

Liabilities

 

$

6,773

 

$

2,673

 

$

 

$

9,446

 

 


(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.

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

 

At December 31, 2011, we owned 1.9 million shares, or approximately 7%, of the common stock of The KEYW Holding Corporation (“KEYW”).  During the three months ended March 31, 2012, we completed the sale of all of these shares for $14.0 million.  At March 31, 2012 and December 31, 2011, we owned warrants to purchase 50,000 additional shares of KEYW common stock at an exercise price of $9.25 per share.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  We estimated the fair values of our mortgage loans receivable as discussed in Note 6 based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments.  For our disclosure of debt fair values in Note 7 to the consolidated financial statements, we estimated the fair value of our exchangeable senior notes based on quoted market prices for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled principal and interest payments.  Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.  Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

 

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

 

Nonrecurring Fair Value Measurements

 

We assess each of our operating properties for impairment quarterly using cash flow projections and estimated fair values that we derive for each of the properties.  We update the leasing and other assumptions used in these projections regularly, paying particular attention to properties that have experienced chronic vacancy or face significant market challenges.  We review our plans and intentions for our development projects and land parcels quarterly.  Each quarter, we also review the reasonableness of changes in our estimated operating property fair values from amounts estimated in the prior quarter.  If events or changes in circumstances indicate that the carrying values of certain operating properties, properties in development or land held for future development may be impaired, we perform a recovery analysis for such properties.  For long-lived assets to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a ten-year holding period.  If we believe there is a significant possibility that we might dispose of the assets earlier, we analyze

 

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recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods.  If the recovery analysis indicates that the carrying value of a tested property is not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized.  If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans.

 

Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. The estimated cash flows used are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future rental rates, occupancies for the tested property and comparable properties, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from third party sources such as CoStar Group and real estate leasing and brokerage firms and our direct experience with the properties and their markets.

 

We recognized impairment losses on certain properties and other assets associated with such properties during the three months ended March 31, 2012.  Accordingly, certain properties and related assets were adjusted to fair value.  The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values (dollars in thousands):

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

Impairment

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

Losses

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Recognized

 

Assets (1):

 

 

 

 

 

 

 

 

 

 

 

Properties, net

 

$

 

$

 

$

92,176

 

$

92,176

 

$

5,479

 

 


(1) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

 

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above:

 

 

 

Fair value

 

 

 

 

 

Range

 

 

 

on measurement

 

Valuation

 

Unobservable

 

(Weighted

 

Description

 

date

 

Technique

 

Input

 

Average)

 

Properties on which impairment losses were recognized

 

$

92,176

 

Bid for properties indicative of value

 

Indicative bid (1)

 

(1)

 

 

 

 

 

Contract of sale

 

Contract price (1)

 

(1)

 

 

 

 

 

Discounted cash flow

 

Discount rate

 

11.0% (2)

 

 

 

 

 

 

 

Terminal capitalization rate

 

9.0% (2)

 

 

 

 

 

 

 

Market rent growth rate

 

3.0% (2)

 

 

 

 

 

 

 

Expense growth rate

 

3.0% (2)

 

 

 

 

 

Yield Analysis

 

Yield

 

12% (2)

 

 

 

 

 

 

 

Market rent rate

 

8.5 (2)

 

 

 

 

 

 

 

Leasing costs

 

$20.00 per square foot (2)

 

 


(1) These fair value measurements were developed from third party sources, subject to our corroboration for reasonableness.

(2) Only one level applied to this unobservable input.

 

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4.                                      Properties, net

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Land

 

$

471,995

 

$

472,483

 

Buildings and improvements

 

2,802,570

 

2,801,252

 

Less: accumulated depreciation

 

(570,242

)

(559,679

)

Operating properties, net

 

$

2,704,323

 

$

2,714,056

 

 

Projects we had in development or held for future development consisted of the following (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Land

 

$

225,085

 

$

229,833

 

Construction in progress, excluding land

 

408,883

 

409,086

 

Projects in development or held for future development

 

$

633,968

 

$

638,919

 

 

Dispositions and Impairments

 

We sold the following operating properties during the three months ended March 31, 2012 (dollars in thousands):

 

 

 

 

 

 

 

Number

 

Total

 

 

 

 

 

 

 

 

 

Date of

 

of

 

Rentable

 

