Exhibit 99.3

 

INDEX TO FINANCIAL STATEMENTS

 

CORPORATE OFFICE PROPERTIES, L.P. CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS

 

Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012

F-2

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)

F-3

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)

F-4

 

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)

F-5

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)

F-6

 

 

Notes to Consolidated Financial Statements

F-8

 

 

CORPORATE OFFICE PROPERTIES, L.P. CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

F-32

 

 

Consolidated Balance Sheets as of December 31, 2012 and 2011

F-33

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011, and 2010

F-34

 

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011, and 2010

F-35

 

 

Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011, and 2010

F-36

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011, and 2010

F-37

 

 

Notes to Consolidated Financial Statements

F-39

 

 

Schedule III—Real Estate and Accumulated Depreciation

F-89

 

F-1



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Balance Sheets

 

(in thousands, except unit data)

 

(unaudited)

 

 

 

March 31,
2013

 

December 31,
2012

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,705,335

 

$

2,597,666

 

Projects in development or held for future development

 

484,638

 

565,378

 

Total properties, net

 

3,189,973

 

3,163,044

 

Assets held for sale, net

 

142,404

 

140,229

 

Cash and cash equivalents

 

23,509

 

10,594

 

Restricted cash and marketable securities

 

9,982

 

14,781

 

Accounts receivable (net of allowance for doubtful accounts of $5,351 and $4,694, respectively)

 

10,768

 

19,247

 

Deferred rent receivable

 

88,716

 

85,802

 

Intangible assets on real estate acquisitions, net

 

72,035

 

75,879

 

Deferred leasing and financing costs, net

 

59,856

 

59,952

 

Prepaid expenses and other assets

 

80,798

 

77,455

 

Total assets

 

$

3,678,041

 

$

3,646,983

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

1,957,360

 

$

2,019,168

 

Accounts payable and accrued expenses

 

90,645

 

97,922

 

Rents received in advance and security deposits

 

26,024

 

27,632

 

Dividends and distributions payable

 

29,947

 

28,698

 

Deferred revenue associated with operating leases

 

10,833

 

11,995

 

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

 

6,420

 

6,420

 

Interest rate derivatives

 

5,340

 

6,185

 

Other liabilities

 

573

 

2,166

 

Total liabilities

 

2,127,142

 

2,200,186

 

Commitments and contingencies (Note 16)

 

 

 

 

 

Redeemable noncontrolling interest

 

10,356

 

10,298

 

Equity:

 

 

 

 

 

Corporate Office Properties, L.P.’s equity:

 

 

 

 

 

Preferred units

 

 

 

 

 

General partner, 12,821,667 preferred units outstanding at March 31, 2013 and December 31, 2012

 

333,833

 

333,833

 

Limited partner, 352,000 preferred units outstanding at March 31, 2013 and December 31, 2012

 

8,800

 

8,800

 

Common units, 85,758,438 and 80,952,986 held by the general partner and 3,818,898 and 4,067,542 held by limited partners at March 31, 2013 and December 31, 2012, respectively

 

1,191,776

 

1,089,391

 

Accumulated other comprehensive loss

 

(4,634

)

(5,708

)

Total Corporate Office Properties, L.P.’s equity

 

1,529,775

 

1,426,316

 

Noncontrolling interests in subsidiaries

 

10,768

 

10,183

 

Total equity

 

1,540,543

 

1,436,499

 

Total liabilities, redeemable noncontrolling interest and equity

 

$

3,678,041

 

$

3,646,983

 

 

See accompanying notes to consolidated financial statements.

 

F-2



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Operations

 

(in thousands, except per unit data)

 

(unaudited)

 

 

 

For the Three
Months
Ended March 31,

 

 

 

2013

 

2012

 

Revenues

 

 

 

 

 

Rental revenue

 

$

95,295

 

$

89,859

 

Tenant recoveries and other real estate operations revenue

 

21,440

 

20,802

 

Construction contract and other service revenues

 

14,262

 

21,534

 

Total revenues

 

130,997

 

132,195

 

Expenses

 

 

 

 

 

Property operating expenses

 

42,575

 

41,253

 

Depreciation and amortization associated with real estate operations

 

28,252

 

27,834

 

Construction contract and other service expenses

 

13,477

 

20,607

 

Impairment losses (recoveries)

 

1,857

 

(4,836

)

General, administrative and leasing expenses

 

7,820

 

9,569

 

Business development expenses and land carry costs

 

1,359

 

1,576

 

Total operating expenses

 

95,340

 

96,003

 

Operating income

 

35,657

 

36,192

 

Interest expense

 

(22,307

)

(24,431

)

Interest and other income

 

946

 

1,217

 

Loss on early extinguishment of debt

 

(5,184

)

 

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

 

9,112

 

12,978

 

Equity in income (loss) of unconsolidated entities

 

41

 

(89

)

Income tax expense

 

(16

)

(204

)

Income from continuing operations

 

9,137

 

12,685

 

Discontinued operations

 

3,786

 

(2,450

)

Income before gain on sales of real estate

 

12,923

 

10,235

 

Gain on sales of real estate

 

2,354

 

 

Net income

 

15,277

 

10,235

 

Net loss attributable to noncontrolling interests in consolidated entities

 

336

 

570

 

Net income attributable to Corporate Office Properties, L.P.

 

15,613

 

10,805

 

Preferred unit distributions

 

(6,271

)

(4,190

)

Net income attributable to Corporate Office Properties, L.P. common unitholders

 

$

9,342

 

$

6,615

 

Net income attributable to Corporate Office Properties, L.P.:

 

 

 

 

 

Income from continuing operations

 

$

11,860

 

$

13,261

 

Discontinued operations, net

 

3,753

 

(2,456

)

Net income attributable to Corporate Office Properties, L.P.

 

$

15,613

 

$

10,805

 

Basic earnings per common unit(1)

 

 

 

 

 

Income from continuing operations

 

$

0.06

 

$

0.12

 

Discontinued operations

 

0.05

 

(0.03

)

Net income attributable to common unitholders

 

$

0.11

 

$

0.09

 

Diluted earnings per common unit(1)

 

 

 

 

 

Income from continuing operations

 

$

0.06

 

$

0.12

 

Discontinued operations

 

0.05

 

(0.03

)

Net income attributable to common unitholders

 

$

0.11

 

$

0.09

 

Distributions declared per common unit

 

$

0.275

 

$

0.275

 

 


(1)              Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

 

See accompanying notes to consolidated financial statements.

 

F-3



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Comprehensive Income

 

(in thousands)

 

(unaudited)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Net income

 

$

15,277

 

$

10,235

 

Other comprehensive income (loss)

 

 

 

 

 

Unrealized gains (losses) on interest rate derivatives

 

462

 

(1,987

)

Losses on interest rate derivatives included in net income

 

658

 

1,474

 

Other comprehensive income (loss)

 

1,120

 

(513

)

Comprehensive income

 

16,397

 

9,722

 

Comprehensive loss attributable to noncontrolling interests

 

290

 

588

 

Comprehensive income attributable to Corporate Office Properties, L.P.

 

$

16,687

 

$

10,310

 

 

See accompanying notes to consolidated financial statements.

 

F-4



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Equity

 

(Dollars in thousands)

 

(unaudited)

 

 

 

Limited Partner
Preferred Units

 

General Partner
Preferred Units

 

Common Units

 

Accumulated
Other
Comprehensive

 

Noncontrolling
Interests in

 

Total

 

 

 

Units

 

Amount

 

Units

 

Amount

 

Units

 

Amount

 

Loss

 

Subsidiaries

 

Equity

 

Balance at December 31, 2011

 

352,000

 

$

8,800

 

8,121,667

 

$

216,333

 

76,313,112

 

$

972,107

 

$

(1,837

)

$

10,496

 

$

1,205,899

 

Costs of common units resulting from public issuance of common shares

 

 

 

 

 

 

(5

)

 

 

(5

)

Issuance of common units resulting from exercise of share options

 

 

 

 

 

5,667

 

82

 

 

 

82

 

Share-based compensation

 

 

 

 

 

83,180

 

3,746

 

 

 

3,746

 

Restricted common unit redemptions

 

 

 

 

 

(97,094

)

(2,373

)

 

 

(2,373

)

Comprehensive income

 

 

165

 

 

4,025

 

 

6,615

 

(495

)

(14

)

10,296

 

Distributions to owners of common and preferred units

 

 

(165

)

 

(4,025

)

 

(20,993

)

 

 

(25,183

)

Adjustment to arrive at fair value of noncontrolling interest

 

 

 

 

 

 

(903

)

 

 

 

 

(903

)

Balance at March 31, 2012

 

352,000

 

$

8,800

 

8,121,667

 

$

216,333

 

76,304,865

 

$

958,276

 

$

(2,332

)

$

10,482

 

$

1,191,559

 

Balance at December 31, 2012

 

352,000

 

$

8,800

 

12,821,667

 

$

333,833

 

85,020,528

 

$

1,089,391

 

$

(5,708

)

$

10,183

 

$

1,436,499

 

Issuance of common units resulting from public issuance of common shares

 

 

 

 

 

4,485,000

 

117,913

 

 

 

117,913

 

Issuance of common units resulting from exercise of share options

 

 

 

 

 

16,453

 

301

 

 

 

301

 

Share-based compensation

 

 

 

 

 

116,315

 

2,000

 

 

 

2,000

 

Restricted common unit redemptions

 

 

 

 

 

(60,960

)

(1,576

)

 

 

(1,576

)

Comprehensive income

 

 

165

 

 

6,106

 

 

9,342

 

1,074

 

500

 

17,187

 

Distributions to owners of common and preferred units

 

 

(165

)

 

(6,106

)

 

(24,643

)

 

 

(30,914

)

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

85

 

85

 

Adjustment to arrive at fair value of noncontrolling interest

 

 

 

 

 

 

(848

)

 

 

(848

)

Increase in tax benefit from share-based compensation

 

 

 

 

 

 

(104

)

 

 

(104

)

Balance at March 31, 2013

 

352,000

 

$

8,800

 

12,821,667

 

$

333,833

 

89,577,336

 

$

1,191,776

 

$

(4,634

)

$

10,768

 

$

1,540,543

 

 

See accompanying notes to consolidated financial statements.

 

F-5



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

(in thousands)

 

(unaudited)

 

 

 

For the
Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Revenues from real estate operations received

 

$

119,348

 

$

129,184

 

Construction contract and other service revenues received

 

15,695

 

18,170

 

Property operating expenses paid

 

(38,865

)

(39,659

)

Construction contract and other service expenses paid

 

(15,588

)

(12,454

)

General, administrative, leasing, business development and land carry costs paid

 

(8,521

)

(7,997

)

Interest expense paid

 

(18,018

)

(19,896

)

Previously accreted interest expense paid

 

(2,263

)

 

Settlement of interest rate derivatives

 

 

(29,738

)

Proceeds from sale of trading marketable securities

 

 

7,041

 

Exit costs on property dispositions

 

 

(1,108

)

Payments in connection with early extinguishment of debt

 

(4,803

)

 

Interest and other income received

 

320

 

252

 

Income taxes paid

 

6

 

(8

)

Net cash provided by operating activities

 

47,311

 

43,787

 

Cash flows from investing activities

 

 

 

 

 

Purchases of and additions to properties

 

 

 

 

 

Construction, development and redevelopment

 

(44,361

)

(35,476

)

Tenant improvements on operating properties

 

(5,263

)

(7,934

)

Other capital improvements on operating properties

 

(9,327

)

(3,360

)

Proceeds from sales of properties

 

 

61,230

 

Mortgage and other loan receivables funded or acquired

 

(2,231

)

(3,506

)

Leasing costs paid

 

(3,436

)

(2,853

)

Other

 

4,442

 

(310

)

Net cash (used in) provided by investing activities

 

(60,176

)

7,791

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from debt

 

 

 

 

 

Revolving Credit Facility

 

99,000

 

71,000

 

Other debt proceeds

 

68,132

 

260,097

 

Repayments of debt

 

 

 

 

 

Revolving Credit Facility

 

(99,000

)

(337,000

)

Scheduled principal amortization

 

(2,512

)

(3,207

)

Other debt repayments

 

(125,877

)

(50

)

Deferred financing costs paid

 

(1,109

)

(2,044

)

Net proceeds from issuance of common units

 

118,389

 

77

 

Common unit distributions paid

 

(23,481

)

(31,460

)

Preferred unit distributions paid

 

(6,271

)

(4,190

)

Restricted unit redemptions

 

(1,576

)

(2,373

)

Other

 

85

 

 

Net cash provided by (used in) financing activities

 

25,780

 

(49,150

)

Net increase in cash and cash equivalents

 

12,915

 

2,428

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

10,594

 

5,559

 

End of period

 

$

23,509

 

$

7,987

 

 

See accompanying notes to consolidated financial statements.

 

F-6



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows (Continued)

 

(in thousands)

 

(unaudited)

 

 

 

For the
Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

Net income

 

$

15,277

 

$

10,235

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and other amortization

 

28,782

 

31,705

 

Impairment losses

 

1,857

 

5,479

 

Settlement of previously accreted interest expense

 

(2,263

)

 

Amortization of deferred financing costs

 

1,528

 

1,572

 

Increase in deferred rent receivable

 

(4,236

)

(2,559

)

Amortization of net debt discounts

 

710

 

775

 

Gain on sales of real estate

 

(2,354

)

(4,138

)

Share-based compensation

 

1,649

 

3,402

 

Loss on early extinguishment of debt

 

381

 

 

Other

 

(2,717

)

(1,423

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable

 

8,479

 

14,792

 

Decrease in restricted cash and marketable securities

 

483

 

14,276

 

Decrease (increase) in prepaid expenses and other assets

 

4,180

 

(9,612

)

(Decrease) increase in accounts payable, accrued expenses and other liabilities

 

(2,837

)

9,187

 

Decrease in rents received in advance and security deposits

 

(1,608

)

(1,901

)

Decrease in interest rate derivatives in connection with cash settlement

 

 

(28,003

)

Net cash provided by operating activities

 

$

47,311

 

$

43,787

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

(Decrease) increase in accrued capital improvements, leasing and other investing activity costs

 

$

(5,353

)

$

11,828

 

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

 

$

1,105

 

$

(528

)

Dividends/distribution payable

 

$

29,947

 

$

24,544

 

Increase in redeemable noncontrolling interest and decrease in equity in connection with adjustment to arrive at fair value of noncontrolling interest

 

$

848

 

$

903

 

 

See accompanying notes to consolidated financial statements.

 

F-7



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

(unaudited)

 

1. Organization

 

Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership,” “we” or “us”) is the entity through which Corporate Office Properties Trust (“COPT” or the “Company”), a fully-integrated and self-managed real estate investment trust (“REIT”) and our sole general partner, conducts almost all of its operations and owns substantially all of its assets. As of March 31, 2013, COPT owned 96% of the outstanding common units and 97% of the outstanding preferred units in COPLP; the remaining common and preferred units in COPLP were owned by third parties, which included certain members of COPT’s Board of Trustees. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation are substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a series of preferred shares that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

 

We focus primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of March 31, 2013, our investments in real estate included the following:

 

·                  210 operating office properties totaling 19.1 million square feet;

 

·                  10 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.3 million square feet upon completion, including one partially operational property included above;

 

·                  land held or under pre-construction totaling 1,703 acres (including 561 controlled but not owned) that we believe is potentially developable into approximately 19.7 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 own real estate both directly and through subsidiary partnerships, limited liability companies, business trusts and corporations. In addition to owning real estate, we also own subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties.

 

Because we are managed by COPT, and COPT conducts substantially all of its operations through us, we refer to COPT’s executive officers as our executive officers, and although, as a partnership, we do not have a board of trustees, we refer to COPT’s Board of Trustees as our Board of Trustees.

 

F-8



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has 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 discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

 

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, 2012 included in this Exhibit 99.3 (“Exhibit 99.3”) to COPLP’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2013 (the “July 25 8-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 errors described below. The consolidated financial statements have been prepared using the accounting policies described in the 2012 audited annual financial statements included in this Exhibit 99.3.

 

Recent Accounting Pronouncements

 

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2013 related to the reporting of the effect of significant reclassifications from accumulated other comprehensive income. This guidance requires an entity to report, either parenthetically on the face of the financial statements or in a single footnote, changes in the components of accumulated other comprehensive income for the period. An entity is required to separately report the amount of such changes attributable to reclassifications (and the statements of operations line affected by such reclassifications) and the amount of such changes attributable to current period other comprehensive income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. Our adoption of this guidance did not 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 2012 audited annual financial statements included in this Exhibit 99.3.

 

F-9



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

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, 2013 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical
Assets(Level 1)

 

Significant Other
Observable
Inputs(Level 2)

 

Significant
Unobservable
Inputs(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Common stock(1)

 

$

743

 

$

 

$

 

$

743

 

Interest rate derivatives(2)

 

 

260

 

 

260

 

Warrants to purchase common stock(2)

 

 

420

 

 

420

 

Assets

 

$

743

 

$

680

 

$

 

$

1,423

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

$

 

$

5,340

 

$

 

$

5,340

 

Redeemable noncontrolling interest

 

$

 

$

 

$

10,356

 

$

10,356

 

 


(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.

 

As discussed further in Note 5, our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest, we used a discount rate of 15.5%, which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

 

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

 

F-10



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

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

 

Three Months Ended March 31, 2013

 

During the three months ended March 31, 2013, we shortened the holding period for a property in the Baltimore/Washington Corridor that we expect to sell. We determined that the carrying amount of this property will not likely be recovered from the cash flows from the operation and sale of the property over the likely remaining holding period. Accordingly, we recognized a non-cash impairment loss of $1.9 million for the amount by which the carrying value of the property exceeded its estimated fair value. The table below sets forth the fair value hierarchy of the valuation technique used by us in determining the fair value of the property (dollars in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Impairment
Losses
Recognized

 

Assets(1):

 

 

 

 

 

 

 

 

 

 

 

Properties, net

 

$

 

$

 

$

7,250

 

$

7,250

 

$

1,857

 

 


(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 (dollars in thousands):

 

Description

 

Fair Value on
Measurement Date

 

Valuation Technique

 

Unobservable Input

 

Range
(Weighted Average)

 

Property on which impairment loss was recognized

 

$

7,250

 

Bid for property indicative of value

 

Indicative bid(1)

 

(1)

 

 


(1)                                 This fair value measurement was developed by a third party source, subject to our corroboration for reasonableness.

 

Three Months Ended March 31, 2012

 

During the three months ended March 31, 2012, we recognized non-cash impairment losses of $5.5 million for the amount by which the carrying values of certain properties exceeded their estimated

 

F-11



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

3. Fair Value Measurements (Continued)

 

fair values. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the three months ended March 31, 2012 (dollars in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Impairment
Losses
Recognized(1)

 

Assets(2):

 

 

 

 

 

 

 

 

 

 

 

Properties, net

 

$

 

$

 

$

92,176

 

$

92,176

 

$

5,479

 

 


(1)                       Represents impairment losses, excluding exit costs incurred of $1.1 million.

 

(2)                       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 (dollars in thousands):

 

Description

 

Fair Value on
Measurement Date

 

Valuation Technique

 

Unobservable Input

 

Range
(Weighted 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

 

$

8.50 per square foot

(2)

 

 

 

 

 

 

Leasing costs

 

$

20.00 per square foot

(2)

 


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

 

(2)                                 Only one value applied for this unobservable input.

 

4. Properties, net

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Land

 

$

431,152

 

$

427,766

 

Buildings and improvements

 

2,850,482

 

2,725,875

 

Less: accumulated depreciation

 

(576,299

)

(555,975

)

Operating properties, net

 

$

2,705,335

 

$

2,597,666

 

 

F-12



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

4. Properties, net (Continued)

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Land

 

$

234,357

 

$

236,324

 

Construction in progress, excluding land

 

250,281

 

329,054

 

Projects in development or held for future development

 

$

484,638

 

$

565,378

 

 

2012 Construction Activities

 

During the three months ended March 31, 2013, we placed into service an aggregate of 236,000 square feet in three newly constructed office properties located in the Baltimore/Washington Corridor, Northern Virginia and Huntsville, Alabama. As of March 31, 2013, we had nine office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.1 million square feet upon completion, including three in the Baltimore/Washington Corridor, three in Huntsville, Alabama and three in Northern Virginia. We also had redevelopment underway on one office property in Greater Philadelphia that we estimate will total 183,000 square feet upon completion.

 

5. Real Estate Joint Ventures

 

During the three months ended March 31, 2013, 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):

 

Investment Balance at(1)

 

Date

 

 

 

Nature of

 

Maximum Exposure

 

March 31, 2013

 

December 31, 2012

 

Acquired

 

Ownership

 

Activity

 

to Loss(2)

 

$

(6,420

)

$

(6,420

)

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 $4.0 million at March 31, 2013 and $4.5 million December 31, 2012 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of loss recognition under the equity method effective October 2012, as discussed below. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same and we continue to no longer recognize income or losses under the equity method.

 

(2)                                 Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 16).

 

F-13



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

5. Real Estate Joint Ventures (Continued)

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Properties, net

 

$

58,130

 

$

58,460

 

Other assets

 

5,120

 

4,376

 

Total assets

 

$

63,250

 

$

62,836

 

Liabilities (primarily debt)

 

$

75,417

 

$

72,693

 

Owners’ equity

 

(12,167

)

(9,857

)

Total liabilities and owners’ equity

 

$

63,250

 

$

62,836

 

 

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,

 

 

 

2013

 

2012

 

Revenues

 

$

1,792

 

$

1,894

 

Property operating expenses

 

(786

)

(737

)

Interest expense

 

(2,774

)

(1,125

)

Depreciation and amortization expense

 

(542

)

(570

)

Net loss

 

$

(2,310

)

$

(538

)

 

As discussed further in our 2012 annual financial statements included in this Exhibit 99.3, in 2012, the holder of mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to our having neither the obligation nor intent to support the joint venture.

 

F-14



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

5. Real Estate Joint Ventures (Continued)

 

The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at March 31, 2013 (dollars in thousands):

 

 

 

 

 

Ownership

 

 

 

March 31, 2013(1)

 

 

 

Date
Acquired

 

% at
3/31/2013

 

Nature of Activity

 

Total
Assets

 

Pledged
Assets

 

Total
Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LW Redstone Company, LLC

 

3/23/2010

 

85

%

Developing business park(2)

 

$

95,447

 

$

23,199

 

$

23,973

 

M Square Associates, LLC

 

6/26/2007

 

50

%

Operating two buildings and developing others(3)

 

61,059

 

47,361

 

42,675

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50

%

Operating one building(4)

 

39,462

 

35,114

 

20,177

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75

%

Holding land parcel(5)

 

6,447

 

 

 

MOR Forbes 2 LLC

 

12/24/2002

 

50

%

Operating one building(6)

 

3,926

 

 

95

 

 

 

 

 

 

 

 

 

$

206,341

 

$

105,674

 

$

86,920

 

 


(1)                                 Excludes amounts eliminated in consolidation.

