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 |
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|
For the quarterly period ended March 31, 2012 | |
| |
or | |
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|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 |
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23-2947217 |
(State or other jurisdiction of |
|
(IRS Employer |
incorporation or organization) |
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Identification No.) |
6711 Columbia Gateway Drive, Suite 300, Columbia, MD |
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21046 |
(Address of principal executive offices) |
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(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 |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 Companys Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
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.
FORM 10-Q
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands, except share data)
(unaudited)
|
|
March 31, |
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December 31, |
| ||
|
|
2012 |
|
2011 |
| ||
Assets |
|
|
|
|
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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 |
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36,232 |
| ||
Accounts receivable (net of allowance for doubtful accounts of $3,796 and $3,546, respectively) |
|
11,231 |
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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 |
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|
|
|
|
|
| ||
Liabilities and equity |
|
|
|
|
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Liabilities: |
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|
|
|
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Debt, net |
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$ |
2,418,078 |
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$ |
2,426,303 |
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Accounts payable and accrued expenses |
|
93,156 |
|
96,425 |
| ||
Rents received in advance and security deposits |
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27,647 |
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29,548 |
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Dividends and distributions payable |
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24,544 |
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35,038 |
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Deferred revenue associated with operating leases |
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15,258 |
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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 |
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2,596,572 |
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2,649,459 |
| ||
Commitments and contingencies (Note 15) |
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|
|
|
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Equity: |
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|
|
|
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Corporate Office Properties Trusts shareholders equity: |
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|
|
|
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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 |
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1,670,451 |
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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 Trusts shareholders equity |
|
1,119,595 |
|
1,135,425 |
| ||
Noncontrolling interests in subsidiaries: |
|
|
|
|
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Common units in the Operating Partnership |
|
53,883 |
|
55,281 |
| ||
Preferred units in the Operating Partnership |
|
8,800 |
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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.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
|
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For the Three Months |
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Ended March 31, |
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2012 |
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2011 |
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Revenues |
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Rental revenue |
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$ |
99,144 |
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$ |
94,249 |
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Tenant recoveries and other real estate operations revenue |
|
22,795 |
|
22,212 |
| ||
Construction contract and other service revenues |
|
21,534 |
|
21,028 |
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Total revenues |
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143,473 |
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137,489 |
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Expenses |
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|
|
|
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Property operating expenses |
|
47,202 |
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47,061 |
| ||
Depreciation and amortization associated with real estate operations |
|
31,066 |
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30,043 |
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Construction contract and other service expenses |
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20,607 |
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20,618 |
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Impairment losses |
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5,126 |
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27,742 |
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General and administrative expenses |
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7,017 |
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6,777 |
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Business development expenses and land carry costs |
|
1,594 |
|
1,241 |
| ||
Total operating expenses |
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112,612 |
|
133,482 |
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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 |
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(20,940 |
) | ||
Equity in (loss) income of unconsolidated entities |
|
(89 |
) |
30 |
| ||
Income tax (expense) benefit |
|
(4,173 |
) |
544 |
| ||
Income (loss) from continuing operations |
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2,592 |
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(20,366 |
) | ||
Discontinued operations |
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4,385 |
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(901 |
) | ||
Income (loss) before gain on sales of real estate |
|
6,977 |
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(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: |
|
|
|
|
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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.
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.
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)
|
|
Preferred |
|
Common |
|
Additional |
|
Cumulative |
|
Accumulated |
|
Noncontrolling |
|
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.
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.
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.
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 Partnerships 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 Partnerships 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 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, 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):
|
|
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
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.
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 Ridgelys 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.
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 |
) |
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 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 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.
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 Partnerships 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.
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 |
) | ||
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.
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. Marys 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/ |
|
Northern |
|
San |
|
Washington, |
|
St. Marys & |
|
Greater |
|
Suburban |
|
Colorado |
|
Greater |
|
Other |
|
Operating |
|
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 |
|