 

 

Gain on

 

Project Name

 

Location

 

Sale

 

Buildings

 

Square Feet

 

Sale Price

 

Sale

 

White Marsh Portfolio (1)

 

White Marsh, Maryland

 

1/30/2012

 

5

 

163,000

 

$

19,100

 

$

2,445

 

1101 Sentry Gateway

 

San Antonio, Texas

 

1/31/2012

 

1

 

95,000

 

13,500

 

1,750

 

222 and 224 Schilling Circle

 

Hunt Valley, Maryland

 

2/10/2012

 

2

 

56,000

 

4,400

 

202

 

 

 

 

 

 

 

8

 

314,000

 

$

37,000

 

$

4,397

 

 


(1)          Includes three properties comprising the White Marsh Professional Center, 8615 Ridgely’s Choice and 8114 Sandpiper Circle.

 

We also sold non-operating properties during the three months ended March 31, 2012 for aggregate sale prices totaling $25.7 million; in addition to the gain on sales reflected above, we also recognized impairment losses on certain of these sales that are disclosed below.

 

As discussed in our 2011 Annual Report on Form 10-K, we implemented a plan in 2011 to dispose of office properties and land that are no longer closely aligned with our strategy (the “Strategic Reallocation Plan”).  During the three months ended March 31, 2012, we recognized aggregate net impairment losses in connection with the Strategic Reallocation Plan of $6.6 million (including $1.5 million classified as discontinued operations and $1.1 million in exit costs).  Approximately $5.1 million of these losses related to our expected disposition of an additional property. The expected cash flows from the resulting shortened holding period for this property are not sufficient to recover its carrying value.

 

2012 Construction Activities

 

As of March 31, 2012, we had construction underway on six office properties that we estimate will total 789,000 square feet upon completion, including three in the Baltimore/Washington Corridor, one in Greater Baltimore, one in Northern Virginia and one in Huntsville, Alabama, and redevelopment underway on one office property in Greater Philadelphia that we estimate will total 113,000 square feet upon completion.

 

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Table of Contents

 

5.                                      Real Estate Joint Ventures

 

During the three months ended March 31, 2012, 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

 

March 31, 2012

 

December 31, 2011

 

Acquired

 

Ownership

 

Activity

 

to Loss (2)

 

$

 (6,178

)

$

(6,071

)

9/29/2005

 

20

%

Operates 16 Buildings

 

$

 

 


(1)          The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5.2 million at March 31, 2012 and December 31, 2011 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation.  A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same.

 

(2)          Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us.  Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages.  Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 15).

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Properties, net

 

$

59,333

 

$

59,792

 

Other assets

 

4,403

 

3,529

 

Total assets

 

$

63,736

 

$

63,321

 

 

 

 

 

 

 

Liabilities (primarily debt)

 

$

68,663

 

$

67,710

 

Owners’ equity

 

(4,927

)

(4,389

)

Total liabilities and owners’ equity

 

$

63,736

 

$

63,321

 

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

Revenues

 

$

1,894

 

$

1,924

 

Property operating expenses

 

(737

)

(986

)

Interest expense

 

(1,125

)

(1,011

)

Depreciation and amortization expense

 

(570

)

(608

)

Net loss

 

$

(538

)

$

(681

)

 

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The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at March 31, 2012 (dollars in thousands):

 

 

 

 

 

Ownership

 

 

 

March 31, 2012 (1)

 

 

 

Date

 

% at

 

Nature of

 

Total

 

Pledged

 

Total

 

 

 

Acquired

 

3/31/2012

 

Activity

 

Assets

 

Assets

 

Liabilities

 

M Square Associates, LLC

 

6/26/2007

 

50

%

Operating two buildings and developing others (2)

 

$

60,260

 

$

47,845

 

$

44,117

 

LW Redstone Company, LLC

 

3/23/2010

 

85

%

Developing business park (3)

 

55,255

 

15,858

 

11,373

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50

%

Operating one building (4)

 

32,477

 

31,619

 

18,079

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75

%

Developing land parcel (5)

 

6,544

 

 

 

MOR Forbes 2 LLC

 

12/24/2002

 

50

%

Operating one building (6)

 

3,836

 

 

40

 

 

 

 

 

 

 

 

 

$

158,372

 

$

95,322

 

$

73,609

 

 


(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 15.