 

(2)                                 This joint venture’s property is in Huntsville, Alabama.

 

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

 

(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. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.

 

(6)                                 This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).

 

These ventures include only ones in which parties other than COPLP and COPT own interests.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.

 

F-15



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

6. Prepaid Expenses and Other Assets

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Mortgage and other investing receivables

 

$

38,441

 

$

33,396

 

Prepaid expenses

 

14,023

 

19,270

 

Furniture, fixtures and equipment, net

 

7,616

 

7,991

 

Deferred tax asset

 

6,493

 

6,612

 

Lease incentives

 

5,366

 

5,578

 

Other assets

 

8,859

 

4,608

 

Prepaid expenses and other assets

 

$

80,798

 

$

77,455

 

 

Mortgage and Other Investing Receivables

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Notes receivable from City of Huntsville

 

$

38,441

 

$

33,252

 

Mortgage loan receivable

 

 

144

 

 

 

$

38,441

 

$

33,396

 

 

Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5). We did not have an allowance for credit losses in connection with our notes receivable at March 31, 2013 or December 31, 2012. The fair value of our mortgage and other investing receivables totaled $38.4 million at March 31, 2013 and $33.4 million at December 31, 2012.

 

Operating Notes Receivable

 

We had operating notes receivable due from tenants with terms exceeding one year totaling $261,000 at March 31, 2013 and $271,000 at December 31, 2012. We carried allowances for estimated losses for most of these balances.

 

F-16



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

7. Debt

 

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

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

 

 

Availability at

 

Carrying Value at

 

 

 

Scheduled Maturity

 

 

 

March 31,

 

March 31,

 

December 31,

 

Stated Interest Rates at

 

Dates at

 

 

 

2013

 

2013

 

2012

 

March 31, 2013

 

March 31, 2013

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans(1)

 

N/A

 

$

931,952

 

$

948,414

 

3.96% - 7.87%(2)

 

2013 - 2034

 

Variable rate secured loans

 

N/A

 

38,270

 

38,475

 

LIBOR + 2.25%(3)

 

2015

 

Other construction loan facilities

 

$

70,800

 

35,400

 

29,557

 

LIBOR + 1.95% to 2.75%(4)

 

2013 - 2015

 

Total mortgage and other secured loans

 

 

 

1,005,622

 

1,016,446

 

 

 

 

 

Revolving Credit Facility

 

800,000

 

 

 

LIBOR + 1.75% to 2.50%

 

September 1, 2014

 

Term Loan Facilities(5)

 

770,000

 

770,000

 

770,000

 

LIBOR + 1.65% to 2.60%(6)

 

2015 - 2019

 

Unsecured notes payable

 

N/A

 

1,766

 

1,788

 

0%(7)

 

2026

 

4.25% Exchangeable Senior Notes(8)

 

N/A

 

179,972

 

230,934

 

4.25%

 

April 2030

 

Total debt

 

 

 

$

1,957,360

 

$

2,019,168

 

 

 

 

 

 


(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 $877,000 at March 31, 2013 and $1.3 million at December 31, 2012.

 

(2)                                 The weighted average interest rate on these loans was 5.97% at March 31, 2013.

 

(3)                                 The interest rate on the loan outstanding was 2.45% at March 31, 2013.

 

(4)                                 The weighted average interest rate on these loans was 2.51% at March 31, 2013.

 

(5)                                 We have the ability to borrow an aggregate of an additional $180.0 million under these term loan facilities, provided that there is no default under the facilities and subject to the approval of the lenders.

 

(6)                                 The weighted average interest rate on these loans was 1.93% at March 31, 2013.

 

(7)                                 These notes 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 $845,000 at March 31, 2013 and $873,000 at December 31, 2012.

 

(8)                                 As described further in our 2012 annual financial statements included in this Exhibit 99.3, these notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at our discretion, COPT 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, 2013 and is equivalent to an exchange price of $47.96 per common share). During the three months ended March 31, 2013, we repaid $53.7 million principal amount of these notes and recognized a $5.3 million loss on early extinguishment of debt. The carrying value of these notes included a principal amount of $186.3 million and an unamortized discount totaling $6.3 million at March 31, 2013 and a principal amount of $240.0 million and an unamortized discount totaling $9.1 million at December 31, 2012. 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, 2013 and December 31, 2012 was less than the exchange price per common share applicable to these notes, the

 

F-17



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

7. Debt (Continued)

 

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,

 

 

 

2013

 

2012

 

Interest expense at stated interest rate

 

$

2,304

 

$

2,550

 

Interest expense associated with amortization of discount

 

864

 

892

 

Total

 

$

3,168

 

$

3,442

 

 

We capitalized interest costs of $2.4 million in the three months ended March 31, 2013 and $3.8 million in the three months ended March 31, 2012.

 

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

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

Fixed-rate debt

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

$

179,972

 

$

187,150

 

$

230,934

 

$

240,282

 

Other fixed-rate debt

 

933,718

 

947,263

 

950,202

 

968,180

 

Variable-rate debt

 

843,670

 

849,555

 

838,032

 

845,558

 

 

 

$

1,957,360

 

$

1,983,968

 

$

2,019,168

 

$

2,054,020

 

 

F-18



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

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
Amount

 

Fixed Rate

 

Floating Rate Index

 

Effective
Date

 

Expiration
Date

 

March 31,
2013

 

December 31,
2012

 

$

100,000

 

0.6123

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

$

(495

)

$

(594

)

100,000

 

0.6100

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

(492

)

(591

)

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(1,238

)

(1,313

)

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(1,238

)

(1,313

)

38,270

(1)

3.8300

%

One-Month LIBOR + 2.25%

 

11/2/2010

 

11/2/2015

 

(1,176

)

(1,268

)

100,000

 

0.8055

%

One-Month LIBOR

 

9/2/2014

 

9/1/2016

 

(329

)

(263

)

100,000

 

0.8100

%

One-Month LIBOR

 

9/2/2014

 

9/1/2016

 

(339

)

(272

)

100,000

 

1.6730

%

One-Month LIBOR

 

9/1/2015

 

8/1/2019

 

260

 

(154

)

100,000

 

1.7300

%

One-Month LIBOR

 

9/1/2015

 

8/1/2019

 

(33

)

(417

)

 

 

 

 

 

 

 

 

 

 

$

(5,080

)

$

(6,185

)

 


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

 

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, 2013

 

December 31, 2012

 

Derivatives

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Interest rate swaps designated as cash flow hedges

 

Prepaid expenses and other assets

 

$

260

 

Prepaid expenses and other assets

 

$

 

Interest rate swaps designated as cash flow hedges

 

Interest rate derivatives

 

(5,340

)

Interest rate derivatives

 

(6,185

)

 

F-19



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

8. Interest Rate Derivatives (Continued)

 

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,

 

 

 

2013

 

2012

 

Amount of gain (loss) recognized in accumulated other comprehensive loss (“AOCL”) (effective portion)

 

$

462

 

$

(1,987

)

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

 

658

 

1,474

 

 

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, 2013, the fair value of interest rate derivatives in a liability position related to these agreements was $5.3 million, excluding the effects of accrued interest. As of March 31, 2013, 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 $5.3 million.

 

9. Redeemable Noncontrolling Interest

 

The table below sets forth activity in our redeemable noncontrolling interest (in thousands):

 

 

 

Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Beginning balance

 

$

10,298

 

$

8,908

 

Net loss attributable to noncontrolling interest

 

(790

)

(574

)

Adjustment to arrive at fair value of interest

 

848

 

903

 

Ending balance

 

$

10,356

 

$

9,237

 

 

10. Equity

 

On March 19, 2013, COPT completed a public offering of 4,485,000 common shares at a price of $26.34 per share for net proceeds of $118.1 million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for 4,485,000 common units.

 

F-20



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

10. Equity (Continued)

 

COPT also acquired common units during the three months ended March 31, 2013 as a result of activity pertaining to our share-based compensation plans, as disclosed in Note 12.

 

During the three months ended March 31, 2013, limited partners holding common units redeemed 248,644 common units into common shares on the basis of one common share for each common unit.

 

F-21



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

11. 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. 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, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

56,436

 

$

22,942

 

$

7,757

 

$

4,244

 

$

3,992

 

$

10,719

 

$

2,224

 

$

6,733

 

$

2,487

 

$

3,190

 

$

1,353

 

$

122,077

 

Property operating expenses

 

19,266

 

7,817

 

3,888

 

1,949

 

1,193

 

4,168

 

787

 

2,448

 

838

 

396

 

1,316

 

44,066

 

NOI from real estate operations

 

$

37,170

 

$

15,125

 

$

3,869

 

$

2,295

 

$

2,799

 

$

6,551

 

$

1,437

 

$

4,285

 

$

1,649

 

$

2,794

 

$

37

 

$

78,011

 

Additions to long-lived assets

 

$

2,731

 

$

1,544

 

$

10

 

$

157

 

$

275

 

$

702

 

$

29

 

$

315

 

$

 

$

91

 

$

 

$

5,854

 

Transfers from non-operating properties

 

$

22,665

 

$

9,839

 

$

 

$

 

$

6

 

$

113

 

$

332

 

$

1,784

 

$

7,050

 

$

24,239

 

$

65,568

 

$

131,596

 

Segment assets at March 31, 2013

 

$

1,226,544

 

$

574,970

 

$

119,145

 

$

102,928

 

$

97,346

 

$

317,953

 

$

53,250

 

$

178,622

 

$

85,017

 

$

133,181

 

$

166,920

 

$

3,055,876

 

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

 

19,674

 

7,230

 

3,762

 

1,885

 

1,212

 

5,761

 

2,459

 

2,307

 

513

 

688

 

1,055

 

46,546

 

NOI from real estate operations

 

$

36,576

 

$

11,330

 

$

3,846

 

$

2,009

 

$

3,000

 

$

9,611

 

$

3,290

 

$

4,146

 

$

1,659

 

$

2,930

 

$

361

 

$

78,758

 

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

 

 

F-22



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

11. Information by Business Segment (Continued)

 

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

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Segment revenues from real estate operations

 

$

122,077

 

$

125,304

 

Construction contract and other service revenues

 

14,262

 

21,534

 

Less: Revenues from discontinued operations (Note 14)

 

(5,342

)

(14,643

)

Total revenues

 

$

130,997

 

$

132,195

 

 

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

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Segment property operating expenses

 

$

44,066

 

$

46,546

 

Less: Property operating expenses from discontinued operations (Note 14)

 

(1,491

)

(5,293

)

Total property operating expenses

 

$

42,575

 

$

41,253

 

 

As previously discussed, we provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Construction contract and other service revenues

 

$

14,262

 

$

21,534

 

Construction contract and other service expenses

 

(13,477

)

(20,607

)

NOI from service operations

 

$

785

 

$

927

 

 

F-23



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

11. Information by Business Segment (Continued)

 

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

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

NOI from real estate operations

 

$

78,011

 

$

78,758

 

NOI from service operations

 

785

 

927

 

Interest and other income

 

946

 

1,217

 

Equity in income (loss) of unconsolidated entities

 

41

 

(89

)

Income tax expense

 

(16

)

(204

)

Other adjustments:

 

 

 

 

 

Depreciation and other amortization associated with real estate operations

 

(28,252

)

(27,834

)

Impairment (losses) recoveries

 

(1,857

)

4,836

 

General, administrative and leasing expenses

 

(7,820

)

(9,569

)

Business development expenses and land carry costs

 

(1,359

)

(1,576

)

Interest expense on continuing operations

 

(22,307

)

(24,431

)

NOI from discontinued operations

 

(3,851

)

(9,350

)

Loss on early extinguishment of debt

 

(5,184

)

 

Income from continuing operations

 

$

9,137

 

$

12,685

 

 

The following table reconciles our segment assets to total assets (in thousands):

 

 

 

March 31,
2013

 

March 31,
2012

 

Segment assets

 

$

3,055,876

 

$

3,007,147

 

Non-operating property assets

 

490,083

 

638,856

 

Other assets

 

132,082

 

144,594

 

Total assets

 

$

3,678,041

 

$

3,790,597

 

 

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

 

F-24



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

12. Share-Based Compensation

 

Performance Share Units (“PSUs”)

 

On March 1, 2013, our Board of Trustees granted 69,579 PSUs with an aggregate grant date fair value of $1.9 million to executives. The PSUs have a performance period beginning on January 1, 2013 and concluding on the earlier of December 31, 2015 or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:

 

Percentile Rank

 

Earned PSUs Payout %

 

75th or greater

 

200% of PSUs granted

 

50th or greater

 

100% of PSUs granted

 

25th

 

50% of PSUs granted

 

Below 25th

 

0% of PSUs granted

 

 

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

 

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

 

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

 

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

 

We computed a grant date fair value of $26.84 per PSU using a Monte Carlo model, which included assumptions of, among other things, the following: baseline common share value of $25.85; expected volatility for our common shares of 29.5%; and risk-free interest rate of 0.33%. We are recognizing the grant date fair value in connection with these PSU awards over the performance period.

 

The PSUs granted to our executives on March 1, 2012 and March 3, 2011, as described in our 2012 annual financial statements included in this Exhibit 99.3, were outstanding at March 31, 2013.

 

Restricted Shares

 

During the three months ended March 31, 2013, certain employees were granted a total of 117,960 restricted shares with an aggregate grant date fair value of $3.0 million (weighted average of $25.85 per share). Restricted shares granted to employees vest based on increments and over periods of time set

 

F-25



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

12. Share-Based Compensation (Continued)

 

forth under the terms of the respective awards provided that the employees remain employed by us. During the three months ended March 31, 2013, forfeiture restrictions lapsed on 161,734 previously issued common shares; these shares had a weighted average grant date fair value of $33.42 per share, and the aggregate intrinsic value of the shares on the vesting dates was $4.2 million.

 

Options

 

During the three months ended March 31, 2013, 16,453 options to purchase COPT common shares (“options”) were exercised. The weighted average exercise price of these options was $18.33 per share, and the aggregate intrinsic value of the options exercised was $129,000.

 

13. Income Taxes

 

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

 

 

 

For the Three
Months Ended
March 31,

 

 

 

2013

 

2012

 

Deferred

 

 

 

 

 

Federal

 

$

(13

)

$

(167

)

State

 

(3

)

(37

)

Total income tax expense

 

$

(16

)

$

(204

)

 

Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation, compensation paid in the form of contributions to a deferred nonqualified compensation plan and net operating losses that are not deductible until future periods.

 

Our TRS’s combined Federal and state effective tax rate was 36.0% for the three months ended March 31, 2013 and 38.1% for the three months ended March 31, 2012.

 

14. Discontinued Operations and Assets Held for Sale

 

Income from discontinued operations primarily includes revenues and expenses associated with the following:

 

·                  five properties in White Marsh, Maryland (in the Greater Baltimore region) that were sold on January 30, 2012;

 

·                  1101 Sentry Gateway in San Antonio that was sold on January 31, 2012;

 

·                  222 and 224 Schilling Circle in Greater Baltimore that were sold on February 10, 2012;

 

·                  15 and 45 West Gude Drive in Suburban Maryland that were sold on May 2, 2012;

 

·                  11800 Tech Road in Suburban Maryland that was sold on June 14, 2012;

 

F-26



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

14. Discontinued Operations and Assets Held for Sale (Continued)

 

·                  400 Professional Drive in Suburban Maryland for which the title to the property was transferred to the mortgage lender on July 2, 2012;

 

·                  23 operating properties in the Baltimore/Washington Corridor and Greater Baltimore regions that were sold on July 24, 2012; and

 

·                  16 operating properties in Colorado Springs and an operating property in Suburban Maryland classified as held for sale at March 31, 2013.

 

The table below sets forth the components of discontinued operations reported on our consolidated statements of operations (in thousands):

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Revenue from real estate operations

 

$

5,342

 

$

14,643

 

Property operating expenses

 

(1,491

)

(5,293

)

Depreciation and amortization

 

 

(3,253

)

Impairment losses

 

 

(11,423

)

General, administrative and leasing expenses

 

(1

)

 

Business development and land carry costs

 

 

(18

)

Interest expense

 

(64

)

(1,244

)

Gain on sales of real estate

 

 

4,138

 

Discontinued operations

 

$

3,786

 

$

(2,450

)

 

The table below sets forth the components of assets held for sale on our consolidated balance sheets (in thousands):

 

 

 

March 31,
2013

 

December 31,
2012

 

Properties, net

 

$

130,292

 

$

128,740

 

Deferred rent receivable

 

4,456

 

4,068

 

Intangible assets on real estate acquisitions, net

 

4,401

 

4,409

 

Deferred leasing costs, net

 

3,166

 

2,923

 

Lease incentives

 

89

 

89

 

Assets held for sale

 

$

142,404

 

$

140,229

 

 

15. Earnings Per Unit (“EPU”)

 

We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders allocable to unrestricted common units under the two-class method by the weighted average number of unrestricted common units outstanding during the period. Our computation of diluted EPU is similar except that:

 

·                  the denominator is increased to include: (1) the weighted average number of potential additional common units that would have been outstanding if securities that are convertible into our

 

F-27



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

15. Earnings Per Unit (“EPU”) (Continued)

 

common units were converted; and (2) the effect of dilutive potential common units outstanding during the period attributable to share-based compensation using the treasury stock or if-converted methods; and

 

·                  the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common units that we added to the denominator.

 

Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in thousands, except per unit data):

 

 

 

For the Three Months
Ended March 31,

 

 

 

2013

 

2012

 

Numerator:

 

 

 

 

 

Income from continuing operations

 

$

9,137

 

$

12,685

 

Gain on sales of real estate, net

 

2,354

 

 

Preferred unit distributions

 

(6,271

)

(4,190

)

Income from continuing operations attributable to noncontrolling interests

 

369

 

576

 

Income from continuing operations attributable to restricted units

 

(118

)

(141

)

Numerator for basic and diluted EPU from continuing operations attributable to COPLP common unitholders

 

$

5,471

 

$

8,930

 

Discontinued operations

 

3,786

 

(2,450

)

Discontinued operations attributable to noncontrolling interests

 

(33

)

(6

)

Numerator for basic and diluted EPU on net income attributable to COPLP common unitholders

 

$

9,224

 

$

6,474

 

Denominator (all weighted averages):

 

 

 

 

 

Denominator for basic EPU (common units)

 

85,290

 

75,739

 

Dilutive effect of share-based compensation awards

 

52

 

44

 

Denominator for basic and diluted EPU

 

85,342

 

75,783

 

Basic EPU:

 

 

 

 

 

Income from continuing operations attributable to COPLP common unitholders

 

$

0.06

 

$

0.12

 

Discontinued operations attributable to COPLP common unitholders

 

0.05

 

(0.03

)

Net income attributable to COPLP common unitholders

 

$

0.11

 

$

0.09

 

Diluted EPU:

 

 

 

 

 

Income from continuing operations attributable to COPLP common unitholders

 

$

0.06

 

$

0.12

 

Discontinued operations attributable to COPLP common unitholders

 

0.05

 

(0.03

)

Net income attributable to COPLP common unitholders

 

$

0.11

 

$

0.09

 

 

F-28



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

15. Earnings Per Unit (“EPU”) (Continued)

 

Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPU for the respective periods (in thousands):

 

 

 

Weighted
Average Units
Excluded from
Denominator For
the Three
Months Ended
March 31,

 

 

 

2013

 

2012

 

Conversion of Series I Preferred Units

 

176

 

176

 

Conversion of Series K Preferred Units

 

434

 

434

 

 

The following share-based compensation securities were excluded from the computation of diluted EPU because their effect was antidilutive:

 

·                  weighted average restricted units for the three months ended March 31, 2013 and 2012 of 409,000 and 572,000, respectively; and

 

·                  weighted average options for the three months ended March 31, 2013 and 2012 of 621,000 and 819,000, respectively.

 

As discussed in Note 7, we have outstanding senior notes that have an exchange settlement feature but did not affect our diluted EPU reported above since the weighted average closing price of COPT’s common shares during each of the periods was less than the exchange prices per common share applicable for such periods.

 

16. Commitments and Contingencies

 

Litigation

 

In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

 

Environmental

 

We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.

 

F-29



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

16. Commitments and Contingencies (Continued)

 

Joint Ventures

 

In connection with our 2005 contribution of properties to an unconsolidated partnership in which we hold a partnership interest, we entered into standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation, and springing guarantees of partnership debt in the event of a voluntary bankruptcy of the partnership). The maximum amount we could be required to pay under the guarantees is approximately $64 million. We are entitled to recover 80% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement. In 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings. Management considered this event and estimates that the aggregate fair value of the guarantees would not exceed the amounts included in distributions received in excess of investment in unconsolidated real estate joint venture reported on the consolidated balance sheets.

 

We are party to a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.3 million square feet of office space on 92 acres of land located in Hanover, Maryland. As we and the joint venture partner agree to proceed with the construction of buildings in the future, our joint venture partner would contribute land into newly-formed entities and we would make cash capital contributions into such entities to fund development and construction activities for which financing is not obtained. We owned a 50% interest in one such joint venture as of March 31, 2013.

 

We may be required to make our pro rata share of additional investments in our real estate joint ventures (generally based on our percentage ownership) in the event that additional funds are needed. In the event that the other members of these joint ventures do not pay their share of investments when additional funds are needed, we may then deem it appropriate to make even larger investments in these joint ventures.

 

Tax Incremental Financing Obligation

 

In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as National Business Park North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $3.5 million liability through March 31, 2013 representing the estimated fair value of our obligation to fund through a special tax any future shortfalls between debt service on the bonds and real estate taxes available to repay the bonds.

 

Environmental Indemnity Agreement

 

We agreed to provide certain environmental indemnifications in connection with a lease and subsequent sale of three New Jersey properties. The prior owner of the properties, a Fortune 100 company that is responsible for groundwater contamination at such properties, previously agreed to indemnify us for (1) direct losses incurred in connection with the contamination and (2) its failure to perform remediation activities required by the State of New Jersey, up to the point that the state

 

F-30



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

(unaudited)

 

16. Commitments and Contingencies (Continued)

 

declares the remediation to be complete. Under the environmental indemnification agreement, we agreed to the following:

 

·                  to indemnify the tenant against losses covered under the prior owner’s indemnity agreement if the prior owner fails to indemnify the tenant for such losses. This indemnification is capped at $5.0 million in perpetuity after the State of New Jersey declares the remediation to be complete;

 

·                  to indemnify the tenant for consequential damages (e.g., business interruption) at one of the buildings in perpetuity and another of the buildings through 2025. This indemnification is limited to $12.5 million; and

 

·                  to pay 50% of additional costs related to construction and environmental regulatory activities incurred by the tenant as a result of the indemnified environmental condition of the properties. This indemnification is limited to $300,000 annually and $1.5 million in the aggregate.