 

6.                                      Prepaid Expenses and Other Assets

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Mortgage and other investing receivables

 

$

32,739

 

$

27,998

 

Prepaid expenses

 

14,196

 

20,035

 

Proceeds from sale of KEYW stock receivable (1)

 

11,934

 

5,057

 

Construction contract costs incurred in excess of billings

 

10,592

 

2,094

 

Furniture, fixtures and equipment, net

 

9,607

 

10,177

 

Deferred tax asset

 

6,746

 

10,892

 

Lease incentives

 

5,360

 

5,233

 

Other assets

 

5,358

 

6,133

 

Prepaid expenses and other assets

 

$

96,532

 

$

87,619

 

 


(1)          Represents unsettled proceeds from sales of KEYW common stock that settled shortly following the respective reporting dates.

 

Mortgage and Other Investing Receivables

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Notes receivable from City of Huntsville

 

$

22,526

 

$

17,741

 

Mortgage loans receivable

 

10,213

 

10,257

 

 

 

$

32,739

 

$

27,998

 

 

Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5).  Our mortgage loans receivable reflected above consists of two loans secured by properties in Greater Baltimore and the Baltimore/Washington Corridor.  We did not have an allowance for credit losses in connection with these receivables at March 31, 2012 or December 31, 2011.  The fair value of our mortgage and other investing receivables totaled $32.7 million at March 31, 2012 and $28.0 million at December 31, 2011.

 

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Operating Notes Receivable

 

We had operating notes receivable due from tenants with terms exceeding one year totaling $482,000 at March 31, 2012 and $530,000 at December 31, 2011.  We carried allowances for estimated losses for most of these balances.

 

7.                                      Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

Scheduled

 

 

 

Maximum

 

Carrying Value at

 

 

 

Maturity

 

 

 

Availability at

 

March 31,

 

December 31,

 

Stated Interest Rates

 

Dates at

 

 

 

March 31, 2012

 

2012

 

2011

 

at March 31, 2012

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans (1)

 

N/A

 

$

1,049,204

 

$

1,052,421

 

5.20% - 7.87% (2)

 

2012-2034

 

Variable rate secured loans

 

N/A

 

39,027

 

39,213

 

LIBOR + 2.25% (3)

 

2015

 

Other construction loan facilities

 

$

123,802

 

50,594

 

40,336

 

LIBOR + 1.95% to 2.75% (4)

 

2012-2015

 

Total mortgage and other secured loans

 

 

 

1,138,825

 

1,131,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

1,000,000

 

396,000

 

662,000

 

LIBOR + 1.75% to 2.50% (5)

 

September 1, 2014

 

Term Loan Facilities (6)

 

650,000

 

650,000

 

400,000

 

LIBOR + 1.65% to 2.40% (7)

 

2015-2017

 

Unsecured notes payable

 

N/A

 

5,078

 

5,050

 

0% (8)

 

2015-2026

 

4.25% Exchangeable Senior Notes

 

N/A

 

228,175

 

227,283

 

4.25%

 

April 2030(9)

 

Total debt

 

 

 

$

2,418,078

 

$

2,426,303

 

 

 

 

 

 


(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 $2.2 million at March 31, 2012 and $2.4 million at December 31, 2011.

(2)          The weighted average interest rate on these loans was 6.01% at March 31, 2012.

(3)          The interest rate on the loan outstanding was 2.49% at March 31, 2012.

(4)          The weighted average interest rate on these loans was 2.73% at March 31, 2012.

(5)          The weighted average interest rate on the Revolving Credit Facility was 2.24% at March 31, 2012.

(6)          As described further below, we entered into a new facility effective on February 14, 2012.

(7)          The weighted average interest rate on these loans was 2.15% at March 31, 2012.

(8)          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 $1.7 million at March 31, 2012 and $1.8 million at December 31, 2011.