 

17. Subsequent Events

 

On April 22, 2013, COPT redeemed all of its outstanding Series J Preferred Shares at a price of $25 per share, or $84.8 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. These shares accrued dividends equal to 7.625% of the liquidation preference. Concurrently, COPLP redeemed the Series J Preferred Units previously owned by COPT that carried terms substantially the same as the Series J Preferred Shares. We recognized a $2.9 million decrease to net income available to common unitholders pertaining to the original issuance costs incurred on the Series J Preferred Units at the time of the redemption.

 

On May 6, 2013, we issued a $350.0 million aggregate principal amount of 3.600% Senior Notes at an initial offering price of 99.816% of their face value. The proceeds from the offering, after deducting discounts of the initial purchasers of the notes, but before other offering expenses, were approximately $347.1 million. The notes mature on May 15, 2023. Prior to 90 days prior to the maturity date, we may redeem the notes, in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes being redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption) discounted to its present value, on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at an adjusted treasury rate plus 30 basis points, plus, in each case, accrued and unpaid interest thereon to the date of redemption. On or after 90 days prior to the maturity date, we may redeem the notes, in whole or in part at any time and from time to time, at our option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest on the amount being redeemed to the date of redemption. The notes are unconditionally guaranteed by COPT.

 

On May 29, 2013, we commenced a cash tender offer for the $186.3 million outstanding principal amount of our 4.25% Exchangeable Senior Notes. The consideration payable will be $1,070 per $1,000 principal amount, or $199.3 million in the aggregate, plus accrued and unpaid interest to, but not including, the payment date for the notes purchased as a result of the tender offer. The tender offer will expire on June 26, 2013, unless extended or earlier terminated by us.

 

F-31



 

Report of Independent Registered Public Accounting Firm

 

To the Board of Trustees of Corporate Office Properties Trust and Corporate Office Properties, L.P.:

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Corporate Office Properties, L.P. (“COPLP”) and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of COPLP’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

 

Baltimore, MD

June 7, 2013

 

F-32



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Balance Sheets

 

(in thousands, except unit data)

 

 

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Properties, net:

 

 

 

 

 

Operating properties, net

 

$

2,597,666

 

$

2,714,056

 

Projects in development or held for future development

 

565,378

 

638,919

 

Total properties, net

 

3,163,044

 

3,352,975

 

Assets held for sale, net

 

140,229

 

116,616

 

Cash and cash equivalents

 

10,594

 

5,559

 

Restricted cash and marketable securities

 

14,781

 

28,644

 

Accounts receivable (net of allowance for doubtful accounts of $4,694 and $3,546, respectively)

 

19,247

 

26,032

 

Deferred rent receivable

 

85,802

 

86,856

 

Intangible assets on real estate acquisitions, net

 

75,879

 

89,120

 

Deferred leasing and financing costs, net

 

59,952

 

66,515

 

Prepaid expenses and other assets

 

77,455

 

83,650

 

Total assets

 

$

3,646,983

 

$

3,855,967

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Debt, net

 

$

2,019,168

 

$

2,426,303

 

Accounts payable and accrued expenses

 

97,922

 

95,714

 

Rents received in advance and security deposits

 

27,632

 

29,548

 

Dividends and distributions payable

 

28,698

 

35,038

 

Deferred revenue associated with operating leases

 

11,995

 

15,554

 

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

 

6,420

 

6,071

 

Interest rate derivatives

 

6,185

 

30,863

 

Other liabilities

 

2,166

 

2,069

 

Total liabilities

 

2,200,186

 

2,641,160

 

 

 

 

 

 

 

Commitments and contingencies (Note 20)

 

 

 

 

 

Redeemable noncontrolling interest

 

10,298

 

8,908

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Corporate Office Properties, L.P.’s equity:

 

 

 

 

 

Preferred units

 

 

 

 

 

General partner, 12,821,667 preferred units outstanding at December 31, 2012 and 8,121,667 preferred units outstanding at December 31, 2011

 

333,833

 

216,333

 

Limited partner, 352,000 preferred units outstanding at December 31, 2012 and 2011

 

8,800

 

8,800

 

Common units, 80,952,986 and 72,011,324 held by the general partner and 4,067,542 and 4,301,788 held by limited partners at December 31, 2012 and 2011, respectively

 

1,089,391

 

972,107

 

Accumulated other comprehensive loss

 

(5,708

)

(1,837

)

 

 

 

 

 

 

Total Corporate Office Properties, L.P.’s equity

 

1,426,316

 

1,195,403

 

Noncontrolling interests in subsidiaries

 

10,183

 

10,496

 

 

 

 

 

 

 

Total equity

 

1,436,499

 

1,205,899

 

 

 

 

 

 

 

Total liabilities, redeemable noncontrolling interest and equity

 

$

3,646,983

 

$

3,855,967

 

 

See accompanying notes to consolidated financial statements.

 

F-33



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Operations

 

(in thousands, except per unit data)

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Revenues

 

 

 

 

 

 

 

Rental revenue

 

$

367,654

 

$

348,006

 

$

316,038

 

Tenant recoveries and other real estate operations revenue

 

86,517

 

80,490

 

71,521

 

Construction contract and other service revenues

 

73,836

 

84,345

 

104,675

 

Total revenues

 

528,007

 

512,841

 

492,234

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

Property operating expenses

 

167,161

 

162,397

 

146,617

 

Depreciation and amortization associated with real estate operations

 

113,480

 

113,111

 

97,897

 

Construction contract and other service expenses

 

70,576

 

81,639

 

102,302

 

Impairment losses

 

43,214

 

83,478

 

 

General, administrative and leasing expenses

 

31,900

 

30,308

 

28,477

 

Business development expenses and land carry costs

 

5,711

 

6,122

 

6,403

 

Total operating expenses

 

432,042

 

477,055

 

381,696

 

 

 

 

 

 

 

 

 

Operating income

 

95,965

 

35,786

 

110,538

 

Interest expense

 

(94,624

)

(98,222

)

(95,729

)

Interest and other income

 

7,172

 

5,603

 

9,568

 

Loss on early extinguishment of debt

 

(943

)

(1,639

)

 

Loss on interest rate derivatives

 

 

(29,805

)

 

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

 

7,570

 

(88,277

)

24,377

 

Equity in (loss) income of unconsolidated entities

 

(546

)

(331

)

1,376

 

Income tax (expense) benefit

 

(381

)

6,710

 

(108

)

Income (loss) from continuing operations

 

6,643

 

(81,898

)

25,645

 

Discontinued operations

 

13,677

 

(48,404

)

17,054

 

Income (loss) before gain on sales of real estate

 

20,320

 

(130,302

)

42,699

 

Gain on sales of real estate, net of income taxes

 

21

 

2,732

 

2,829

 

Net income (loss)

 

20,341

 

(127,570

)

45,528

 

Net loss (income) attributable to noncontrolling interests in consolidated entities

 

507

 

244

 

(61

)

Net income (loss) attributable to Corporate Office Properties, L.P.

 

20,848

 

(127,326

)

45,467

 

Preferred unit distributions

 

(21,504

)

(16,762

)

(16,762

)

Issuance costs associated with redeemed preferred units

 

(1,827

)

 

 

Net (loss) income attributable to Corporate Office Properties, L.P. common unitholders

 

$

(2,483

)

$

(144,088

)

$

28,705

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Corporate Office Properties, L.P.:

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

7,870

 

$

(78,785

)

$

28,574

 

Discontinued operations, net

 

12,978

 

(48,541

)

16,893

 

Net income (loss) attributable to Corporate Office Properties, L.P.

 

$

20,848

 

$

(127,326

)

$

45,467

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common unit(1)

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.21

)

$

(1.33

)

$

0.17

 

Discontinued operations

 

0.17

 

(0.67

)

0.27

 

Net (loss) income attributable to common unitholders

 

$

(0.04

)

$

(2.00

)

$

0.44

 

 

 

 

 

 

 

 

 

Diluted earnings per common unit(1)

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.21

)

$

(1.33

)

$

0.17

 

Discontinued operations

 

0.17

 

(0.67

)

0.27

 

Net (loss) income attributable to common unitholders

 

$

(0.04

)

$

(2.00

)

$

0.44

 

 


(1)                                 Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office Properties, L.P.

 

See accompanying notes to consolidated financial statements.

 

F-34



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Comprehensive Income

 

(in thousands)

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Net income (loss)

 

$

20,341

 

$

(127,570

)

$

45,528

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

(7,676

)

(31,531

)

(5,473

)

Losses on interest rate derivatives included in net income (loss)

 

3,697

 

4,601

 

3,689

 

Loss on interest rate derivatives upon discontinuing hedge accounting

 

 

28,430

 

 

Other comprehensive (loss) income

 

(3,979

)

1,500

 

(1,784

)

Comprehensive income (loss)

 

16,362

 

(126,070

)

43,744

 

Comprehensive loss (income) attributable to noncontrolling interests

 

615

 

244

 

(61

)

Comprehensive income (loss) attributable to Corporate Office Properties, L.P.

 

$

16,977

 

$

(125,826

)

$

43,683

 

 

See accompanying notes to consolidated financial statements.

 

F-35



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Equity

 

(Dollars in thousands)

 

 

 

Limited Partner
Preferred Units

 

General Partner
Preferred Units

 

Common Units

 

Accumulated
Other
Comprehensive

 

Noncontrolling
Interests in

 

Total

 

 

 

Units

 

Amount

 

Units

 

Amount

 

Units

 

Amount

 

Loss

 

Subsidiaries

 

Equity

 

Balance at December 31, 2009

 

352,000

 

$

8,800

 

8,121,667

 

$

216,333

 

61,742,815

 

$

887,046

 

$

(2,080

)

$

11,187

 

$

1,121,286

 

Issuance of 4.25% Exchangeable Senior Notes

 

 

 

 

 

 

18,149

 

 

 

18,149

 

Issuance of common units resulting from public issuance of common shares

 

 

 

 

 

7,475,000

 

245,621

 

 

 

245,621

 

Issuance of common units resulting from exercise of share options

 

 

 

 

 

278,656

 

4,575

 

 

 

4,575

 

Share-based compensation

 

 

 

 

 

276,970

 

11,845

 

 

 

11,845

 

Restricted common unit redemptions

 

 

 

 

 

(105,215

)

(3,913

)

 

 

(3,913

)

Comprehensive income

 

 

660

 

 

16,102

 

 

28,705

 

(2,367

)

644

 

43,744

 

Distributions to owners of common and preferred units

 

 

(660

)

 

(16,102

)

 

(105,768

)

 

 

(122,530

)

COPT contribution to COPLP of distribution from subsidiary

 

 

 

 

 

 

47

 

 

(47

)

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

510

 

510

 

Acquisition of noncontrolling interests in subsidiaries

 

 

 

 

 

 

(2,344

)

 

(2,118

)

(4,462

)

Balance at December 31, 2010

 

352,000

 

8,800

 

8,121,667

 

216,333

 

69,668,226

 

1,083,963

 

(4,447

)

10,176

 

1,314,825

 

Issuance of common units resulting from public issuance of common shares

 

 

 

 

 

4,600,000

 

145,367

 

 

 

145,367

 

Issuance of common units resulting from exercise of share options

 

 

 

 

 

191,264

 

2,461

 

 

 

2,461

 

Share-based compensation

 

 

 

 

 

302,226

 

14,267

 

 

 

14,267

 

Restricted common unit redemptions

 

 

 

 

 

(114,687

)

(3,990

)

 

 

(3,990

)

Issuance of common units to COPT to balance units owned with common shares outstanding

 

 

 

 

 

1,666,083

 

 

 

 

 

Comprehensive loss

 

 

660

 

 

16,102

 

 

(144,088

)

2,610

 

52

 

(124,664

)

Distributions to owners of common and preferred units

 

 

(660

)

 

(16,102

)

 

(124,582

)

 

 

(141,344

)

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

(23

)

 

284

 

261

 

Distributions to noncontrolling interest in subsidiaries

 

 

 

 

 

 

 

 

(16

)

(16

)

Adjustment to arrive at fair value of noncontrolling interest

 

 

 

 

 

 

(1,315

)

 

 

(1,315

)

Increase in tax benefit from share-based compensation

 

 

 

 

 

 

47

 

 

 

47

 

Balance at December 31, 2011

 

352,000

 

8,800

 

8,121,667

 

216,333

 

76,313,112

 

972,107

 

(1,837

)

10,496

 

1,205,899

 

Issuance of preferred units resulting from public issuance of preferred shares

 

 

 

6,900,000

 

172,500

 

 

(6,848

)

 

 

165,652

 

Issuance of common units resulting from public issuance of common shares

 

 

 

 

 

8,625,000

 

204,696

 

 

 

204,696

 

Redemption of preferred units resulting from redemption of preferred shares

 

 

 

(2,200,000

)

(55,000

)

 

 

 

 

(55,000

)

Issuance of common units resulting from exercise of share options

 

 

 

 

 

61,624

 

928

 

 

 

928

 

Share-based compensation

 

 

 

 

 

160,643

 

11,184

 

 

 

11,184

 

Restricted common unit redemptions

 

 

 

 

 

(139,851

)

(3,379

)

 

 

(3,379

)

Comprehensive income

 

 

660

 

 

20,844

 

 

(656

)

(3,871

)

1,950

 

18,927

 

Distributions declared to owners of common and preferred units

 

 

(660

)

 

(20,844

)

 

(86,337

)

 

 

(107,841

)

Distributions to noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

(655

)

(655

)

COPT contribution to COPLP of distribution from subsidiary

 

 

 

 

 

 

1,608

 

 

(1,608

)

 

Adjustment to arrive at fair value of noncontrolling interest

 

 

 

 

 

 

(3,955

)

 

 

(3,955

)

Increase in tax benefit from share-based compensation

 

 

 

 

 

 

43

 

 

 

43

 

Balance at December 31, 2012

 

352,000

 

$

8,800

 

12,821,667

 

$

333,833

 

85,020,528

 

$

1,089,391

 

$

(5,708

)

$

10,183

 

$

1,436,499

 

 

See accompanying notes to consolidated financial statements.

 

F-36



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

(in thousands)

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Cash flows from operating activities

 

 

 

 

 

 

 

Revenues from real estate operations received

 

$

483,421

 

$

476,762

 

$

453,847

 

Construction contract and other service revenues received

 

77,831

 

88,433

 

112,644

 

Property operating expenses paid

 

(174,683

)

(180,041

)

(173,625

)

Construction contract and other service expenses paid

 

(67,952

)

(94,140

)

(124,867

)

General, administrative, leasing, business development and land carry costs paid

 

(22,904

)

(28,021

)

(23,945

)

Interest expense paid

 

(87,394

)

(93,715

)

(87,917

)

Previously accreted interest expense paid

 

 

(17,314

)

 

Settlement of interest rate derivatives

 

(29,738

)

 

 

Proceeds from sale of trading marketable securities

 

18,975

 

 

 

Exit costs on property dispositions

 

(4,146

)

 

 

Payments in connection with early extinguishment of debt

 

(2,637

)

(353

)

 

Interest and other income received

 

1,073

 

698

 

323

 

Income taxes paid

 

(8

)

(160

)

 

Net cash provided by operating activities

 

191,838

 

152,149

 

156,460

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of and additions to properties

 

 

 

 

 

 

 

Construction, development and redevelopment

 

(165,275

)

(232,667

)

(303,064

)

Acquisitions of operating properties

 

(48,308

)

(32,856

)

(146,275

)

Tenant improvements on operating properties

 

(27,103

)

(37,195

)

(20,826

)

Other capital improvements on operating properties

 

(20,066

)

(16,906

)

(10,422

)

Proceeds from sales of properties

 

290,603

 

79,638

 

27,576

 

Proceeds from sale of equity method investment

 

 

5,773

 

 

Mortgage and other loan receivables funded or acquired

 

(14,232

)

(23,377

)

(5,588

)

Mortgage and other loan receivables payments received

 

10,113

 

16,759

 

1,568

 

Leasing costs paid

 

(13,278

)

(15,997

)

(14,403

)

Investment in unconsolidated entities

 

(250

)

(250

)

(6,600

)

Other

 

1,540

 

(3,309

)

(1,133

)

Net cash provided by (used in) investing activities

 

13,744

 

(260,387

)

(479,167

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

 

 

 

 

 

Revolving Credit Facility

 

329,000

 

1,180,000

 

663,000

 

Other debt proceeds

 

403,117

 

456,206

 

359,912

 

Repayments of debt

 

 

 

 

 

 

 

Revolving Credit Facility

 

(991,000

)

(813,000

)

(733,000

)

Scheduled principal amortization

 

(11,684

)

(13,755

)

(13,996

)

Other debt repayments

 

(124,386

)

(698,100

)

(66,663

)

Deferred financing costs paid

 

(3,371

)

(13,113

)

(8,570

)

Net proceeds from issuance of preferred units

 

165,652

 

 

 

Net proceeds from issuance of common units

 

205,425

 

147,828

 

250,196

 

Redemption of preferred units

 

(55,000

)

 

 

Acquisition of noncontrolling interests in consolidated entities

 

 

 

(4,462

)

Common unit distributions paid

 

(94,329

)

(121,864

)

(101,255

)

Preferred unit distributions paid

 

(19,747

)

(16,762

)

(16,762

)

Restricted common unit redemptions

 

(3,379

)

(3,990

)

(3,913

)

Other

 

(845

)

245

 

60

 

Net cash (used in) provided by financing activities

 

(200,547

)

103,695

 

324,547

 

Net increase (decrease) in cash and cash equivalents

 

5,035

 

(4,543

)

1,840

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

5,559

 

10,102

 

8,262

 

End of period

 

$

10,594

 

$

5,559

 

$

10,102

 

 

See accompanying notes to consolidated financial statements.

 

F-37



 

Corporate Office Properties, L.P. and Subsidiaries

 

Consolidated Statements of Cash Flows (Continued)

 

(in thousands)

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

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

 

 

 

 

 

 

 

Net income (loss)

 

$

20,341

 

$

(127,570

)

$

45,528

 

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

 

 

 

 

 

 

 

Depreciation and other amortization

 

124,418

 

136,594

 

125,819

 

Impairment losses

 

62,702

 

151,021

 

 

Loss on interest rate derivatives

 

 

29,805

 

 

Settlement of previously accreted interest expense

 

 

(17,314

)

 

Amortization of deferred financing costs

 

6,243

 

6,596

 

5,871

 

Increase in deferred rent receivable

 

(11,776

)

(10,102

)

(5,706

)

Amortization of net debt discounts

 

3,155

 

5,540

 

5,841

 

Gain on sales of real estate

 

(20,961

)

(7,528

)

(3,917

)

Gain on equity method investment

 

 

(2,452

)

(6,406

)

Share-based compensation

 

9,982

 

11,920

 

11,845

 

(Gain) loss on early extinguishment of debt

 

(3,430

)

1,670

 

 

Other

 

(3,195

)

(314

)

(3,872

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

6,693

 

(7,094

)

(1,680

)

Decrease (increase) in restricted cash and marketable securities

 

14,122

 

1,560

 

(3,372

)

Decrease (increase) in prepaid expenses and other assets

 

8,550

 

(687

)

8,674

 

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

 

4,913

 

(17,441

)

(21,147

)

Decrease in rents received in advance and security deposits

 

(1,916

)

(2,055

)

(1,018

)

Decrease in interest rate derivatives in connection with cash settlement

 

(28,003

)

 

 

Net cash provided by operating activities

 

$

191,838

 

$

152,149

 

$

156,460

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

(Decrease) increase in accrued capital improvements, leasing and other investing activity costs

 

$

(1,227

)

$

11,719

 

$

4,576

 

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

 

$

 

$

3,040

 

$

74,244

 

Decrease in property in connection with surrender of property in settlement of debt

 

$

12,042

 

$

 

$

 

Decrease in debt in connection with surrender of property in settlement of debt

 

$

16,304

 

$

 

$

 

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

 

$

 

$

 

$

9,000

 

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

 

$

4,040

 

$

1,438

 

$

(1,846

)

Distribution payable

 

$

28,698

 

$

35,038

 

$

32,299

 

Increase in redeemable noncontrolling interest and decrease in equity in connection with adjustment to arrive at fair value of noncontrolling interest

 

$

3,955

 

$

1,315

 

$

 

 

See accompanying notes to consolidated financial statements.

 

F-38



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

1. Organization

 

Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership,” “we” or “us”) is the entity through which Corporate Office Properties Trust (“COPT” or the “Company”), a fully-integrated and self-managed real estate investment trust (“REIT”) and our sole general partner, conducts almost all of its operations and owns substantially all of its assets. Interests in COPLP are in the form of common and preferred units. As discussed further in Note 12, as of December 31, 2012, COPT owned 95% of the outstanding common units and 97% of the outstanding preferred units in COPLP; the remaining common and preferred units in COPLP were owned by third parties, which included certain members of COPT’s Board of Trustees. Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in liquidation are substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a series of preferred shares that is equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

 

We focus primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of December 31, 2012, our investments in real estate included the following:

 

·                  208 operating office properties totaling 18.8 million square feet;

 

·                  13 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.7 million square feet upon completion, including two partially operational properties included above;

 

·                  land held or under pre-construction totaling 1,694 acres (including 561 controlled but not owned) that we believe is potentially developable into approximately 19.3 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 own real estate both directly and through subsidiary partnerships, limited liability companies, business trusts and corporations. In addition to owning real estate, we also own subsidiaries that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties.

 

Because we are managed by COPT, and COPT conducts substantially all of its operations through us, we refer to COPT’s executive officers as our executive officers, and although, as a partnership, we do not have a board of trustees, we refer to COPT’s Board of Trustees as our Board of Trustees.

 

F-39



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has 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 discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

 

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

 

Use of Estimates in the Preparation of Financial Statements

 

We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions affect various matters, including:

 

·                  the reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements;

 

·                  the disclosure of contingent assets and liabilities at the dates of the financial statements; and

 

·                  the reported amounts of revenues and expenses in our consolidated statements of operations during the reporting periods.

 

Significant estimates are inherent in the presentation of our financial statements in a number of areas, including the evaluation of the collectability of accounts and notes receivable, the allocation of property acquisition costs, the determination of estimated useful lives of assets, the determination of lease terms, the evaluation of impairment of long-lived assets, the amount of revenue recognized relating to tenant improvements and the level of expense recognized in connection with share-based compensation. Actual results could differ from these and other estimates.

 

Acquisitions of Properties

 

Upon completion of property acquisitions, we allocate the purchase price to tangible and intangible assets and liabilities associated with such acquisitions based on our estimates of their fair values. We determine these fair values by using market data and independent appraisals available to us and making numerous estimates and assumptions. We allocate property acquisitions to the following components:

 

·                  properties based on a valuation performed under the assumption that the property is vacant upon acquisition (the “if vacant value”). The if-vacant value is allocated between land and buildings or, in the case of properties under development, construction in progress. We also allocate additional amounts to properties for in-place tenant improvements based on our

 

F-40



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

estimate of improvements per square foot provided under market leases that would be attributable to the remaining non-cancellable terms of the respective leases;

 

·                  above- and below-market lease intangible assets or liabilities based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between: (1) the contractual amounts to be received pursuant to the in-place leases; and (2) our estimate of fair market lease rates for the corresponding space, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining non-cancellable terms of the respective leases;

 

·                  in-place lease value based on our estimates of: (1) the present value of additional income to be realized as a result of leases being in place on the acquired properties; and (2) costs to execute similar leases. Our estimate of additional income to be realized includes carrying costs, such as real estate taxes, insurance and other operating expenses, and revenues during the expected lease-up periods considering current market conditions. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs;

 

·                  tenant relationship value based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors; and

 

·                  above- and below- market cost arrangements (such as real estate tax treaties or above- or below- market ground leases) based on the present value of the expected benefit from any such arrangements in place on the property at the time of acquisition.

 

Properties

 

We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses. The preconstruction stage of the development or redevelopment of an operating property includes efforts and related costs to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. We capitalize interest expense, real estate taxes and direct and indirect project costs (including related compensation and other indirect costs) associated with properties, or portions thereof, undergoing construction, development and redevelopment activities. We continue to capitalize these costs while construction, development or redevelopment activities are underway until a property becomes “operational,” which occurs upon the earlier of when leases commence or one year after the cessation of major construction activities. When leases commence on portions of a newly-constructed or redeveloped property in the period prior to one year from the cessation of major construction activities, we consider that property to be “partially operational.” When a property is partially operational, we allocate the costs associated with the property between the portion that is operational and the portion under construction. We start depreciating newly-constructed and redeveloped properties as they become operational.

 

Most of our leases involve some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets. We capitalize the cost of the improvements when we deem the

 

F-41



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

improvements to be landlord assets. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors, including: whether the improvements are unique to the tenant or reusable by other tenants; whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease term; and whether the economic substance of the lease terms is properly reflected.

 

We depreciate our fixed assets using the straight-line method over their estimated useful lives as follows:

 

 

 

Estimated Useful Lives

Buildings and building improvements

 

10 - 40 years

Land improvements

 

10 - 20 years

Tenant improvements on operating properties

 

Related lease term

Equipment and personal property

 

3 - 10 years

 

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. Changes in holding periods may require us to recognize significant impairment losses.

 

Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. Estimated cash flows used in such analyses 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.

 

When we determine that a property is held for sale, we discontinue the recording of depreciation expense on the property and estimate the fair value, net of selling costs; if we then determine that the

 

F-42



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

estimated fair value, net of selling costs, is less than the net book value of the property, we recognize an impairment loss equal to the difference and reduce the net book value of the property.

 

When we sell an operating property, or determine that an operating property is held for sale, and determine that we have no significant continuing involvement in such property, we classify the results of operations for such property as discontinued operations. Interest expense that is specifically identifiable to properties included in discontinued operations is used in the computation of interest expense attributable to discontinued operations.

 

Sales of Interests in Real Estate

 

We recognize gains from sales of interests in real estate using the full accrual method, provided that various criteria relating to the terms of sale and any subsequent involvement by us with the real estate sold are met. We recognize gains relating to transactions that do not meet the requirements of the full accrual method of accounting when the full accrual method of accounting criteria are met.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts that may exceed Federally insured limits at times. We have not experienced any losses in these accounts in the past and believe that we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.

 

Investments in Marketable Securities

 

We classify marketable securities as trading securities when we have the intent to sell such securities in the near term, and classify other marketable securities as available-for-sale securities. We determine the appropriate classification of investments in marketable securities at the acquisition date and re-evaluate the classification at each balance sheet date. We report investments in marketable securities classified as trading securities at fair value, with unrealized gains and losses recognized through earnings. We report investments in marketable securities classified as available-for-sale securities at fair value, with net unrealized gains or losses deferred to accumulated other comprehensive loss (“AOCL”) and realized gains and losses resulting from sales of such investments recognized through earnings.

 

Accounts and Deferred Rents Receivable and Mortgage and Other Investing Receivables

 

We maintain allowances for estimated losses resulting from the failure of our customers or borrowers to satisfy their payment obligations. We use judgment in estimating these allowances based primarily upon the payment history and credit status of the entities associated with the individual receivables. We write off these receivables when we believe the facts and circumstances indicate that continued pursuit of collection is no longer warranted. When we earn interest income in connection with receivables for which we have established allowances, we establish allowances in connection with such interest income that is unpaid. When cash is received in connection with receivables for which we have established allowances, we reduce the amount of losses recognized in connection with the receivables’ allowance.

 

F-43



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

Intangible Assets and Deferred Revenue on Real Estate Acquisitions

 

We capitalize intangible assets and deferred revenue on real estate acquisitions as described in the section above entitled “Acquisitions of Properties.” We amortize the intangible assets and deferred revenue as follows:

 

 

 

Amortization Period

Above- and below-market leases

 

Related lease terms

In-place lease value

 

Related lease terms

Tenant relationship value

 

Estimated period of time that tenant will lease space in property

Above- and below-market cost arrangements

 

Term of arrangements

Market concentration premium

 

40 years

 

We recognize the amortization of acquired above-market and below-market leases as adjustments to rental revenue. We recognize the amortization of above- and below- market cost arrangements as adjustments to property operating expenses. We recognize the amortization of other intangible assets on property acquisitions as amortization expense.

 

Deferred Leasing and Financing Costs, Net

 

We defer costs incurred to obtain new tenant leases or extend existing tenant leases, including related compensation costs. We amortize these costs evenly over the lease terms. When tenant leases are terminated early, we expense any unamortized deferred leasing costs associated with those leases over the shortened term of the lease.

 

We defer costs of financing arrangements and recognize these costs as interest expense over the related loan terms on a straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization. We expense any unamortized loan costs when loans are retired early.

 

Noncontrolling Interests

 

Our consolidated noncontrolling interests are comprised primarily of interests in our consolidated real estate joint ventures. Also included in consolidated noncontrolling interests are interests in several real estate entities owned directly by COPT, or a wholly owned subsidiary of COPT, that generally do not exceed 1%. We evaluate whether noncontrolling interests are subject to redemption features outside of our control. For noncontrolling interests that are currently redeemable or deemed probable to eventually become redeemable, we classify such interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets; we adjust these interests each period to the greater of their fair value or carrying amount (initial amount as adjusted for allocations of income and losses and future contributions and distributions), with a corresponding offset to additional paid-in capital on our consolidated balance sheets, and only recognize reductions in such interests to the extent of their carrying amount. Our other noncontrolling interests are reported in the equity section of our consolidated balance sheets. The amounts reported for noncontrolling interests on our consolidated statements of operations represent the portion of these entities’ income or losses not attributable to us.

 

F-44



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

The table below sets forth activity in our redeemable noncontrolling interest (in thousands):

 

 

 

Year Ended
December 31,

 

 

 

2012

 

2011

 

Beginning balance

 

$

8,908

 

$

9,000

 

Net loss attributable to noncontrolling interest

 

(2,565

)

(1,407

)

Adjustment to arrive at fair value of interest

 

3,955

 

1,315

 

Ending balance

 

$

10,298

 

$

8,908

 

 

Revenue Recognition

 

We recognize minimum rents, net of abatements, on a straight-line basis over the non-cancelable term of tenant leases (including periods under bargain renewal options). The non-cancelable term of a lease includes periods when a tenant: (1) may not terminate its lease obligation early; or (2) may terminate its lease obligation early in exchange for a fee or penalty that we consider material enough such that termination would not be probable. We report the amount by which our minimum rental revenue recognized on a straight-line basis under leases exceeds the contractual rent billings associated with such leases as deferred rent receivable on our consolidated balance sheets. Amounts by which our minimum rental revenue recognized on a straight-line basis under leases are less than the contractual rent billings associated with such leases are included in deferred revenue associated with operating leases on our consolidated balance sheets.

 

In connection with a tenant’s entry into, or modification of, a lease, if we make cash payments to, or on behalf of, the tenant for purposes other than funding the construction of landlord assets, we defer the amount of such payments as lease incentives. We amortize lease incentives as a reduction of rental revenue over the term of the lease.

 

We recognize tenant recovery revenue in the same periods in which we incur the related expenses. Tenant recovery revenue includes payments from tenants as reimbursement for property taxes, utilities and other property operating expenses.

 

We recognize fees received for lease terminations as revenue and write off against such revenue any (1) deferred rents receivable, and (2) deferred revenue, lease incentives and intangible assets that are amortizable into rental revenue associated with the leases; the resulting net amount is the net revenue from the early termination of the leases. When a tenant’s lease for space in a property is terminated early but the tenant continues to lease such space under a new or modified lease in the property, the net revenue from the early termination of the lease is recognized evenly over the remaining life of the new or modified lease in place on that property.

 

We recognize fees for services provided by us once services are rendered, fees are determinable and collectability is assured. We recognize revenue under construction contracts using the percentage of completion method when the revenue and costs for such contracts can be estimated with reasonable accuracy; when these criteria do not apply to a contract, we recognize revenue on that contract using the completed contract method. Under the percentage of completion method, we recognize a percentage of the total estimated revenue on a contract based on the cost of services provided on the contract as of a point in time relative to the total estimated costs on the contract.

 

F-45



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

Interest Rate Derivatives

 

Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Derivatives are used to hedge the cash flows associated with interest rates on existing debt as well as future debt. We recognize all derivatives as assets or liabilities in the balance sheet at fair value. We defer the effective portion of changes in fair value of the designated cash flow hedges to AOCL and reclassify such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions. We recognize the ineffective portion of the change in fair value of interest rate derivatives directly in interest expense. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting, we recognize changes in fair value of the hedge previously deferred to AOCL, along with any changes in fair value occurring thereafter, through earnings. We do not use interest rate derivatives for trading or speculative purposes. We manage counter-party risk by only entering into contracts with major financial institutions based upon their credit ratings and other risk factors.

 

We use standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost in computing the fair value of derivatives at each balance sheet date.

 

Please refer to Note 11 for additional information pertaining to interest rate derivatives.

 

Expense Classification

 

We classify as property operations expense costs incurred for property taxes, ground rents, utilities, property management, insurance, repairs, exterior and interior maintenance and tenant revenue collection losses, as well as associated labor and indirect costs attributable to these costs.

 

We classify as general and administrative and leasing expenses costs incurred for corporate-level management, public company administration, asset management, leasing, investor relations, marketing and corporate-level insurance (including general business, director and officers and key man life) and leasing prospects, as well as associated labor and indirect costs attributable to these costs.

 

Share-Based Compensation

 

We issued two forms of share-based compensation: restricted COPT common shares (“restricted shares”) and COPT performance share units (“PSUs”). We also issued options to purchase COPT common shares (“options”) in prior years. We account for share-based compensation in accordance with authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) that establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The guidance requires us to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the grant date; such cost is then recognized over the period during which the employee is required to provide service in exchange for the award. No compensation cost is

 

F-46



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

recognized for equity instruments for which employees do not render the requisite service. The guidance also requires that share-based compensation be computed based on awards that are ultimately expected to vest; as a result, future forfeitures of awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If an award is voluntarily cancelled by an employee, we recognize the previously unrecognized cost associated with the original award on the date of such cancellation. We capitalize costs associated with share-based compensation attributable to employees engaged in construction and development activities.

 

When we adopted the authoritative guidance on accounting for share-based compensation, we elected to adopt the alternative transition method for calculating the tax effects of share-based compensation. The alternative transition method enabled us to use a simplified method to establishing the beginning balance of the additional paid-in capital pool related to the tax effects of employee share-based compensation, which was available to absorb tax deficiencies recognized subsequent to the adoption of this guidance.

 

We compute the fair value of options using the Black-Scholes option-pricing model. Under that model, the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected option life is based on our historical experience of employee exercise behavior. Expected volatility is based on historical volatility of our common shares common shares. Expected dividend yield is based on the average historical dividend yield on our common shares over a period of time ending on the grant date of the options.

 

We compute the fair value of PSUs using a Monte Carlo model. Under that model, the baseline common share value is based on the market value on the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility of our common shares.

 

Recent Accounting Pronouncements

 

We adopted guidance issued by the 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.

 

F-47



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

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 a quantitative 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

 

Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standards also establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active and (3) inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is most significant to the fair value measurement.

 

The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of December 31, 2012, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

At December 31, 2012 and 2011, we owned warrants to purchase 50,000 common shares in The KEYW Holding Corporation (“KEYW”) at an exercise price of $9.25 per share. KEYW is an entity supporting the intelligence community’s operations and transformation to Cyber Age mission by providing engineering services and integrated platforms that support the intelligence process. We acquired these warrants in March 2010 and began accounting for such warrants as derivatives in November 2010 when KEYW became a publicly-traded company. We compute the fair value of these warrants using the Black-Scholes option-pricing model. Under that model, the risk-free interest rate is based on the U.S. Treasury yield curve in effect as of the valuation date. The expected life is based on

 

F-48



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

3. Fair Value Measurements (Continued)

 

the period of time until the expiration of the warrants. Expected volatility is based on an average of the historical volatility of companies in KEYW’s industry that we deem to be comparable. Expected dividend yield is based on the dividend yield on KEYW’s common shares as of the date of valuation. The warrants are classified in Level 2 of the fair value hierarchy.

 

In addition to the warrants in KEYW described above, we also owned 1.9 million shares, or approximately 7%, of KEYW’s common stock at December 31, 2011 and 3.1 million shares, or approximately 12%, at December 31, 2010. Our investment in these common shares had a fair value of $13.8 million at December 31, 2011 based on the closing price of KEYW’s common stock on the NASDAQ Stock Market on that date and is included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet. We sold 1.2 million of these shares in 2011, resulting in $2.1 million in gain recognized. We used the equity method of accounting for our investment in the common stock until the resignation of our then Chief Executive Officer from the Board of Directors of KEYW effective July 1, 2011, at which time we began accounting for our investment in KEYW’s common stock as a trading marketable equity security to be reported at fair value, with unrealized gains and losses recognized through earnings. We sold our remaining 1.9 million shares in 2012 for $14.0 million. We recognized revenue from a lease with KEYW in one of our properties of $2.4 million in 2012, $780,000 in 2011 and $668,000 in 2010.

 

As discussed further in Note 6, our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. We determine the fair value of the interest based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partner from the properties underlying the joint venture. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancies for the properties and comparable properties and estimated operating and capital expenditures. In determining the fair value of our partner’s interest, we used a discount rate of 15.6%, which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

 

F-49



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

3. Fair Value Measurements (Continued)

 

Recurring Fair Value Measurements

 

The tables below set forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2012 and 2011 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical
Assets(Level 1)

 

Significant Other
Observable
Inputs(Level 2)

 

Significant
Unobservable
Inputs(Level 3)

 

Total

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Common stock(1)

 

$

809

 

$

 

$

 

$

809

 

Warrants to purchase common shares in KEYW(2)

 

 

294

 

 

294

 

Assets

 

$

809

 

$

294

 

$

 

$

1,103

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

$

 

$

6,185

 

$

 

$

6,185

 

Redeemable noncontrolling interest

 

$

 

$

 

$

10,298

 

$

10,298

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Common stock(1)

 

$

13,928

 

$

 

$

 

$

13,928

 

Interest rate derivative(2)

 

 

716

 

 

 

716

 

Warrants to purchase common shares in KEYW(2)

 

 

125

 

 

125

 

Assets

 

$

13,928

 

$

841

 

$

 

$

14,769

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

$

 

$

30,863

 

$

 

$

30,863

 

Redeemable noncontrolling interest

 

$

 

$

 

$

8,908

 

$

8,908

 

 


(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.

 

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 9 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 10 to the consolidated financial statements, we estimated the fair value of our

 

F-50



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

3. Fair Value Measurements (Continued)

 

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 9 for mortgage loans receivable, Note 10 for debt and Note 11 for interest rate derivatives.

 

Nonrecurring Fair Value Measurements

 

We recognized impairment losses on certain properties and other assets associated with such properties in 2011 and 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 for the year ended December 31, 2012 (dollars in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Impairment
Losses
Recognized in
2012(1)

 

Assets(2):

 

 

 

 

 

 

 

 

 

 

 

Properties, net

 

$

 

$

 

$

379,684

 

$

379,684

 

$

62,702

 

 


(1)                                  Represents impairment losses, excluding exit costs incurred of $4.2 million in 2012.

 

(2)                                  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 (dollars in thousands):

 

Description

 

Fair Value on
Measurement Date

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

 

Properties on which impairment losses were recognized

 

$

379,684

 

Bid for properties indicative of value

 

Indicative bid(1)

 

(1)

 

 

 

 

 

Contract of sale

 

Contract price(1)

 

(1)

 

 

 

 

 

Discounted cash flow

 

Discount rate

 

10.0% to 11.0% (10.4%)

 

 

 

 

 

 

 

Terminal capitalization rate

 

8.7% to 10.0% (8.9%)

 

 

 

 

 

 

 

Market rent growth rate

 

3.0%(2)

 

 

 

 

 

 

 

Expense growth rate

 

3.0%(2)

 

 

 

 

 

Yield Analysis

 

Yield

 

12%(2)

 

 

 

 

 

 

 

Market rent rate

 

$8.50 per square foot(2)

 

 

 

 

 

 

 

Leasing costs

 

$20.00 per square foot(2)

 

 


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

 

(2)                                  Only one value applied for this unobservable input.

 

F-51



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

3. Fair Value Measurements (Continued)

 

The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the year ended December 31, 2011 (dollars in thousands):

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Impairment
Losses
Recognized in
2011

 

Assets(1):

 

 

 

 

 

 

 

 

 

 

 

Properties, net

 

$

 

$

 

$

320,894

 

$

320,894

 

$

150,093

 

Prepaid and other assets

 

 

 

163

 

163

 

928

 

 


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

 

4. Concentration of Rental Revenue

 

We derived large concentrations of our revenue from real estate operations from certain tenants during the periods set forth in our consolidated statements of operations. The following table summarizes the percentage of our rental revenue (which excludes tenant recoveries and other real estate operations revenue) earned from (1) individual tenants that accounted for at least 5% of our rental revenue from continuing and discontinued operations and (2) the aggregate of the five tenants from which we recognized the most rental revenue in the respective years:

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

United States Government

 

18

%

17

%

16

%

Northrop Grumman Corporation(1)

 

7

%

8

%

9

%

Booz Allen Hamilton, Inc.

 

6

%

6

%

5

%

Computer Sciences Corporation

 

5

%

N/A

 

N/A

 

Five largest tenants

 

39

%

38

%

35

%

 


(1)   Includes affiliated organizations and agencies and predecessor companies.

 

We also derived in excess of 90% of our construction contract revenue from the United States Government in each of the years set forth on the consolidated statements of operations.

 

In addition, we derived large concentrations of our total revenue from real estate operations (defined as the sum of rental revenue and tenant recoveries and other real estate operations revenue) from certain geographic regions. These concentrations are set forth in the segment information provided in Note 15. Several of these regions, including the Baltimore/Washington Corridor, Northern Virginia, Washington, DC—Capitol Riverfront, St. Mary’s & King George Counties, Greater Baltimore, Maryland (“Greater Baltimore”) and Suburban Maryland, are within close proximity to each other, and all but two of our regions with real estate operations (San Antonio, Texas (“San Antonio”) and Colorado Springs, Colorado (“Colorado Springs”)) are located in the Mid-Atlantic region of the United States.

 

F-52



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

5. Properties, net

 

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

 

 

 

December 31,

 

 

 

2012

 

2011

 

Land

 

$

427,766

 

$

472,483

 

Buildings and improvements

 

2,725,875

 

2,801,252

 

Less: accumulated depreciation

 

(555,975

)

(559,679

)

Operating properties, net

 

$

2,597,666

 

$

2,714,056

 

 

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

 

 

 

December 31,

 

 

 

2012

 

2011

 

Land

 

$

236,324

 

$

229,833

 

Construction in progress, excluding land

 

329,054

 

409,086

 

Projects in development or held for future development

 

$

565,378

 

$

638,919

 

 

2012 Dispositions and Impairments

 

In April 2011, we completed a review of our portfolio and identified a number of properties that are no longer closely aligned with our strategy, and our Board of Trustees approved a plan by Management to dispose of some of these properties (the “Strategic Reallocation Plan”). In December 2011, we identified additional properties for disposal, and our Board of Trustees approved a plan by management to increase the scope of the Strategic Reallocation Plan to include the disposition of additional properties. We completed dispositions of the following properties in 2012 primarily in connection with the Strategic Reallocation Plan (dollars in thousands):

 

Project Name

 

Location

 

Date of Sale

 

Number of
Buildings

 

Total Rentable
Square Feet

 

Transaction
Value

 

Gain on
Disposition

 

White Marsh Portfolio Disposition

 

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

 

1,739

 

222 and 224 Schilling Circle

 

Hunt Valley, Maryland

 

2/10/2012

 

2

 

56,000

 

4,400

 

102

 

15 and 45 West Gude Drive

 

Rockville, Maryland

 

5/2/2012

 

2

 

231,000

 

49,107

 

 

11800 Tech Road

 

Silver Spring, Maryland

 

6/14/2012

 

1

 

240,000

 

21,300

 

 

400 Professional Drive

 

Gaithersburg, Maryland

 

7/2/2012

 

1

 

130,000

 

16,198

 

 

July 2012 Portfolio Disposition

 

Baltimore/Washington Corridor and Greater Baltimore

 

7/24/2012

 

23

 

1,387,000

 

161,901

 

16,900

 

 

 

 

 

 

 

35

 

2,302,000

 

$

285,506

 

$

21,186

 

 

F-53



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

5. Properties, net (Continued)

 

Each of the above dispositions represents property sales except for 400 Professional Drive, the disposition of which was completed in connection with a debt extinguishment, as described further below. We also had dispositions of non-operating properties during the year ended December 31, 2012 for aggregate transaction values totaling $28.1 million; in addition to the gain on sales reflected above, we also recognized impairment losses on certain of these sales that are disclosed below.