(9)          As described further in our 2011 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 20.8513 shares per one thousand dollar principal amount of the notes (exchange rate is as of March 31, 2012 and is equivalent to an exchange price of $47.96 per common share).  The carrying value of these notes included a principal amount of $240.0 million and an unamortized discount totaling $11.8 million at March 31, 2012 and $12.7 million at December 31, 2011.  The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%.  Because the closing price of our common shares at March 31, 2012 and December 31, 2011 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount.  The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized (in thousands):

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

Interest expense at stated interest rate

 

$

2,550

 

$

2,550

 

Interest expense associated with amortization of discount

 

892

 

840

 

Total

 

$

3,442

 

$

3,390

 

 

Effective February 14, 2012, we entered into an unsecured term loan agreement (the “Term Loan Agreement”) with a group of lenders for which J.P. Morgan Securities LLC and KeyBank Capital Markets acted as joint lead arrangers and joint book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. acted as syndication agent.  We borrowed $250.0 million under the Term Loan Agreement.  The term loan matures on February 14, 2017.  The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels.

 

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At March 31, 2012 and December 31, 2011, we were in default on a $15 million nonrecourse mortgage loan secured by a property with an estimated fair value of approximately $11 million that is included in our Strategic Reallocation Plan.

 

We capitalized interest costs of $3.8 million in the three months ended March 31, 2012 and $4.3 million in the three months ended March 31, 2011.

 

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

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Fixed-rate debt

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

$

228,175

 

$

239,331

 

$

227,283

 

$

238,077

 

Other fixed-rate debt

 

1,054,282

 

1,049,110

 

1,057,471

 

1,054,424

 

Variable-rate debt

 

1,135,621

 

1,135,847

 

1,141,549

 

1,139,856

 

 

 

$

2,418,078

 

$

2,424,288

 

$

2,426,303

 

$

2,432,357

 

 

8.                                      Interest Rate Derivatives

 

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

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Notional

 

Fixed

 

Floating Rate

 

Effective

 

Expiration

 

March 31,

 

December 31,

 

Amount

 

Rate

 

Index

 

Date

 

Date

 

2012

 

2011

 

$

 50,000

 

0.5025

%

One-Month LIBOR

 

1/3/2011

 

1/3/2012

 

$

 

$

(1

)

50,000

 

0.5025

%

One-Month LIBOR

 

1/3/2011

 

1/3/2012

 

 

(1

)

120,000

 

1.7600

%

One-Month LIBOR

 

1/2/2009

 

5/1/2012

 

(152

)

(552

)

100,000

 

1.9750

%

One-Month LIBOR

 

1/1/2010

 

5/1/2012

 

(144

)

(532

)

100,000

 

0.6123

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

(282

)

55

 

100,000

 

0.6100

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

(277

)

56

 

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(365

)

(66

)

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(363

)

(49

)

39,027

(1)

3.8300

%

One-Month LIBOR

 

11/2/2010

 

11/2/2015

 

(1,090

)

(1,054

)

100,000

(2)

3.8415

%

Three-Month LIBOR

 

9/30/2011

 

9/30/2021

 

 

(16,333

)

75,000

(2)

3.8450

%

Three-Month LIBOR

 

9/30/2011

 

9/30/2021

 

 

(12,275

)

100,000

(2)

2.0525

%

Three-Month LIBOR-Reverse

 

12/30/2011

 

9/30/2021

 

 

345

 

75,000

(2)

2.0525

%

Three-Month LIBOR-Reverse

 

12/30/2011

 

9/30/2021

 

 

260

 

 

 

 

 

 

 

 

 

 

 

$

(2,673

)

$

(30,147

)

 


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

(2)          As described further in our 2011 Annual Report on Form 10-K, on January 5, 2012, we cash settled these instruments, along with interest accrued thereon, for an aggregate of $29.7 million.  Our policy is to present payments to terminate interest rate swaps entered into in order to hedge forecasted interest payments as operating activities on our consolidated statement of cash flows.  Accordingly, the payments to cash settle these instruments were included in net cash provided by operating activities on our consolidated statement of cash flows.

 

Each of the one-month LIBOR interest rate swaps set forth in the table above was designated as cash flow hedges of interest rate risk.

 

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheet (in thousands):

 

 

 

March 31, 2012

 

December 31, 2011

 

Derivatives

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps designated as cash flow hedges

 

Prepaid expenses and other assets

 

$

 

Prepaid expenses and other assets

 

$

111

 

Interest rate swaps not designated as hedges

 

N/A

 

 

Prepaid expenses and other assets

 

605

 

Interest rate swaps designated as cash flow hedges

 

Interest rate derivatives

 

(2,673

)

Interest rate derivatives

 

(2,255

)

Interest rate swaps not designated as hedges

 

N/A

 

 

Interest rate derivatives

 

(28,608

)

 

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Table of Contents

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

Amount of loss recognized in AOCL (effective portion)

 

$

(1,987

)

$

(136

)

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

 

(1,474

)

(1,104

)

 

Over the next 12 months, we estimate that approximately $2.5 million will be reclassified from AOCL as an increase to interest expense.