 

On July 2, 2012, the mortgage lender on a $15 million nonrecourse mortgage loan that was secured by our 400 Professional Drive property accepted a deed in lieu of foreclosure on the property. As a result, we transferred title to the property to the mortgage lender and we were relieved of the debt obligation plus accrued interest. As of the transfer date, the property had an estimated fair value of $11 million. Upon completion of this transfer, we recognized a gain on extinguishment of debt of $3.7 million, representing the difference between the mortgage loan and interest payable extinguished over the carrying value of the property transferred as of the transfer date, which included the effect of previous impairments taken.

 

We recognized impairment losses in 2012 in connection with the following:

 

·                  our office properties and developable land in Greater Philadelphia, Pennsylvania. Our Board of Trustees approved a plan by Management to shorten the holding period for these properties because they no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, we recognized aggregate non-cash impairment losses of $46.1 million in 2012 for the amounts by which the carrying values of the properties exceeded their respective estimated fair values. These losses contemplate our expectation that we will incur future cash expenditures of approximately $25 million to complete the redevelopment of certain of these properties;

 

·                  the Strategic Reallocation Plan of $19.0 million ($23.7 million classified as discontinued operations and including $4.2 million in exit costs), including $6.9 million pertaining to certain properties in Colorado Springs, Colorado classified as held for sale at December 31, 2012 and approximately $5.1 million related to our disposition of an additional property from which the cash flows were not sufficient to recover its carrying value; and

 

·                  construction costs incurred on a property held for future development of $1.9 million.

 

The table below sets forth the impairment losses and exit costs recognized in 2012 by period of recognition and by property classification (in thousands):

 

 

 

Three Months Ended

 

 

 

3/31/2012

 

6/30/2012

 

9/30/2012

 

12/31/2012

 

Total

 

Operating properties

 

$

11,833

 

$

2,354

 

$

55,829

 

$

247

 

$

70,263

 

Non-operating properties

 

(5,246

)

 

 

1,893

 

(3,353

)

Total

 

$

6,587

 

$

2,354

 

$

55,829

 

$

2,140

 

$

66,910

 

 

F-54



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

5. Properties, net (Continued)

 

2012 Acquisition

 

On July 11, 2012, we acquired 13857 McLearen Road, a 202,000 square foot office property in Herndon, Virginia that was 100% leased, for $48.3 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands):

 

Land, operating properties

 

$

3,507

 

Building and improvements

 

30,177

 

Intangible assets on real estate acquisitions

 

14,993

 

Total assets

 

48,677

 

Below-market leases

 

(369

)

Total acquisition cost

 

$

48,308

 

 

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

 

 

 

 

 

Weighted
Average
Amortization
Period
(in Years)

 

Tenant relationship value

 

$

7,472

 

10

 

In-place lease value

 

7,109

 

5

 

Above-market leases

 

412

 

5

 

 

 

$

14,993

 

7

 

 

We expensed $229,000 in operating property acquisition costs in 2012 that are included in business development expenses and land carry costs on our consolidated statements of operations.

 

2012 Construction Activities

 

During 2012, we placed into service an aggregate of 371,000 square feet in four newly constructed office properties, including two properties in the Baltimore/Washington Corridor, one in Greater Baltimore and one in Northern Virginia. As of December 31, 2012, we had 11 office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.4 million square feet upon completion, including four in the Baltimore/Washington Corridor, four in Huntsville, Alabama and three in Northern Virginia. We also had redevelopment underway on two office properties in Greater Philadelphia that we estimate will total 297,000 square feet upon completion.

 

2011 Dispositions and Impairment

 

As discussed above, we implemented the Strategic Reallocation Plan in 2011 to dispose of office properties and land that are no longer closely aligned with our strategy. We determined that the carrying amounts of certain of the properties included in the Strategic Reallocation Plan (the “Impaired Properties”) were not likely to be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, we recognized aggregate

 

F-55



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

5. Properties, net (Continued)

 

non-cash impairment losses in 2011 of $122.5 million (including $67.5 million classified as discontinued operations and excluding $4.8 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values. We completed the sale of the following properties under the Strategic Reallocation Plan in 2011 (dollars in thousands):

 

Project Name

 

Location

 

Date of Sale

 

Number of
Buildings

 

Total Rentable
Square Feet

 

Transaction
Value

 

Gain on
Disposition

 

1344 & 1348 Ashton Road
and 1350 Dorsey Road

 

Hanover, Maryland

 

5/24/2011

 

3

 

39,000

 

$

3,800

 

$

150

 

216 Schilling Circle

 

Hunt Valley, Maryland

 

8/23/2011

 

1

 

36,000

 

4,700

 

175

 

Towson Portfolio

 

Towson, Maryland

 

9/29/2011

 

4

 

179,000

 

16,000

 

1,134

 

11011 McCormick Road

 

Hunt Valley, Maryland

 

11/1/2011

 

1

 

57,000

 

3,450

 

822

 

10001 Franklin Square
Drive

 

White Marsh, Maryland

 

12/13/2011

 

1

 

218,000

 

16,250

 

305

 

Rutherford Business
Center Portfolio

 

Woodlawn, Maryland

 

12/15/2011

 

13

 

365,000

 

32,460

 

2,221

 

 

 

 

 

 

 

23

 

894,000

 

$

76,660

 

$

4,807

 

 

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

 

In 2011, we also recognized additional impairment losses of $803,000 on goodwill associated with operating properties.

 

The table below sets forth the impairment losses recognized in 2011 by period of recognition and by property classification (in thousands):

 

 

 

Three Months Ended

 

 

 

3/31/2011

 

6/30/2011

 

12/31/2011

 

Total

 

Non-operating properties

 

$

27,742

 

$

13,574

 

$

39,193

 

$

80,509

 

Operating properties

 

 

31,031

 

39,481

 

70,512

 

Total

 

$

27,742

 

$

44,605

 

$

78,674

 

$

151,021

 

 

F-56



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

5. Properties, net (Continued)

 

2011 Acquisition

 

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

 

Land, operating properties

 

$

261

 

Building and improvements

 

26,577

 

Intangible assets on real estate acquisitions

 

6,575

 

Total acquisition cost

 

$

33,413

 

 

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

 

 

 

 

 

Weighted
Average
Amortization
Period
(in Years)

 

Tenant relationship value

 

$

3,187

 

8

 

In-place lease value

 

2,904

 

3

 

Above-market leases

 

484

 

3

 

 

 

$

6,575

 

6

 

 

We expensed $156,000 in 2011 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations.

 

2011 Construction Activities

 

During 2011, we placed into service an aggregate of 566,000 square feet in seven newly constructed office properties, including three in the Baltimore/Washington Corridor, two in Greater Baltimore, one in San Antonio and one in St. Mary’s County.

 

F-57



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

6. Real Estate Joint Ventures

 

During the periods included herein, 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

 

 

 

 

 

Exposure

 

December 31, 2012

 

December 31, 2011

 

Acquired

 

Ownership

 

Nature of Activity

 

to Loss(2)

 

$

(6,420

)

$

(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 $4.5 million at December 31, 2012 and $5.2 million at December 31, 2011 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of loss recognition under the equity method effective October 2012, as discussed below. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same and we continue to no longer recognize income or losses under the equity method.

 

(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 20).

 

Net cash flows of the joint venture are distributed to the partners in proportion to their respective ownership interests. We did not recognize fees from the joint venture for property management, construction and leasing services we provided in 2012, 2011 and 2010.

 

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

 

 

 

December 31,

 

 

 

2012

 

2011

 

Properties, net

 

$

58,460

 

$

59,792

 

Other assets

 

4,376

 

3,529

 

Total assets

 

$

62,836

 

$

63,321

 

Liabilities (primarily debt)

 

$

72,693

 

$

67,710

 

Owners’ equity

 

(9,857

)

(4,389

)

Total liabilities and owners’ equity

 

$

62,836

 

$

63,321

 

 

F-58



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

6. Real Estate Joint Ventures (Continued)

 

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

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Revenues

 

$

7,316

 

$

7,577

 

$

8,405

 

Property operating expenses

 

(2,829

)

(3,673

)

(3,600

)

Interest expense

 

(7,672

)

(3,913

)

(3,937

)

Depreciation and amortization expense

 

(2,283

)

(2,463

)

(3,154

)

Net loss

 

$

(5,468

)

$

(2,472

)

$

(2,286

)

 

We historically accounted for the investment in our one unconsolidated real estate joint venture using the equity method of accounting primarily because: (1) we share with our partner the power to direct the matters that most significantly impact the activities of the joint venture, including the management and operations of the properties and disposal rights with respect to such properties; and (2) our partner has the right to receive benefits and absorb losses that could be significant to the VIE through its proportionately larger investment. We deferred gain in a prior period on our initial contribution of property to the joint venture due to certain guarantees described in Note 20, and we subsequently recognized losses in excess of our investment due to such guarantees and our intent to support the joint venture. During the fourth quarter of 2012, the holder of mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to our having neither the obligation nor intent to support the joint venture.

 

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

 

 

 

 

 

Nominal
Ownership

 

 

 

December 31, 2012(1)

 

 

 

Date
Acquired

 

% at
12/31/2012

 

Nature of Activity

 

Total
Assets

 

Encumbered
Assets

 

Total
Liabilities

 

LW Redstone Company, LLC

 

3/23/2010

 

85

%

Developing business park(2)

 

$

76,295

 

$

16,809

 

$

12,990

 

M Square Associates, LLC

 

6/26/2007

 

50

%

Operating two buildings and developing others(3)

 

60,798

 

47,360

 

43,149

 

Arundel Preserve #5, LLC

 

7/2/2007

 

50

%

Operating one building(4)

 

39,581

 

36,811

 

17,722

 

COPT-FD Indian Head, LLC

 

10/23/2006

 

75

%

Holding land parcel(5)

 

6,436

 

 

16

 

MOR Forbes 2 LLC

 

12/24/2002

 

50

%

Operating one building(6)

 

3,879

 

 

96

 

 

 

 

 

 

 

 

 

$

186,989

 

$

100,980

 

$

73,973

 

 


(1)                                  Excludes amounts eliminated in consolidation.

 

(2)                                  This joint venture’s property is in Huntsville, Alabama.

 

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

 

(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. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.

 

(6)                                  This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).

 

F-59



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

6. Real Estate Joint Ventures (Continued)

 

With regard to our consolidated joint ventures:

 

·                  For LW Redstone, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million) that we expect will be reimbursed by the City of Huntsville; as of December 31, 2012, we had advanced $33.3 million to the City to fund such costs (included in prepaid expenses and other assets on our consolidated balance sheet). We also expect to fund additional development and construction costs through equity contributions to the extent that third party financing is not obtained. Our partner was credited with a $9.0 million capital account upon formation and is not required to make any future equity contributions. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash flows are generally distributed as follows:

 

·                  cumulative preferred returns on capital invested to fund the project’s infrastructure costs on a pro rata basis to us and our partner;

 

·                  cumulative preferred returns on our capital invested to fund the project’s vertical construction;

 

·                  return of our invested capital;

 

·                  return of our partner’s capital;

 

·                  any remaining residual 85% to us and 15% to our partner.

 

Our partner has the right to require us to acquire its interest for fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheet. We have the right to purchase our partner’s interest at fair value upon the earlier of five years following the project’s achievement of a construction commencement threshold of 4.4 million square feet or March 2040.

 

·                  For M Square Associates, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans and accrued interest; (2) our preferred return and capital contributions used to fund infrastructure costs; (3) the partners’ preferred returns and capital contributions used to fund all other costs, including the base land value credit, in proportion to the accrued returns and capital accounts; and (4) residual amounts distributed 50% to each member.

 

·                  For Arundel Preserve #5, LLC, net cash flows will be distributed to the partners as follows: (1) member loans and accrued interest; (2) preferred returns in proportion to the partners’ respective capital accounts; (3) repayment of any building operating reserves funded by us; and (4) residual cash flows in proportion to the partners’ respective ownership interests.

 

·                  For COPT-FD Indian Head, LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests.

 

·                  For MOR Forbes 2 LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests.

 

We consolidate these real estate joint ventures because we have: (1) the power to direct the matters that most significantly impact the activities of the joint ventures, including development, leasing and

 

F-60



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

6. Real Estate Joint Ventures (Continued)

 

management of the properties constructed by the VIEs; and (2) the right to receive returns on our fundings and, in many cases, the obligation to fund the activities of the ventures to the extent that third-party financing is not obtained, both of which could be potentially significant to the VIEs.

 

The ventures discussed above include only ones in which parties other than COPLP and COPT own interests.

 

Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 20.

 

7. Intangible Assets on Real Estate Acquisitions

 

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

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

In-place lease value

 

$

134,964

 

$

93,362

 

$

41,602

 

$

151,361

 

$

97,594

 

$

53,767

 

Tenant relationship value

 

46,828

 

23,346

 

23,482

 

45,940

 

23,246

 

22,694

 

Above-market cost arrangements

 

12,416

 

4,100

 

8,316

 

12,416

 

2,857

 

9,559

 

Above-market leases

 

8,925

 

7,432

 

1,493

 

10,118

 

8,037

 

2,081

 

Market concentration premium

 

1,333

 

347

 

986

 

1,333

 

314

 

1,019

 

 

 

$

204,466

 

$

128,587

 

$

75,879

 

$

221,168

 

$

132,048

 

$

89,120

 

 

Amortization of the intangible asset categories set forth above totaled $21.4 million in 2012, $28.3 million in 2011 and $28.3 million in 2010. The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: seven years; tenant relationship value: eight years; above-market cost arrangements: 28 years; above-market leases: four years; and market concentration premium: 30 years. The approximate weighted average amortization period for all of the categories combined is ten years. Estimated amortization expense associated with the intangible asset categories set forth above for the next five years is: $14.4 million for 2013; $12.3 million for 2014; $10.6 million for 2015; $9.5 million for 2016; and $7.1 million for 2017.

 

8. Deferred Leasing and Financing Costs

 

Deferred leasing and financing costs, net consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2012

 

2011

 

Deferred leasing costs

 

$

97,852

 

$

96,140

 

Deferred financing costs

 

30,520

 

44,159

 

Accumulated amortization

 

(68,420

)

(73,784

)

Deferred leasing and financing costs, net

 

$

59,952

 

$

66,515

 

 

F-61



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

9. Prepaid Expenses and Other Assets

 

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

 

 

 

December 31,

 

 

 

2012

 

2011

 

Mortgage and other investing receivables

 

$

33,396

 

$

27,998

 

Prepaid expenses

 

19,270

 

20,035

 

Furniture, fixtures and equipment, net

 

7,991

 

10,177

 

Deferred tax asset

 

6,612

 

6,923

 

Lease incentives

 

5,578

 

5,233

 

Other assets

 

4,608

 

13,284

 

Prepaid expenses and other assets

 

$

77,455

 

$

83,650

 

 

Mortgage and Other Investing Receivables

 

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

 

 

 

December 31,

 

 

 

2012

 

2011

 

Notes receivable from City of Huntsville

 

$

33,252

 

$

17,741

 

Mortgage loans receivable

 

144

 

10,257

 

 

 

$

33,396

 

$

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 6). As of December 31, 2012, our mortgage loans receivable reflected above consisted of one loan secured by a property in Greater Baltimore. We did not have an allowance for credit losses in connection with these receivables at December 31, 2012 or December 31, 2011. The fair value of our mortgage and other investing receivables totaled $33.4 million at December 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 $271,000 at December 31, 2012 and $530,000 at December 31, 2011. We carried allowances for estimated losses for most of these balances.

 

F-62



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

10. Debt

 

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

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

 

 

Availability at

 

Carrying Value at

 

 

 

Scheduled Maturity

 

 

 

December 31,

 

December 31,

 

December 31,

 

Stated Interest Rates at

 

Dates at

 

 

 

2012

 

2012

 

2011

 

December 31, 2012

 

December 31, 2012

 

Mortgage and Other Secured Loans:

 

 

 

 

 

 

 

 

 

 

 

Fixed rate mortgage loans(1)

 

N/A

 

$

948,414

 

$

1,052,421

 

5.20% - 7.87%(2)

 

2013 - 2034

 

Variable rate secured loans

 

N/A

 

38,475

 

39,213

 

LIBOR + 2.25%(3)

 

2015

 

Other construction loan facilities

 

$

123,802

 

29,557

 

40,336

 

LIBOR + 1.95% to 2.75%(4)

 

2013 - 2015

 

Total mortgage and other secured loans

 

 

 

1,016,446

 

1,131,970

 

 

 

 

 

Revolving Credit Facility

 

800,000

 

 

662,000

 

LIBOR + 1.75% to 2.50%

 

September 1, 2014

 

Term Loan Facilities

 

770,000

 

770,000

 

400,000

 

LIBOR + 1.65% to 2.60%(5)

 

2015 - 2019

 

Unsecured notes payable

 

N/A

 

1,788

 

5,050

 

0%(6)

 

2026

 

4.25% Exchangeable Senior Notes

 

N/A

 

230,934

 

227,283

 

4.25%

 

April 2030(7)

 

Total debt

 

 

 

$

2,019,168

 

$

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 $1.3 million at December 31, 2012 and $2.4 million at December 31, 2011.

 

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

 

(3)                                 The interest rate on the loan outstanding was 2.46% at December 31, 2012.

 

(4)                                 The weighted average interest rate on these loans was 2.66% at December 31, 2012.

 

(5)                                 The weighted average interest rate on these loans was 2.17% at December 31, 2012.

 

(6)                                 These notes 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 $873,000 at December 31, 2012 and $1.8 million at December 31, 2011.

 

(7)                                 Refer to the paragraph below for descriptions of provisions for early redemption and repurchase of these notes.

 

Effective September 1, 2011, we entered into a credit agreement providing for an unsecured revolving credit facility (the “Revolving Credit Facility”) with a group of lenders for which J.P. Morgan Securities LLC and KeyBanc Capital Markets acted as join lead arrangers and joint book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. and Bank of America, N.A. acted as co-syndication agents. The lenders’ aggregate commitment under the facility was $1.0 billion, with the ability for us to increase the lenders’ aggregate commitment to $1.5 billion, provided that there is no default under the facility and subject to the approval of the lenders. Effective August 10, 2012, we exercised our right to reduce the lenders’ aggregate commitment under the facility from $1.0 billion to $800 million, with the ability for us to increase the lenders’ aggregate commitment to $1.3 billion, provided that there is no default under the facility and subject to the approval of the lenders. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement. The facility matures on September 1, 2014,

 

F-63



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

10. Debt (Continued)

 

and may be extended by one year at our option, provided that there is no default under the facility and we pay an extension fee of 0.20% of the total availability of the facility. The interest rate on the facility is based on LIBOR (customarily the 30-day rate) plus 1.75% to 2.50%, as determined by our leverage levels. The facility also carries a quarterly fee that is based on the unused amount of the facility multiplied by a per annum rate of 0.25% to 0.35%, as determined by the level of our unused amount. As of December 31, 2012, the maximum borrowing capacity under this facility totaled $800.0 million, of which $792.3 million was available.

 

Effective September 1, 2011, we entered into an unsecured term loan agreement with the same group of lenders as the Revolving Credit Facility under which we borrowed $400.0 million, with a right for us to borrow an additional $100.0 million, provided that there is no default under the agreement. The term loan matures on September 1, 2015, and may be extended by one year at our option, provided that there is no default and we pay an extension fee of 0.20% of the total availability of the agreement. The variable interest rate on the term loan is based on LIBOR rate (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels.

 

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

 

Effective February 14, 2012, we entered into an unsecured 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. 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.

 

Effective August 3, 2012, we entered into an unsecured term loan agreement with a group of lenders for which Wells Fargo Securities, LLC acted as sole arranger and sole book runner, Wells Fargo Bank, National Association acted as administrative agent and Capital One, N.A. acted as documentation agent. We borrowed $120.0 million under the term loan, with the ability for us to borrow an additional $80.0 million, provided that there is no default under the loan and subject to the approval of the lenders. The term loan matures on August 2, 2019. The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate) plus 2.10% to 2.60%, as determined by our leverage levels.

 

In 2010, we issued a $240.0 million aggregate principal amount of 4.25% Exchangeable Senior Notes due 2030. Interest on the notes is payable on April 15 and October 15 of each year. These notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at our discretion, COPT 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 December 31, 2012 and is equivalent to an exchange price of $47.96 per common share) (the initial exchange rate of the notes was based on a 20% premium over the closing price on the NYSE on the transaction pricing date). On or after April 20, 2015, COPLP may redeem the notes in cash in whole or in part. The holders of the notes have the right to require us to repurchase the notes in cash

 

F-64



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

10. Debt (Continued)

 

in whole or in part on each of April 15, 2015, April 15, 2020 and April 15, 2025, or in the event of a “fundamental change,” as defined under the terms of the notes, for a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are general unsecured senior obligations of COPLP and rank equally in right of payment with all other senior unsecured indebtedness of COPLP and are guaranteed by COPT. The carrying value of these notes included a principal amount of $240 million and an unamortized discount totaling $9.1 million at December 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 COPT’s common shares at December 31, 2012 and 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 Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Interest expense at stated interest rate

 

$

10,200

 

$

10,200

 

$

7,480

 

Interest expense associated with amortization of discount

 

3,651

 

3,437

 

2,445

 

Total

 

$

13,851

 

$

13,637

 

$

9,925

 

 

Until September 15, 2011, we had $162.5 million aggregate principal amount of 3.50% Exchangeable Senior Notes due 2026. These notes had an exchange settlement feature that provided that the notes were, under certain circumstances, exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, were exchangeable into (at our option) cash, COPT common shares or a combination of cash and COPT common shares. On September 15, 2011, we repurchased these notes at 100% of the principal amount of $162.5 million after the holders of such notes surrendered them for repurchase pursuant to the terms of the notes and the related Indenture. The effective interest rate under the notes, including amortization of the issuance costs, was 5.97%. Because the closing price of COPT’s common shares at 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:

 

 

 

For the Years
Ended
December 31,

 

 

2011

 

2010

 

Interest expense at stated interest rate

 

$

4,013

 

$

5,687

 

Interest expense associated with amortization of discount

 

2,617

 

3,736

 

Total

 

$

6,630

 

$

9,423

 

 

Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt

 

F-65



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

10. Debt (Continued)

 

service and maximum secured indebtedness ratio. As of December 31, 2012, we were within the compliance requirements of these financial covenants.

 

Our debt matures on the following schedule (in thousands):

 

2013

 

$

121,129

(1)

2014

 

158,341

 

2015

 

795,802

(2)

2016

 

278,642

 

2017

 

551,388

 

Thereafter

 

122,490

 

Total

 

$

2,027,792

(3)

 


(1)         Includes $17.5 million that may be extended for one year, subject to certain conditions.

 

(2)         Includes $411.1 million that may be extended for one year, subject to certain conditions.

 

(3)         Represents scheduled principal amortization and maturities only and therefore excludes net discounts of $8.6 million.

 

Weighted average borrowings under our Revolving Credit Facilities totaled $276.5 million in 2012 and $482.3 million in 2011. The weighted average interest rate on our Revolving Credit Facilities was 2.27% in 2012 and 1.65% in 2011.

 

We capitalized interest costs of $13.9 million in 2012, $17.4 million in 2011 and $16.5 million in 2010.

 

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

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

Fixed-rate debt

 

 

 

 

 

 

 

 

 

4.25% Exchangeable Senior Notes

 

$

230,934

 

$

240,282

 

$

227,283

 

$

238,077

 

Other fixed-rate debt

 

950,202

 

968,180

 

1,057,471

 

1,054,424

 

Variable-rate debt

 

838,032

 

845,558

 

1,141,549

 

1,139,856

 

 

 

$

2,019,168

 

$

2,054,020

 

$

2,426,303

 

$

2,432,357

 

 

F-66



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

11. Interest Rate Derivatives

 

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

 

Notional

 

 

 

 

 

Effective

 

Expiration

 

Fair Value at
December 31,

 

Amount

 

Fixed Rate

 

Floating Rate Index

 

Date

 

Date

 

2012

 

2011

 

$

100,000

 

0.6123

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

$

(594

)

$

55

 

100,000

 

0.6100

%

One-Month LIBOR

 

1/3/2012

 

9/1/2014

 

(591

)

56

 

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(1,313

)

(66

)

100,000

 

0.8320

%

One-Month LIBOR

 

1/3/2012

 

9/1/2015

 

(1,313

)

(49

)

38,475

(1)

3.8300

%

One-Month LIBOR + 2.25%

 

11/2/2010

 

11/2/2015

 

(1,268

)

(1,054

)

100,000

 

0.8055

%

One-Month LIBOR

 

9/2/2014

 

9/1/2016

 

(263

)

 

100,000

 

0.8100

%

One-Month LIBOR

 

9/2/2014

 

9/1/2016

 

(272

)

 

100,000

 

1.6730

%

One-Month LIBOR

 

9/1/2015

 

8/1/2019

 

(154

)

 

100,000

 

1.7300

%

One-Month LIBOR

 

9/1/2015

 

8/1/2019

 

(417

)

 

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

 

 

(552

)

100,000

 

1.9750

%

One-Month LIBOR

 

1/1/2010

 

5/1/2012

 

 

(532

)

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

 

 

 

 

 

 

 

 

 

 

 

$

(6,185

)

$

(30,147

)

 


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

 

(2)                                  As described below, we settled these instruments on January 5, 2012, 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 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 a cash flow hedge of interest rate risk.

 

On April 5, 2011, we entered into the two forward starting three-month LIBOR swaps set forth above with an effective date of September 30, 2011 for an aggregate notional amount of $175 million. We designated these swaps as cash flow hedges of interest payments on ten-year, fixed-rate borrowings forecasted to occur between August 2011 and April 2012. After meeting with our Board of Trustees on December 21, 2011, we determined that we would pursue other financing options and concluded that the originally forecasted borrowings were expected not to occur. Accordingly, the swaps no longer qualified for hedge accounting. On December 22, 2011, we entered into the two reverse three-month LIBOR swaps set forth above with an effective date of December 30, 2011 for an aggregate notional amount of $175 million in order to remove the majority of the variability in the termination value of

 

F-67



 

 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

11. Interest Rate Derivatives (Continued)

 

the forward starting swaps entered into on April 5, 2011. We recognized aggregate net losses of $29.8 million on these interest rate swaps in December 2011. On January 5, 2012, we settled all of the forward starting swaps entered into on April 5, 2011 and December 22, 2011 and interest accrued thereon for an aggregate of $29.7 million.

 

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):

 

 

 

December 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

 

(6,185

)

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 Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Amount of loss recognized in accumulated other comprehensive loss (“AOCL”) (effective portion)

 

$

(7,676

)

$

(31,531

)

$

(5,473

)

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

 

(3,697

)

(4,601

)

(3,689

)

Amount of loss reclassified from AOCL to loss on interest rate derivatives upon discontinuing hedge accounting

 

 

28,430

 

 

Amount of loss on interest rate derivatives recognized subsequent to such derivatives no longer being designated as hedges

 

 

1,375

 

 

 

Over the next 12 months, we estimate that approximately $2.6 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 December 31, 2012, the fair value of interest rate derivatives in a liability position related to these agreements was $6.2 million, excluding the effects of accrued interest. As of December 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 $6.4 million.

 

F-68



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

12. Equity

 

General Partner Preferred Units

 

The table below sets forth information pertaining to preferred units in COPLP held by COPT at December 31, 2012 (dollars in thousands, except per share data):

 

Series

 

# of
Units Issued

 

Aggregate
Liquidation
Preference

 

Month of Issuance

 

Annual
Distribution
Yield

 

Annual
Distribution
Per Unit

 

Earliest
Redemption
Date

 

Series H

 

2,000,000

 

$

50,000

 

December 2003

 

7.500

%

$

1.87500

 

12/18/2008

 

Series J

 

3,390,000

 

84,750

 

July 2006

 

7.625

%

$

1.90625

 

7/20/2011

 

Series K

 

531,667

 

26,583

 

January 2007

 

5.600

%

$

2.80000

 

1/9/2017

 

Series L

 

6,900,000

 

172,500

 

June 2012

 

7.375

%

$

1.84375

 

6/27/2017

 

 

 

12,821,667

 

$

333,833

 

 

 

 

 

 

 

 

 

 

In the case of each series of preferred units, COPT had outstanding series of preferred shares of beneficial interest (“preferred shares”) that carry substantially the same terms. Each series of preferred units are redeemable for cash in the amount of its liquidation preference at our option on or after the earliest redemption date. The Series K Preferred Units are also convertible, subject to certain conditions, into common units on the basis of 0.8163 common units for each preferred unit. Holders of all preferred units are entitled to cumulative distributions, payable quarterly (as and if declared by our Board of Trustees).

 

On June 27, 2012, COPT completed the public offering of 6.9 million Series L Cumulative Preferred Shares of beneficial interest (“Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. COPT contributed the net proceeds from the sale to COPLP in exchange for 6.9 million Series L Preferred Units. The Series L Preferred Units carry terms that are substantially the same as the Series L Preferred Shares.

 

On August 6, 2012, COPLP redeemed all of the outstanding 8% Series G Preferred Units held by COPT at a price of $25.00 per unit, or $55.0 million in the aggregate, plus accrued and unpaid distributions thereon through the date of redemption. We recognized a $1.8 million decrease to net income available to common unitholders pertaining to the original issuance costs incurred on the Series G Preferred Units at the time of the redemption.

 

Limited Partner Preferred Units

 

COPLP has 352,000 Series I Preferred Units issued to an unrelated party that have an aggregate liquidation preference of $8.8 million ($25.00 per unit), plus any accrued and unpaid distributions of return thereon (as described below), and may be redeemed for cash by COPLP at our option any time after September 22, 2019. The owner of these units is entitled to a priority annual cumulative return equal to 7.5% of their liquidation preference through September 22, 2019; the annual cumulative preferred return increases for each subsequent five-year period, subject to certain maximum limits. These units are convertible into common units on the basis of 0.5 common units for each Series I Preferred Unit; the resulting common units would then be exchangeable for common shares in accordance with the terms of COPLP’s agreement of limited partnership.

 

F-69



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

12. Equity (Continued)

 

Common Units

 

COPT owned 95% of COPLP’s common units as of December 31, 2012 and 94% as of December 31, 2011. Three of COPT’s trustees also controlled, either directly or through ownership by other entities or family members, an additional 4% of COPLP’s common units (“common units”) as of December 31, 2012.

 

During 2011 and 2012, COPT acquired additional common units through the following public offerings of common shares:

 

·                  4.6 million common shares in May 2011 at a public offering price of $33.00 per share for net proceeds of $145.7 million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for 4.6 million common units; and

 

·                  8.6 million common shares in October 2012 at a public offering price of $24.75 per share for net proceeds of $204.9 million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for 8.6 million common units.

 

COPLP also issued 1,666,083 common units to COPT in September 2011 to enable the number of common units in COPLP owned by COPT to equal the number of outstanding common shares of COPT. In addition, COPT also acquired common units as a result of activity pertaining to our share-based compensation plans, as disclosed in Note 13.

 

Limited partners in COPLP holding common units have the right to require COPLP to redeem all or a portion of their common units. COPLP (or COPT as the general partner) has the right, in its sole discretion, to deliver to such redeeming limited partners for each partnership unit either one COPT common share (subject to anti-dilution adjustment) or a cash payment equal to the then fair market value of such share (so adjusted) (based on the formula for determining such value set forth in the partnership agreement). Limited partners holding common units redeemed their units into common shares on the basis of one common share for each common unit in the amount of 234,246 in 2012 and 100,939 in 2011.

 

We declared distributions per common unit of $1.10 in 2012, $1.65 in 2011 and $1.61 in 2010.

 

13. Share-Based Compensation and Employee Benefit Plans

 

Share-Based Compensation Plans

 

In May 2010, COPT adopted the Amended and Restated 2008 Omnibus Equity and Incentive Plan. COPT may issue equity-based awards under this plan to officers, employees, non-employee trustees and any other key persons of us and our subsidiaries, as defined in the plan. The plan provides for a maximum of 5,900,000 common shares in COPT to be issued in the form of options, share appreciation rights, deferred share awards, restricted share awards, unrestricted share awards, performance shares, dividend equivalent rights and other equity-based awards and for the granting of cash-based awards. The plan expires on May 13, 2020.

 

In March 1998, COPT adopted a long-term incentive plan for our Trustees and our employees. This plan, which expired in March 2008, provided for the award of options, restricted shares and dividend equivalents.

 

F-70



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

13. Share-Based Compensation and Employee Benefit Plans (Continued)

 

Grants of restricted shares and options under these plans to nonemployee Trustees generally vest on the first anniversary of the grant date provided that the Trustee remains in his or her position. Restricted shares and options granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employees remain employed by us. Options expire ten years after the date of grant. Shares for each of the share-based compensation plans are issued under registration statements on Form S-8 that became effective upon filing with the Securities and Exchange Commission. In connection with awards of common shares granted by COPT under such share-based compensation plans, COPLP issues to COPT an equal number of equity instruments with identical terms.

 

The following table summarizes restricted share transactions under the share-based compensation plans for 2010, 2011 and 2012:

 

 

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Unvested at December 31, 2009

 

668,990

 

$

30.43

 

Granted

 

290,956

 

37.74

 

Forfeited

 

(13,986

)

34.38

 

Vested

 

(276,102

)

32.24

 

Unvested at December 31, 2010

 

669,858

 

32.77

 

Granted

 

320,284

 

33.68

 

Forfeited

 

(18,058

)

34.23

 

Vested

 

(323,706

)

32.86

 

Unvested at December 31, 2011

 

648,378

 

33.13

 

Granted

 

177,662

 

23.64

 

Forfeited

 

(17,019

)

31.43

 

Vested

 

(374,378

)

32.72

 

Unvested at December 31, 2012

 

434,643

 

$

29.67

 

Restricted shares expected to vest

 

419,014

 

$

29.73

 

 

The aggregate intrinsic value of restricted shares that vested was $9.0 million in 2012, $11.2 million in 2011 and $10.3 million in 2010.

 

Our Board of Trustees made the following grants of PSUs to our executives:

 

·                  100,645 PSUs on March 4, 2010 (the “2010 PSU Grants”) with an aggregate grant date fair value of $5.4 million. Certain executives voluntarily cancelled 58,105 of these PSUs in 2011; we recognized a non-cash compensation charge of $1.2 million in 2011 in connection with these PSU cancellations. The remaining PSUs at December 31, 2011 were held by Mr. Randall M. Griffin, our former Chief Executive Officer, and were terminated upon his retirement on March 31, 2012; based on COPT’s total shareholder return relative to its peer group of companies, there was no payout value in connection with the termination of the PSUs;

 

·                  56,883 PSUs on March 3, 2011 (the “2011 PSU Grants”) with an aggregate grant date fair value of $2.8 million which were all outstanding at December 31, 2012; and

 

F-71



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

13. Share-Based Compensation and Employee Benefit Plans (Continued)

 

·                  54,070 PSUs on March 1, 2012, (the “2012 PSU Grants”) with an aggregate grant date fair value of $1.8 million which were all outstanding at December 31, 2012.

 

The PSUs have a performance period beginning on the respective grant dates and concluding on the earlier of three years from the respective grant dates or the date of: (1) termination by us without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of COPT’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:

 

Percentile Rank

 

Earned PSUs Payout %

 

75th or greater

 

200% of PSUs granted

 

50th or greater

 

100% of PSUs granted

 

25th

 

50% of PSUs granted

 

Below 25th

 

0% of PSUs granted

 

 

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

 

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

 

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

 

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

 

We computed grant date fair values for PSUs using Monte Carlo models and are recognizing these values over three-year periods that commenced on the respective grant dates. The grant date fair value and certain of the assumptions used in the Monte Carlo models for PSUs granted in 2010, 2011 and 2012 are set forth below:

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Grant date fair value

 

$

32.77

 

$

49.15

 

$

53.31

 

Baseline common share value

 

$

24.39

 

$

35.17

 

$

37.84

 

Expected volatility of common shares

 

43.2

%

61.1

%

62.2

%

Risk-free interest rate

 

0.41

%

1.32

%

1.38

%

 

F-72



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

13. Share-Based Compensation and Employee Benefit Plans (Continued)

 

The following table summarizes option transactions under COPT’s share-based compensation plans for 2010, 2011 and 2012 (dollars in thousands, except per share data):

 

 

 

Shares

 

Range of Exercise
Price per Share

 

Weighted
Average
Exercise
Price per
Share

 

Weighted
Average
Remaining
Contractual
Term
(in Years)

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2009

 

1,501,906

 

$8.63 - $57.00

 

$

30.29

 

5

 

$

14,579

 

Forfeited/Expired—2010

 

(34,966

)

$41.33 - $49.60

 

$

46.59

 

 

 

 

 

Exercised—2010

 

(278,656

)

$8.63 - $42.07

 

$

16.42

 

 

 

 

 

Outstanding at December 31, 2010

 

1,188,284

 

$9.54 - $57.00

 

$

33.07

 

5

 

$

7,987

 

Forfeited/Expired—2011

 

(51,598

)

$22.49 - $50.59

 

$

42.82

 

 

 

 

 

Exercised—2011

 

(191,264

)

$9.54 - $30.25

 

$

12.82

 

 

 

 

 

Outstanding at December 31, 2011

 

945,422

 

$13.40 - $57.00

 

$

36.63

 

4

 

$

510

 

Forfeited/Expired—2012

 

(85,588

)

$25.52 - $57.00

 

$

42.98

 

 

 

 

 

Exercised—2012

 

(61,624

)

$13.40 - $22.49

 

$

15.08

 

 

 

 

 

Outstanding at December 31, 2012

 

798,210

 

$13.60 - $57.00

 

$

37.62

 

3

 

$

325

 

Exercisable at December 31, 2010

 

1,188,284

 

(1)

 

$

33.07

 

 

 

 

 

Exercisable at December 31, 2011

 

945,422

 

(2)

 

$

36.63

 

 

 

 

 

Exercisable at December 31, 2012

 

798,210

 

(3)

 

$

37.62

 

 

 

 

 

 


(1)                                 231,946 of these options had an exercise price ranging from $9.54 to $16.73; 246,103 had an exercise price ranging from $16.74 to $30.04; 205,012 had an exercise price ranging from $30.05 to $41.28; 253,607 had an exercise price ranging from $41.29 to $45.24; and 251,616 had an exercise price ranging from $45.25 to $57.00.

 

(2)                                 53,957 of these options had an exercise price ranging from $13.40 to $16.73; 225,903 had an exercise price ranging from $16.74 to $30.04; 198,762 had an exercise price ranging from $30.05 to $41.28; and 466,800 had an exercise price ranging from $41.29 to $57.00.

 

(3)                                 9,500 of these options had an exercise price ranging from $13.60 to $16.73; 204,736 had an exercise price ranging from $16.74 to $30.04; 180,962 had an exercise price ranging from $30.05 to $41.28; and 403,012 had an exercise price ranging from $41.29 to $57.00.

 

The aggregate intrinsic value of options exercised was $553,000 in 2012, $4.0 million in 2011 and $5.9 million in 2010.

 

We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax benefit of $43,000 in 2012 and $47,000 in 2011 on options exercised and vesting restricted shares in connection with employees of that subsidiary.

 

F-73



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

13. Share-Based Compensation and Employee Benefit Plans (Continued)

 

The table below sets forth our reporting for share based compensation expense (in thousands):

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

General, administrative and leasing expenses

 

$

8,611

 

$

9,077

 

$

7,511

 

Property operating expenses

 

1,371

 

2,843

 

2,543

 

Capitalized to development activities

 

1,202

 

2,347

 

1,791

 

Share-based compensation expense

 

$

11,184

 

$

14,267

 

$

11,845

 

 

The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of: 0% for all PSUs; 0% to 5% for restricted shares for 2012; and 0% to 4% for restricted shares for 2011 and 2010.

 

As of December 31, 2012, all of our options are vested and fully expensed. As of December 31, 2012, there was $6.8 million of unrecognized compensation cost related to unvested restricted shares that is expected to be recognized over a weighted average period of approximately two years. As of December 31, 2012, there was $2.3 million of unrecognized compensation cost related to PSUs that is expected to be recognized over a weighted average performance period of approximately two years.

 

401(k) Plan

 

We have a 401(k) defined contribution plan covering substantially all of our employees that permits participants to contribute up to 90% of their compensation, as defined in the Plan, per pay period on a before-tax basis or after-tax basis, or a combination of both, subject to limitations under the Internal Revenue Code of 1986 (the “IRC”), as amended. Participants who are 50 years of age or older by the end of a particular plan year and have contributed the maximum 401(k) deferral amount allowed under the plan for that year are eligible to contribute an additional portion of their annual compensation on a before-tax basis as catch-up contributions, up to the annual limit under the IRC. We match 100% of the first 1% of pre-tax and/or after-tax contributions that participants contribute to the plan and 50% of the next 5% in participant contributions to the plan (representing an aggregate match by us of 3.5% on the first 6% of participant pre-tax and/or after-tax contributions to the plan). Participants’ contributions are fully vested. Participants are 50% vested in matching contributions after one year of credited service and 100% vested after two years of credited service. We fund all contributions with cash. Our matching contributions under the plan totaled approximately $1.1 million in 2012, $1.1 million in 2011 and $1.0 million in 2010. The 401(k) plan is fully funded at December 31, 2012.

 

F-74



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

14. Operating Leases

 

We lease our properties to tenants under operating leases with various expiration dates extending to the year 2025. Gross minimum future rentals on noncancelable leases in our properties at December 31, 2012 were as follows (in thousands):

 

Year Ending December 31,

 

 

 

2013

 

$

352,149

 

2014

 

310,422

 

2015

 

261,123

 

2016

 

208,483

 

2017

 

168,585

 

Thereafter

 

373,283

 

 

 

$

1,674,045

 

 

F-75



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

15. 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). In 2012, we also reclassified costs expensed in connection with marketing space for lease to prospective tenants from property operating expenses to general, administrative and leasing expenses, the result of which is the exclusion of such expenses from NOI from real estate operations. Financial information for prior periods has been presented in conformity with these revisions.