 

We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on any of our indebtedness, we could also be declared in default on our derivative obligations.  These agreements also incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparties.  Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements.  As of March 31, 2012, the fair value of interest rate derivatives in a liability position related to these agreements was $2.7 million, excluding the effects of accrued interest. As of March 31, 2012, we had not posted any collateral related to these agreements.  We are not in default with any of these provisions.  If we breached any of these provisions, we could be required to settle our obligations under the agreements at their termination value of $3.3 million.

 

9.                                      Shareholders’ Equity

 

During the three months ended March 31, 2012, holders of 34,550 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 $0.275 in the three months ended March 31, 2012 and $0.4125 in the three months ended March 31, 2011.

 

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

 

18


 


Table of Contents

 

10.                               Information by Business Segment

 

We have ten reportable operating office property segments (comprised of: the Baltimore/Washington Corridor; Northern Virginia; San Antonio; Washington, DC — Capitol Riverfront; St. Mary’s and King George Counties; Greater Baltimore; Suburban Maryland; Colorado Springs; Greater Philadelphia; and other). We also have an operating wholesale data center segment.  On January 1, 2012, we revised our reportable segments to include only operating properties.  Accordingly, we revised net operating income from real estate operations (“NOI from real estate operations”) to exclude operating expenses not related to operating properties, revised our definition of segment assets to include only long-lived assets associated with operating properties and revised our definition of additions to long-lived assets to include only additions to existing operating properties (excluding acquisitions and transfers from non-operating properties).  Financial information for prior periods has been presented in conformity with this revision.

 

The table below reports segment financial information for our reportable segments (in thousands).  We measure the performance of our segments through the measure we define as NOI from real estate operations, which is derived by subtracting property operating expenses from revenues from real estate operations.

 

 

 

Operating Office Property Segments

 

 

 

 

 

 

 

Baltimore/
Washington
Corridor

 

Northern
Virginia

 

San
Antonio

 

Washington,
DC - Capitol
Riverfront

 

St. Mary’s & 
King George
Counties

 

Greater
Baltimore

 

Suburban
Maryland

 

Colorado
Springs

 

Greater
Philadelphia

 

Other

 

Operating
Wholesale
Data Center

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

56,250

 

$

18,560

 

$

7,608

 

$

3,894

 

$

4,212

 

$

15,372

 

$

5,749

 

$

6,453

 

$

2,172

 

$

3,618

 

$

1,416

 

$

125,304

 

Property operating expenses

 

20,151

 

7,400

 

3,817

 

1,910

 

1,258

 

5,890

 

2,521

 

2,385

 

615

 

1,233

 

1,207

 

48,387

 

NOI from real estate operations

 

$

36,099

 

$

11,160

 

$

3,791

 

$

1,984

 

$

2,954

 

$

9,482

 

$

3,228

 

$

4,068

 

$

1,557

 

$

2,385

 

$

209

 

$

76,917

 

Additions to long-lived assets

 

$

1,864

 

$

1,661

 

$

 

$

(729

)

$

167

 

$

719

 

$

771

 

$

99

 

$

 

$

26

 

$

 

$

4,578

 

Transfers from non-operating properties

 

$

25,594

 

$

 

$

362

 

$

 

$

556

 

$

365

 

$

335

 

$

316

 

$

7,303

 

$

 

$

 

$

34,831

 

Segment assets at March 31, 2012

 

$

1,231,949

 

$

480,457

 

$

120,024

 

$

108,649

 

$

99,946

 

$

370,754

 

$

147,197

 

$

181,241

 

$

109,432

 

$

114,108

 

$

43,390

 

$

3,007,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

53,252

 

$

18,274

 

$

7,663

 

$

4,590

 

$

3,534

 

$

17,612

 

$

5,609

 

$

5,920

 

$

1,939

 

$

2,838

 

$

1,210

 

$

122,441

 

Property operating expenses

 

21,058