 

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

 

Operating

 

 

 

 

 

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

 

Wholesale
Data
Center

 

Total

 

Year Ended December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

224,959

 

$

79,574

 

$

32,018

 

$

16,697

 

$

16,392

 

$

52,616

 

$

15,016

 

$

25,189

 

$

9,698

 

$

14,294

 

$

6,647

 

$

493,100

 

Property operating expenses

 

77,295

 

29,103

 

16,499

 

7,555

 

4,745

 

19,917

 

6,295

 

9,283

 

2,562

 

2,666

 

4,815

 

180,735

 

NOI from real estate operations

 

$

147,664

 

$

50,471

 

$

15,519

 

$

9,142

 

$

11,647

 

$

32,699

 

$

8,721

 

$

15,906

 

$

7,136

 

$

11,628

 

$

1,832

 

$

312,365

 

Additions to long-lived assets

 

$

24,599

 

$

65,157

 

$

280

 

$

317

 

$

1,844

 

$

9,690

 

$

1,319

 

$

2,977

 

$

286

 

$

133

 

$

199

 

$

106,801

 

Transfers from non-operating properties

 

$

64,318

 

$

44,250

 

$

468

 

$

 

$

289

 

$

37,558

 

$

790

 

$

4,295

 

$

10,626

 

$

394

 

$

58,009

 

$

220,997

 

Segment assets at December 31, 2012

 

$

1,214,105

 

$

569,860

 

$

119,369

 

$

104,544

 

$

98,027

 

$

320,548

 

$

53,252

 

$

176,726

 

$

78,798

 

$

109,924

 

$

100,777

 

$

2,945,930

 

Year Ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

218,051

 

$

74,214

 

$

30,066

 

$

17,878

 

$

14,366

 

$

70,668

 

$

21,982

 

$

23,860

 

$

7,458

 

$

12,235

 

$

5,054

 

$

495,832

 

Property operating expenses

 

78,631

 

28,518

 

14,371

 

6,762

 

4,142

 

29,543

 

9,174

 

8,800

 

1,402

 

3,048

 

3,429

 

187,820

 

NOI from real estate operations

 

$

139,420

 

$

45,696

 

$

15,695

 

$

11,116

 

$

10,224

 

$

41,125

 

$

12,808

 

$

15,060

 

$

6,056

 

$

9,187

 

$

1,625

 

$

308,012

 

Additions to long-lived assets

 

$

20,974

 

$

14,770

 

$

 

$

2,794

 

$

1,638

 

$

21,086

 

$

12,267

 

$

4,116

 

$

516

 

$

26,889

 

$

59

 

$

105,109

 

Transfers from non-operating properties

 

$

67,357

 

$

4

 

$

17,638

 

$

 

$

16,858

 

$

16,307

 

$

395

 

$

214

 

$

5,446

 

$

 

$

20,169

 

$

144,388

 

Segment assets at December 31, 2011

 

$

1,216,770

 

$

484,392

 

$

131,412

 

$

111,318

 

$

100,818

 

$

402,067

 

$

148,635

 

$

182,758

 

$

102,572

 

$

115,048

 

$

43,650

 

$

3,039,440

 

Year Ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from real estate operations

 

$

207,456

 

$

75,063

 

$

21,673

 

$

4,678

 

$

13,967

 

$

71,850

 

$

21,759

 

$

24,897

 

$

6,299

 

$

13,024

 

$

1,062

 

$

461,728

 

Property operating expenses

 

74,365

 

26,688

 

10,260

 

1,736

 

4,176

 

30,406

 

9,455

 

8,231

 

2,131

 

4,105

 

1,216

 

172,769

 

NOI from real estate operations

 

$

133,091

 

$

48,375

 

$

11,413

 

$

2,942

 

$

9,791

 

$

41,444

 

$

12,304

 

$

16,666

 

$

4,168

 

$

8,919

 

$

(154

)

$

288,959

 

Additions to long-lived assets

 

$

21,629

 

$

91,919

 

$

17

 

$

92,827

 

$

1,103

 

$

11,501

 

$

1,959

 

$

1,626

 

$

30

 

$

(2,012

)

$

369

 

$

220,968

 

Transfers from non-operating properties

 

$

48,549

 

$

(42

)

$

40,500

 

$

 

$

 

$

15,289

 

$

5,623

 

$

32,438

 

$

23,119

 

$

14

 

$

19,798

 

$

185,288

 

Segment assets at December 31, 2010

 

$

1,182,659

 

$

492,005

 

$

114,850

 

$

119,927

 

$

88,221

 

$

473,977

 

$

145,646

 

$

215,801

 

$

99,701

 

$

85,633

 

$

24,227

 

$

3,042,647

 

 

F-76



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

15. Information by Business Segment (Continued)

 

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

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Segment revenues from real estate operations

 

$

493,100

 

$

495,832

 

$

461,728

 

Construction contract and other service revenues

 

73,836

 

84,345

 

104,675

 

Less: Revenues from discontinued operations (Note 17)

 

(38,929

)

(67,336

)

(74,169

)

Total revenues

 

$

528,007

 

$

512,841

 

$

492,234

 

 

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

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Segment property operating expenses

 

$

180,735

 

$

187,820

 

$

172,769

 

Less: Property operating expenses from discontinued operations (Note 17)

 

(13,574

)

(25,423

)

(26,152

)

Total property operating expenses

 

$

167,161

 

$

162,397

 

$

146,617

 

 

As previously discussed, we provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Construction contract and other service revenues

 

$

73,836

 

$

84,345

 

$

104,675

 

Construction contract and other service expenses

 

(70,576

)

(81,639

)

(102,302

)

NOI from service operations

 

$

3,260

 

$

2,706

 

$

2,373

 

 

F-77



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

15. Information by Business Segment (Continued)

 

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

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

NOI from real estate operations

 

$

312,365

 

$

308,012

 

$

288,959

 

NOI from service operations

 

3,260

 

2,706

 

2,373

 

Interest and other income

 

7,172

 

5,603

 

9,568

 

Equity in (loss) income of unconsolidated entities

 

(546

)

(331

)

1,376

 

Income tax (expense) benefit

 

(381

)

6,710

 

(108

)

Other adjustments:

 

 

 

 

 

 

 

Depreciation and other amortization associated with real estate operations

 

(113,480

)

(113,111

)

(97,897

)

Impairment losses

 

(43,214

)

(83,478

)

 

General, administrative and leasing expenses

 

(31,900

)

(30,308

)

(28,477

)

Business development expenses and land carry costs

 

(5,711

)

(6,122

)

(6,403

)

Interest expense on continuing operations

 

(94,624

)

(98,222

)

(95,729

)

NOI from discontinued operations

 

(25,355

)

(41,913

)

(48,017

)

Loss on interest rate derivatives

 

 

(29,805

)

 

Loss on early extinguishment of debt

 

(943

)

(1,639

)

 

Income (loss) from continuing operations

 

$

6,643

 

$

(81,898

)

$

25,645

 

 

The following table reconciles our segment assets to total assets (in thousands):

 

 

 

As of December 31,

 

 

 

2012

 

2011

 

Segment assets

 

$

2,945,930

 

$

3,039,440

 

Non-operating property assets

 

570,402

 

658,900

 

Other assets

 

130,651

 

157,627

 

Total assets

 

$

3,646,983

 

$

3,855,967

 

 

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

 

16. Income Taxes

 

Because COPLP is a limited partnership, its partners are required to report their respective share of the Operating Partnership’s taxable income on their respective tax returns.

 

F-78



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

16. Income Taxes (Continued)

 

The differences between taxable income reported on our income tax return and net income as reported on our consolidated statements of operations are set forth below (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Net income (loss)

 

$

20,341

 

$

(127,570

)

$

45,528

 

Adjustments:

 

 

 

 

 

 

 

Rental revenue recognition

 

(10,794

)

(10,708

)

(9,192

)

Compensation expense recognition

 

(2,669

)

(1,298

)

(4,820

)

Operating expense recognition

 

1,158

 

751

 

280

 

Gain on sales of properties

 

(74,858

)

1,154

 

6,548

 

Impairment losses

 

66,910

 

151,021

 

 

Loss on interest rate derivatives

 

(29,805

)

29,805

 

 

Gains from non-real estate investments

 

7,854

 

4,447

 

(6,994

)

Income from service operations

 

1,500

 

(12,078

)

(1,628

)

Income tax expense

 

381

 

6,710

 

119

 

Depreciation and amortization

 

24,804

 

44,070

 

42,365

 

Discounts/premiums included in interest expense

 

3,978

 

5,548

 

5,841

 

Income from unconsolidated entities

 

(725

)

(374

)

(244

)

Noncontrolling interests, gross

 

(636

)

(1,919

)

2,501

 

Other

 

(70

)

80

 

2,173

 

Taxable income

 

$

7,369

 

$

89,639

 

$

82,477

 

 

The net basis of our consolidated assets and liabilities for tax reporting purposes is approximately $387 million lower than the amount reported on our consolidated balance sheet at December 31, 2012, which is primarily related to differences in basis for net properties, intangible assets on property acquisitions and deferred rent receivable.

 

We own a taxable REIT subsidiary (“TRS”) that is subject to Federal and state income taxes. Our TRS had income (loss) before income taxes under GAAP of $11.3 million in 2012, $(27.7) million in

 

F-79



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

16. Income Taxes (Continued)

 

2011 and $345,000 in 2010. Our TRS’ provision for income tax consisted of the following (in thousands):

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Deferred

 

 

 

 

 

 

 

Federal

 

$

(312

)

$

5,510

 

$

64

 

State

 

(69

)

1,219

 

14

 

 

 

(381

)

6,729

 

78

 

Current

 

 

 

 

 

 

 

Federal

 

 

(16

)

(161

)

State

 

 

(3

)

(36

)

 

 

 

(19

)

(197

)

Total income tax (expense) benefit

 

$

(381

)

$

6,710

 

$

(119

)

Reported on line entitled income tax (expense) benefit

 

$

(381

)

$

6,710

 

$

(108

)

Reported on line entitled gain on sales of real estate, net

 

 

 

(11

)

Total income tax (expense) benefit

 

$

(381

)

$

6,710

 

$

(119

)

 

A reconciliation of our TRS’ Federal statutory rate to the effective tax rate for income tax reported on our statements of operations is set forth below:

 

 

 

For the Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Income taxes at U.S. statutory rate

 

34.0

%

34.0

%

34.0

%

State and local, net of U.S. Federal tax benefit

 

4.6

%

4.6

%

4.2

%

Other

 

0.0

%

0.0

%

(3.5

)%

Effective tax rate

 

38.6

%

38.6

%

34.7

%

 

Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation, compensation paid in the form of contributions to a deferred nonqualified compensation plan, impairment losses and net operating losses that are not deductible until future periods. As of December 31, 2012, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $16 million expiring in 2033.

 

F-80



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

16. Income Taxes (Continued)

 

The table below sets forth the tax effects of temporary differences and carry forwards included in the net deferred tax asset of our TRS (in thousands):

 

 

 

December 31,

 

 

 

2012

 

2011

 

Operating loss and interest deduction carry forwards

 

$

6,014

 

$

1,758

 

Share-based compensation

 

598

 

497

 

Property(1)

 

 

4,668

 

Net deferred tax asset

 

$

6,612

 

$

6,923

 

 


(1)    Difference primarily pertains to depreciation and amortization, basis of contributed assets and the capitalization of interest and certain other costs.

 

We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes is included in general and administrative expense and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant.

 

17. Discontinued Operations and Assets Held for Sale

 

Income from discontinued operations primarily includes revenues and expenses associated with the following:

 

·                  11101 McCormick Road in Greater Baltimore that was sold on February 1, 2010;

 

·                  431 and 437 Ridge Road in Central New Jersey (included in the Other region) that were sold on September 8, 2010;

 

·                  1344 and 1348 Ashton Road and 1350 Dorsey Road in the Baltimore/Washington Corridor that were sold on May 24, 2011;

 

·                  216 Schilling Circle in Greater Baltimore that was sold on August 23, 2011;

 

·                  four properties comprising the Towson Portfolio in Greater Baltimore that were sold on September 29, 2011;

 

·                  11011 McCormick Road in Greater Baltimore that was sold on November 1, 2011;

 

·                  10001 Franklin Square Drive in Greater Baltimore that was sold on December 13, 2011;

 

·                  13 properties comprising the Rutherford Business Center portfolio in Greater Baltimore that were sold on December 15, 2011;

 

·                  five properties in White Marsh, Maryland (in the Greater Baltimore region) that were sold on January 30, 2012;

 

·                  1101 Sentry Gateway in San Antonio that was sold on January 31, 2012;

 

·                  222 and 224 Schilling Circle in Greater Baltimore that were sold on February 10, 2012;

 

F-81



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

17. Discontinued Operations and Assets Held for Sale (continued)

 

·                  15 and 45 West Gude Drive in Suburban Maryland that were sold on May 2, 2012;

 

·                  11800 Tech Road in Suburban Maryland that was sold on June 14, 2012;

 

·                  400 Professional Drive in Suburban Maryland for which the title to the property was transferred to the mortgage lender on July 2, 2012 (see Note 5);

 

·                  23 operating properties in the Baltimore/Washington Corridor and Greater Baltimore regions that were sold on July 24, 2012; and

 

·                  16 operating properties in Colorado Springs and an operating property in Suburban Maryland classified as held for sale at December 31, 2012.

 

The table below sets forth the components of discontinued operations reported on our consolidated statements of operations (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Revenue from real estate operations

 

$

38,929

 

$

67,336

 

$

74,169

 

Property operating expenses

 

(13,574

)

(25,423

)

(26,152

)

Depreciation and amortization

 

(8,457

)

(21,020

)

(25,346

)

Impairment losses

 

(23,696

)

(67,543

)

 

General, administrative and leasing expenses

 

(3

)

(12

)

(223

)

Business development and land carry costs

 

(24

)

(75

)

(72

)

Interest expense

 

(2,174

)

(6,079

)

(6,399

)

Gain on sales of real estate

 

20,940

 

4,796

 

1,077

 

Gain (loss) on early extinguishment of debt

 

1,736

 

(384

)

 

Discontinued operations

 

$

13,677

 

$

(48,404

)

$

17,054

 

 

The table below sets forth the components of assets held for sale on our consolidated balance sheets (in thousands):

 

 

 

As of December 31,

 

 

 

2012

 

2011

 

Properties, net

 

$

128,740

 

$

108,356

 

Deferred rent receivable

 

4,068

 

2,800

 

Intangible assets on real estate acquisitions, net

 

4,409

 

1,737

 

Deferred leasing costs, net

 

2,923

 

3,723

 

Lease incentives

 

89

 

 

Assets held for sale, net

 

$

140,229

 

$

116,616

 

 

18. Earnings Per Common Unit (“EPU”)

 

We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders allocable to unrestricted common units under the two-class method by the

 

F-82



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

18. Earnings Per Common Unit (“EPU”) (Continued)

 

weighted average number of unrestricted common units outstanding during the period. Our computation of diluted EPU is similar except that:

 

·                  the denominator is increased to include: (1) the weighted average number of potential additional common units that would have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive potential common units outstanding during the period attributable to share-based compensation using the treasury stock or if-converted methods; and

 

·                  the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common units that we added to the denominator.

 

Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in thousands, except per share data):

 

 

 

For the Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Numerator:

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

6,643

 

$

(81,898

)

$

25,645

 

Gain on sales of real estate, net

 

21

 

2,732

 

2,829

 

Preferred unit distributions

 

(21,504

)

(16,762

)

(16,762

)

Issuance costs associated with redeemed preferred units

 

(1,827

)

 

 

Loss from continuing operations attributable to noncontrolling interests

 

1,206

 

381

 

100

 

Income from continuing operations attributable to restricted units

 

(469

)

(1,037

)

(1,071

)

Numerator for basic and diluted EPU from continuing operations attributable to COPLP common unitholders

 

$

(15,930

)

$

(96,584

)

$

10,741

 

Discontinued operations

 

13,677

 

(48,404

)

17,054

 

Discontinued operations attributable to noncontrolling interests

 

(699

)

(137

)

(161

)

Numerator for basic and diluted EPU on net (loss) income attributable to COPLP common unitholders

 

$

(2,952

)

$

(145,125

)

$

27,634

 

Denominator (all weighted averages):

 

 

 

 

 

 

 

Denominator for basic EPU (common units)

 

77,689

 

72,564

 

62,553

 

Dilutive effect of share-based compensation awards

 

 

 

333

 

Denominator for diluted EPU

 

77,689

 

72,564

 

62,886

 

Basic EPU:

 

 

 

 

 

 

 

(Loss) income from continuing operations attributable to COPLP common unitholders

 

$

(0.21

)

$

(1.33

)

$

0.17

 

Discontinued operations attributable to COPLP common unitholders

 

0.17

 

(0.67

)

0.27

 

Net (loss) income attributable to COPLP common unitholders

 

$

(0.04

)

$

(2.00

)

$

0.44

 

Diluted EPU:

 

 

 

 

 

 

 

(Loss) income from continuing operations attributable to COPLP common unitholders

 

$

(0.21

)

$

(1.33

)

$

0.17

 

Discontinued operations attributable to COPLP common unitholders

 

0.17

 

(0.67

)

0.27

 

Net (loss) income attributable to COPLP common unitholders

 

$

(0.04

)

$

(2.00

)

$

0.44

 

 

F-83



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

18. Earnings Per Common Unit (“EPU”) (Continued)

 

Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPU for the respective periods (in thousands):

 

 

 

Weighted Average Units
Excluded from
Denominator for the
Years Ended
December 31,

 

 

 

2012

 

2011

 

2010

 

Conversion of Series I Preferred Units

 

176

 

176

 

176

 

Conversion of Series K Preferred Units

 

434

 

434

 

434

 

 

The following share-based compensation securities were excluded from the computation of diluted EPU because their effect was antidilutive:

 

·                  weighted average restricted units of 461,000 for 2012, 638,000 for 2011 and 666,000 for 2010; and

 

·                  weighted average options of 772,000 for 2012, 712,000 for 2011 and 653,000 for 2010, respectively.

 

As discussed in Note 10, we have outstanding senior notes that have an exchange settlement feature but did not affect our diluted EPU reported above since the weighted average closing price of COPT’s common shares during each of the periods was less than the exchange prices per common share applicable for such periods.

 

19. Quarterly Data (Unaudited)

 

The tables below set forth selected quarterly information for the years ended December 31, 2012 and 2011 (in thousands, except per share data).

 

 

 

For the Year Ended December 31, 2012

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Revenues

 

$

132,195

 

$

128,163

 

$

130,144

 

$

137,505

 

Operating income (loss)

 

$

36,192

 

$

33,837

 

$

(8,586

)

$

34,522

 

Income (loss) from continuing operations

 

$

12,685

 

$

10,065

 

$

(31,850

)

$

15,743

 

Discontinued operations

 

$

(2,450

)

$

1,775

 

$

11,085

 

$

3,267

 

Net income (loss)

 

$

10,235

 

$

11,861

 

$

(20,765

)

$

19,010

 

Net loss (income) attributable to noncontrolling interests

 

570

 

1

 

(404

)

340

 

Net income (loss) attributable to COPLP

 

10,805

 

11,862

 

(21,169

)

19,350

 

Preferred unit distributions

 

(4,190

)

(4,332

)

(6,711

)

(6,271

)

Issuance costs associated with redeemed preferred units

 

 

 

(1,827

)

 

Net income (loss) attributable to COPLP common unitholders

 

$

6,615

 

$

7,530

 

$

(29,707

)

$

13,079

 

Basic earnings per common unit

 

$

0.09

 

$

0.10

 

$

(0.39

)

$

0.16

 

Diluted earnings per common unit

 

$

0.09

 

$

0.10

 

$

(0.39

)

$

0.16

 

 

F-84



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

19. Quarterly Data (Unaudited) (Continued)

 

 

 

For the Year Ended December 31, 2011

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Revenues

 

$

126,320

 

$

131,840

 

$

126,707

 

$

127,974

 

Operating income (loss)

 

$

789

 

$

16,604

 

$

27,400

 

$

(9,007

)

(Loss) income from continuing operations

 

$

(22,859

)

$

(393

)

$

1,669

 

$

(60,315

)

Discontinued operations

 

$

1,584

 

$

(25,008

)

$

5,801

 

$

(30,781

)

Net (loss) income

 

$

(18,574

)

$

(25,374

)

$

7,470

 

$

(91,092

)

Net loss (income) attributable to noncontrolling interests

 

(103

)

266

 

(301

)

382

 

Net (loss) income attributable to COPLP

 

(18,677

)

(25,108

)

7,169

 

(90,710

)

Preferred unit distributions

 

(4,190

)

(4,191

)

(4,190

)

(4,191

)

Net (loss) income attributable to COPLP common unitholders

 

$

(22,867

)

$

(29,299

)

$

2,979

 

$

(94,901

)

Basic earnings per common unit

 

$

(0.34

)

$

(0.42

)

$

0.04

 

$

(1.26

)

Diluted earnings per common unit

 

$

(0.34

)

$

(0.42

)

$

0.04

 

$

(1.26

)

 

20. Commitments and Contingencies

 

Litigation

 

In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

 

Environmental

 

We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.

 

Joint Ventures

 

In connection with our 2005 contribution of properties to an unconsolidated partnership in which we hold a partnership interest, we entered into standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation, and springing guarantees of partnership debt in the event of a voluntary bankruptcy of the partnership). The maximum amount we could be required to pay under the guarantees is approximately $64 million. We are entitled to recover 80% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement. In 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings. Management considered this event and estimates that the aggregate fair value of the guarantees would not exceed the amounts included in distributions received

 

F-85



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

20. Commitments and Contingencies (Continued)

 

in excess of investment in unconsolidated real estate joint venture reported on the consolidated balance sheets.

 

We are party to a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.3 million square feet of office space on 92 acres of land located in Hanover, Maryland. As we and the joint venture partner agree to proceed with the construction of buildings in the future, our joint venture partner would contribute land into newly-formed entities and we would make cash capital contributions into such entities to fund development and construction activities for which financing is not obtained. We owned a 50% interest in one such joint venture as of December 31, 2012.

 

We may be required to make our pro rata share of additional investments in our real estate joint ventures (generally based on our percentage ownership) in the event that additional funds are needed. In the event that the other members of these joint ventures do not pay their share of investments when additional funds are needed, we may then deem it appropriate to make even larger investments in these joint ventures.

 

Tax Incremental Financing Obligation

 

In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as National Business Park North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $3.6 million liability through December 31, 2012 representing the estimated fair value of our obligation to fund through a special tax any future shortfalls between debt service on the bonds and real estate taxes available to repay the bonds.

 

Ground Leases

 

We are obligated as lessee under ground leases with various lease expiration dates extending to the year 2100. Future minimum rental payments due under the terms of these leases as of December 31, 2012 follow (in thousands):

 

Year Ending December 31,

 

 

 

2013

 

$

919

 

2014

 

973

 

2015

 

974

 

2016

 

974

 

2017

 

974

 

Thereafter

 

81,700

 

 

 

$

86,514

 

 

Environmental Indemnity Agreement

 

We agreed to provide certain environmental indemnifications in connection with a lease and subsequent sale of three New Jersey properties. The prior owner of the properties, a Fortune

 

F-86



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

20. Commitments and Contingencies (Continued)

 

100 company that is responsible for groundwater contamination at such properties, previously agreed to indemnify us for (1) direct losses incurred in connection with the contamination and (2) its failure to perform remediation activities required by the State of New Jersey, up to the point that the state declares the remediation to be complete. Under the environmental indemnification agreement, we agreed to the following:

 

·                  to indemnify the tenant against losses covered under the prior owner’s indemnity agreement if the prior owner fails to indemnify the tenant for such losses. This indemnification is capped at $5.0 million in perpetuity after the State of New Jersey declares the remediation to be complete;

 

·                  to indemnify the tenant for consequential damages (e.g., business interruption) at one of the buildings in perpetuity and another of the buildings through 2025. This indemnification is limited to $12.5 million; and

 

·                  to pay 50% of additional costs related to construction and environmental regulatory activities incurred by the tenant as a result of the indemnified environmental condition of the properties. This indemnification is limited to $300,000 annually and $1.5 million in the aggregate.

 

21. Subsequent Events

 

On March 19, 2013, COPT completed a public offering of 4,485,000 common shares at a price of $26.34 per share for net proceeds of $118.1 million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for 4,485,000 common units.

 

During the three months ended March 31, 2013, we repaid a $53.7 million principal amount of our 4.25% Exchangeable Senior Notes for an aggregate repayment amount of $56.4 million, and recognized a $5.3 million loss of early extinguishment of debt, including unamortized loan issuance costs.

 

On April 22, 2013, COPT redeemed all of its outstanding Series J Preferred Shares at a price of $25 per share, or $84.8 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. Concurrently, COPLP redeemed the Series J Preferred Units previously owned by COPT that carried terms substantially the same as the Series J Preferred Shares. We recognized a $2.9 million decrease to net income available to common unitholders pertaining to the original issuance costs incurred on the Series J Preferred Units at the time of the redemption.

 

On May 6, 2013, we issued a $350.0 million aggregate principal amount of 3.600% Senior Notes at an initial offering price of 99.816% of their face value. The proceeds from the offering, after deducting discounts of the initial purchasers of the notes, but before other offering expenses, were approximately $347.1 million. The notes mature on May 15, 2023. Prior to 90 days prior to the maturity date, we may redeem the notes, in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes being redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption) discounted to its present value, on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at an adjusted treasury rate plus 30 basis points, plus, in each case, accrued and unpaid interest thereon to the date of redemption. On or after 90 days prior to the maturity date, we may redeem the notes, in whole or in part at any time and from time to time, at our option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and

 

F-87



 

Corporate Office Properties, L.P. and Subsidiaries

 

Notes to Consolidated Financial Statements (Continued)

 

21. Subsequent Events (Continued)

 

unpaid interest on the amount being redeemed to the date of redemption. The notes are unconditionally guaranteed by COPT.

 

On May 29, 2013, we commenced a cash tender offer for the $186.3 million outstanding principal amount of our 4.25% Exchangeable Senior Notes. The consideration payable will be $1,070 per $1,000 principal amount, or $199.3 million in the aggregate, plus accrued and unpaid interest to, but not including, the payment date for the notes purchased as a result of the tender offer. The tender offer will expire on June 26, 2013, unless extended or earlier terminated by us.

 

F-88



 

Corporate Office Properties, L.P. and Subsidiaries

 

Schedule III—Real Estate and Accumulated Depreciation

 

December 31, 2012

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Carried At Close of

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

1000 Redstone Gateway (O)

 

Huntsville, AL

 

$

11,078

 

$

 

$

18,582

 

$

 

$

 

$

18,582

 

$

18,582

 

$

 

 

(7)

3/23/2010

 

1055 North Newport Road (O)(10)

 

Colorado Springs, CO

 

 

972

 

5,708

 

 

972

 

5,708

 

6,680

 

(178

)

2007 - 2008

 

5/19/2006

 

10807 New Allegiance Drive (O)(10)

 

Colorado Springs, CO

 

 

1,840

 

15,439

 

122

 

1,840

 

15,561

 

17,401

 

(298

)

2009

 

9/28/2005

 

1099 Winterson Road (O)

 

Linthicum, MD

 

12,012

 

1,323

 

5,293

 

2,499

 

1,323

 

7,792

 

9,115

 

(3,348

)

1988

 

4/30/1998

 

1100 Redstone Gateway (O)

 

Huntsville, AL

 

 

 

924

 

 

 

924

 

924

 

 

 

(7)

3/23/2010

 

114 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

364

 

3,109

 

21

 

364

 

3,130

 

3,494

 

(878

)

2002

 

6/30/2000

 

11751 Meadowville Lane (O)

 

Richmond, VA

 

 

1,305

 

52,098

 

112

 

1,305

 

52,210

 

53,515

 

(7,278

)

2007

 

9/15/2006

 

1190 Winterson Road (O)

 

Linthicum, MD

 

11,291

 

1,335

 

5,340

 

4,025

 

1,335

 

9,365

 

10,700

 

(5,111

)

1987

 

4/30/1998

 

1199 Winterson Road (O)

 

Linthicum, MD

 

18,578

 

1,599

 

6,395

 

3,266

 

1,599

 

9,661

 

11,260

 

(4,665

)

1988

 

4/30/1998

 

1200 Redstone Gateway (O)

 

Huntsville, AL

 

 

 

2,297

 

 

 

2,297

 

2,297

 

 

 

(7)

3/23/2010

 

1201 M Street (O)

 

Washington, DC

 

36,659

 

 

49,785

 

1,959

 

 

51,744

 

51,744

 

(3,939

)

2001

 

9/28/2010

 

1201 Winterson Road (O)

 

Linthicum, MD

 

 

1,288

 

5,154

 

460

 

1,288

 

5,614

 

6,902

 

(2,068

)

1985

 

4/30/1998

 

1220 12th Street, SE (O)

 

Washington, DC

 

30,153

 

 

42,464

 

733

 

 

43,197

 

43,197

 

(3,914

)

2003

 

9/28/2010

 

1243 Winterson Road (L)

 

Linthicum, MD

 

 

630

 

 

 

630

 

 

630

 

 

 

(8)

12/19/2001

 

12515 Academy Ridge View (O)(10)

 

Colorado Springs, CO

 

 

2,612

 

6,087

 

 

2,612

 

6,087

 

8,699

 

(441

)

2006

 

6/26/2009

 

1302 Concourse Drive (O)

 

Linthicum, MD

 

 

2,078

 

8,313

 

2,991

 

2,078

 

11,304

 

13,382

 

(4,626

)

1996

 

11/18/1999

 

1304 Concourse Drive (O)

 

Linthicum, MD

 

 

1,999

 

12,934

 

1,202

 

1,999

 

14,136

 

16,135

 

(4,657

)

2002

 

11/18/1999

 

1306 Concourse Drive (O)

 

Linthicum, MD

 

 

2,796

 

11,186

 

2,837

 

2,796

 

14,023

 

16,819

 

(4,998

)

1990

 

11/18/1999

 

131 National Business Parkway (O)

 

Annapolis Junction, MD

 

6,922

 

1,906

 

7,623

 

2,657

 

1,906

 

10,280

 

12,186

 

(3,876

)

1990

 

9/28/1998

 

132 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

2,917

 

12,259

 

2,895

 

2,917

 

15,154

 

18,071

 

(6,563

)

2000

 

5/28/1999

 

13200 Woodland Park Road (O)

 

Herndon, VA

 

 

10,428

 

41,711

 

13,831

 

10,428

 

55,542

 

65,970

 

(19,432

)

2002

 

6/2/2003

 

133 National Business Parkway (O)

 

Annapolis Junction, MD

 

9,262

 

2,517

 

10,068

 

4,821

 

2,517

 

14,889

 

17,406

 

(6,167

)

1997

 

9/28/1998

 

1331 Ashton Road (O)

 

Hanover, MD

 

 

587

 

2,347

 

677

 

587

 

3,024

 

3,611

 

(939

)

1989

 

4/28/1999

 

1334 Ashton Road (O)

 

Hanover, MD

 

 

736

 

1,488

 

2,301

 

736

 

3,789

 

4,525

 

(1,468

)

1989

 

4/28/1999

 

134 National Business Parkway (O)

 

Annapolis Junction, MD

 

19,200

 

3,684

 

7,517

 

2,230

 

3,684

 

9,747

 

13,431

 

(4,138

)

1999

 

11/13/1998

 

1340 Ashton Road (O)

 

Hanover, MD

 

 

905

 

3,620

 

1,067

 

905

 

4,687

 

5,592

 

(1,874

)

1989

 

4/28/1999

 

1341 Ashton Road (O)

 

Hanover, MD

 

 

306

 

1,223

 

588

 

306

 

1,811

 

2,117

 

(727

)

1989

 

4/28/1999

 

1343 Ashton Road (O)

 

Hanover, MD

 

 

193

 

774

 

405

 

193

 

1,179

 

1,372

 

(435

)

1989

 

4/28/1999

 

13450 Sunrise Valley Road (O)

 

Herndon, VA

 

 

1,386

 

5,576

 

2,722

 

1,386

 

8,298

 

9,684

 

(2,853

)

1998

 

7/25/2003

 

13454 Sunrise Valley Road (O)

 

Herndon, VA

 

 

2,899

 

11,986

 

3,909

 

2,899

 

15,895

 

18,794

 

(4,605

)

1998

 

7/25/2003

 

135 National Business Parkway (O)

 

Annapolis Junction, MD

 

9,925

 

2,484

 

9,750

 

2,882

 

2,484

 

12,632

 

15,116

 

(4,932

)

1998

 

12/30/1998

 

1362 Mellon Road (O)

 

Hanover, MD

 

 

1,706

 

8,412

 

18

 

1,706

 

8,430

 

10,136

 

(841

)

2006

 

2/10/2006

 

13857 McLearen Road (O)

 

Herndon, VA

 

 

3,507

 

30,177

 

1,724

 

3,507

 

31,901

 

35,408

 

(973

)

2007

 

7/11/2012

 

140 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

3,407

 

24,167

 

643

 

3,407

 

24,810

 

28,217

 

(5,748

)

2003

 

12/31/2003

 

141 National Business Parkway (O)

 

Annapolis Junction, MD

 

9,725

 

2,398

 

9,590

 

2,389

 

2,398

 

11,979

 

14,377

 

(4,354

)

1990

 

9/28/1998

 

14280 Park Meadow Drive (O)

 

Chantilly, VA

 

 

3,731

 

15,953

 

1,009

 

3,731

 

16,962

 

20,693

 

(4,529

)

1999

 

9/29/2004

 

1460 Dorsey Road (L)

 

Hanover, MD

 

 

1,800

 

 

 

1,800

 

 

1,800

 

 

 

(8)

2/28/2006

 

14840 Conference Center Drive (O)

 

Chantilly, VA

 

 

1,572

 

8,175

 

508

 

1,572

 

8,683

 

10,255

 

(3,385

)

2000

 

7/25/2003

 

14850 Conference Center Drive (O)

 

Chantilly, VA

 

 

1,615

 

8,358

 

539

 

1,615

 

8,897

 

10,512

 

(3,434

)

2000

 

7/25/2003

 

14900 Conference Center Drive (O)

 

Chantilly, VA

 

 

3,436

 

14,402

 

3,560

 

3,436

 

17,962

 

21,398

 

(5,796

)

1999

 

7/25/2003

 

15000 Conference Center Drive (O)

 

Chantilly, VA

 

54,000

 

5,193

 

47,045

 

18,198

 

5,193

 

65,243

 

70,436

 

(20,752

)

1989

 

11/30/2001

 

 

F-89



 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Carried At Close of

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

1501 South Clinton Street (O)

 

Baltimore, MD

 

 

27,964

 

50,415

 

5,222

 

27,964

 

55,637

 

83,601

 

(5,696

)

2006

 

10/27/2009

 

15010 Conference Center Drive (O)

 

Chantilly, VA

 

96,000

 

3,500

 

41,921

 

344

 

3,500

 

42,265

 

45,765

 

(6,503

)

2006

 

11/30/2001

 

15049 Conference Center Drive (O)

 

Chantilly, VA

 

 

4,415

 

20,365

 

726

 

4,415

 

21,091

 

25,506

 

(7,276

)

1997

 

8/14/2002

 

15059 Conference Center Drive (O)

 

Chantilly, VA

 

 

5,753

 

13,615

 

1,423

 

5,753

 

15,038

 

20,791

 

(4,891

)

2000

 

8/14/2002

 

1550 West Nursery Road (O)

 

Linthicum, MD

 

 

14,071

 

16,930

 

 

14,071

 

16,930

 

31,001

 

(1,862

)

2009

 

10/28/2009

 

1550 Westbranch Drive (O)

 

McLean, VA

 

 

5,595

 

26,212

 

116

 

5,595

 

26,328

 

31,923

 

(2,354

)

2002

 

6/28/2010

 

1560A Cable Ranch Road (O)

 

San Antonio, TX

 

 

1,097

 

3,770

 

28

 

1,097

 

3,798

 

4,895

 

(667

)

1985/2007

 

6/19/2008

 

1560B Cable Ranch Road (O)

 

San Antonio, TX

 

 

2,299

 

6,545

 

11

 

2,299

 

6,556

 

8,855

 

(1,120

)

1985/2006

 

6/19/2008

 

16442 Commerce Drive (O)

 

Dahlgren, VA

 

2,305

 

613

 

2,582

 

555

 

613

 

3,137

 

3,750

 

(761

)

2002

 

12/21/2004

 

16480 Commerce Drive (O)

 

Dahlgren, VA

 

 

1,856

 

7,425

 

164

 

1,856

 

7,589

 

9,445

 

(1,649

)

2000

 

12/28/2004

 

16501 Commerce Drive (O)

 

Dahlgren, VA

 

1,885

 

522

 

2,090

 

185

 

522

 

2,275

 

2,797

 

(594

)

2002

 

12/21/2004

 

16539 Commerce Drive (O)

 

Dahlgren, VA

 

 

688

 

2,860

 

1,443

 

688

 

4,303

 

4,991

 

(1,224

)

1990

 

12/21/2004

 

16541 Commerce Drive (O)

 

Dahlgren, VA

 

 

773

 

3,094

 

1,321

 

773

 

4,415

 

5,188

 

(1,149

)

1996

 

12/21/2004

 

16543 Commerce Drive (O)

 

Dahlgren, VA

 

1,571

 

436

 

1,742

 

12

 

436

 

1,754

 

2,190

 

(349

)

2002

 

12/21/2004

 

1670 North Newport Road (O)(10)

 

Colorado Springs, CO

 

4,383

 

853

 

5,188

 

763

 

853

 

5,951

 

6,804

 

(776

)

1986/1987

 

9/30/2005

 

1751 Pinnacle Drive (O)

 

McLean, VA

 

30,283

 

10,486

 

42,339

 

12,461

 

10,486

 

54,800

 

65,286

 

(16,190

)

1989/1995

 

9/23/2004

 

1753 Pinnacle Drive (O)

 

McLean, VA

 

24,438

 

8,275

 

34,353

 

8,736

 

8,275

 

43,089

 

51,364

 

(10,657

)

1976/2004

 

9/23/2004

 

1915 Aerotech Drive (O)

 

Colorado Springs, CO

 

3,394

 

556

 

3,094

 

539

 

556

 

3,633

 

4,189

 

(1,037

)

1985

 

6/8/2006

 

1925 Aerotech Drive (O)

 

Colorado Springs, CO

 

3,717

 

556

 

3,067

 

343

 

556

 

3,410

 

3,966

 

(759

)

1985

 

6/8/2006

 

201 Technology Drive (O)

 

Lebanon, VA

 

 

726

 

31,091

 

60

 

726

 

31,151

 

31,877

 

(4,021

)

2007

 

10/5/2007

 

206 Research Boulevard (O)

 

Aberdeen, MD

 

 

1,813

 

17,334

 

 

1,813

 

17,334

 

19,147

 

(107

)

2012

 

9/14/2007

 

209 Research Boulevard (O)

 

Aberdeen, MD

 

 

1,045

 

16,063

 

 

1,045

 

16,063

 

17,108

 

(859

)

2010

 

9/14/2007

 

210 Research Boulevard (O)

 

Aberdeen, MD

 

 

1,065

 

13,144

 

 

1,065

 

13,144

 

14,209

 

(519

)

2010

 

9/14/2007

 

22289 Exploration Drive (O)

 

Lexington Park, MD

 

 

1,422

 

5,719

 

1,005

 

1,422

 

6,724

 

8,146

 

(1,951

)

2000

 

3/24/2004

 

22299 Exploration Drive (O)

 

Lexington Park, MD

 

 

1,362

 

5,791

 

682

 

1,362

 

6,473

 

7,835

 

(2,026

)

1998

 

3/24/2004

 

22300 Exploration Drive (O)

 

Lexington Park, MD

 

 

1,094

 

5,038

 

169

 

1,094

 

5,207

 

6,301

 

(1,569

)

1997

 

11/9/2004

 

22309 Exploration Drive (O)

 

Lexington Park, MD

 

 

2,243

 

10,419

 

227

 

2,243

 

10,646

 

12,889

 

(3,459

)

1984/1997

 

3/24/2004

 

23535 Cottonwood Parkway (O)

 

California, MD

 

 

692

 

3,051

 

223

 

692

 

3,274

 

3,966

 

(789

)

1984

 

3/24/2004

 

2500 Riva Road (O)

 

Annapolis, MD

 

 

2,791

 

12,145

 

1

 

2,791

 

12,146

 

14,937

 

(3,384

)

2000

 

3/4/2003

 

2691 Technology Drive (O)

 

Annapolis Junction, MD

 

24,000

 

2,098

 

17,334

 

5,096

 

2,098

 

22,430

 

24,528

 

(5,167

)

2005

 

5/26/2000

 

2701 Technology Drive (O)

 

Annapolis Junction, MD

 

13,794

 

1,737

 

15,266

 

306

 

1,737

 

15,572

 

17,309

 

(5,403

)

2001

 

5/26/2000

 

2711 Technology Drive (O)

 

Annapolis Junction, MD

 

19,359

 

2,251

 

21,611

 

1,075

 

2,251

 

22,686

 

24,937

 

(7,961

)

2002

 

11/13/2000

 

2720 Technology Drive (O)

 

Annapolis Junction, MD

 

24,068

 

3,863

 

29,272

 

88

 

3,863

 

29,360

 

33,223

 

(6,102

)

2004

 

1/31/2002

 

2721 Technology Drive (O)

 

Annapolis Junction, MD

 

 

4,611

 

14,597

 

1,497

 

4,611

 

16,094

 

20,705

 

(4,841

)

2000

 

10/21/1999

 

2730 Hercules Road (O)

 

Annapolis Junction, MD

 

32,734

 

8,737

 

31,612

 

5,277

 

8,737

 

36,889

 

45,626

 

(11,825

)

1990

 

9/28/1998

 

2900 Towerview Road (O)

 

Herndon, VA

 

 

3,207

 

16,344

 

5,607

 

3,207

 

21,951

 

25,158

 

(3,785

)

1982/2008

 

12/20/2005

 

300 Sentinel Drive (O)

 

Annapolis Junction, MD

 

 

1,517

 

58,642

 

119

 

1,517

 

58,761

 

60,278

 

(4,026

)

2009

 

11/14/2003

 

302 Sentinel Drive (O)

 

Annapolis Junction, MD

 

22,693

 

2,648

 

29,398

 

380

 

2,648

 

29,778

 

32,426

 

(3,642

)

2007

 

11/14/2003

 

304 Sentinel Drive (O)

 

Annapolis Junction, MD

 

37,280

 

3,411

 

24,917

 

132

 

3,411

 

25,049

 

28,460

 

(4,361

)

2005

 

11/14/2003

 

306 Sentinel Drive (O)

 

Annapolis Junction, MD

 

20,973

 

3,260

 

22,592

 

110

 

3,260

 

22,702

 

25,962

 

(3,541

)

2006

 

11/14/2003

 

308 Sentinel Drive (O)

 

Annapolis Junction, MD

 

 

1,422

 

26,197

 

 

1,422

 

26,197

 

27,619

 

(1,085

)

2010

 

11/14/2003

 

310 The Bridge Street (O)

 

Huntsville, AL

 

 

261

 

26,576

 

26

 

261

 

26,602

 

26,863

 

(2,028

)

2009

 

8/4/2011

 

312 Sentinel Way (O)

 

Annapolis Junction, MD

 

 

3,138

 

9,128

 

 

3,138

 

9,128

 

12,266

 

 

 

(7)

11/14/2003

 

3120 Fairview Park Drive (O)

 

Falls Church, VA

 

 

6,863

 

35,606

 

5,406

 

6,863

 

41,012

 

47,875

 

(2,247

)

2008

 

11/23/2010

 

 

F-90



 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Carried At Close of

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

314 Sentinel Way (O)

 

Annapolis Junction, MD

 

 

1,254

 

1,325

 

 

1,254

 

1,325

 

2,579

 

(149

)

2008

 

11/14/2003

 

316 Sentinel Way (O)

 

Annapolis Junction, MD

 

 

2,748

 

31,861

 

131

 

2,748

 

31,992

 

34,740

 

(830

)

2011

 

11/14/2003

 

318 Sentinel Way (O)

 

Annapolis Junction, MD

 

22,240

 

2,185

 

28,426

 

 

2,185

 

28,426

 

30,611

 

(4,849

)

2005

 

11/14/2003

 

320 Sentinel Way (O)

 

Annapolis Junction, MD

 

 

2,067

 

21,623

 

 

2,067

 

21,623

 

23,690

 

(2,688

)

2007

 

11/14/2003

 

322 Sentinel Way (O)

 

Annapolis Junction, MD

 

21,912

 

2,605

 

22,827

 

 

2,605

 

22,827

 

25,432

 

(3,431

)

2006

 

11/14/2003

 

324 Sentinel Way (O)

 

Annapolis Junction, MD

 

 

1,656

 

23,005

 

 

1,656

 

23,005

 

24,661

 

(1,352

)

2010

 

6/29/2006

 

3535 Northrop Grumman Pt. (O)(10)

 

Colorado Springs, CO

 

17,982

 

 

18,388

 

121

 

 

18,509

 

18,509

 

(1,555

)

2008

 

6/10/2008

 

375 West Padonia Road (O)

 

Timonium, MD

 

 

2,483

 

10,415

 

4,821

 

2,483

 

15,236

 

17,719

 

(5,242

)

1986

 

12/21/1999

 

410 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

1,831

 

16,569

 

 

1,831

 

16,569

 

18,400

 

(34

)

2012

 

6/29/2003

 

420 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

2,370

 

15,673

 

 

2,370

 

15,673

 

18,043

 

 

 

(7)

6/29/2006

 

4230 Forbes Boulevard (O)(10)

 

Lanham, MD

 

 

511

 

4,346

 

192

 

511

 

4,538

 

5,049

 

(1,837

)

2003

 

12/24/2002

 

430 National Business Parkway (O)

 

Annapolis Junction, MD

 

 

1,852

 

21,038

 

 

1,852

 

21,038

 

22,890

 

(449

)

2011

 

6/29/2006

 

44408 Pecan Court (O)

 

California, MD

 

 

817

 

1,583

 

118

 

817

 

1,701

 

2,518

 

(161

)

1986

 

3/24/2004

 

44414 Pecan Court (O)

 

California, MD

 

 

405

 

1,619

 

336

 

405

 

1,955

 

2,360

 

(475

)

1986

 

3/24/2004

 

44417 Pecan Court (O)

 

California, MD

 

 

434

 

1,939

 

88

 

434

 

2,027

 

2,461

 

(636

)

1989

 

3/24/2004

 

44420 Pecan Court (O)

 

California, MD

 

 

344

 

890

 

126

 

344

 

1,016

 

1,360

 

(90

)

1989

 

11/9/2004

 

44425 Pecan Court (O)

 

California, MD

 

 

1,309

 

3,506

 

1,217

 

1,309

 

4,723

 

6,032

 

(921

)

1997

 

5/5/2004

 

45310 Abell House Lane (O)

 

California, MD

 

 

2,272

 

13,794

 

 

2,272

 

13,794

 

16,066

 

(368

)

2011

 

8/30/2010

 

46579 Expedition Drive (O)

 

Lexington Park, MD

 

 

1,406

 

5,796

 

1,078

 

1,406

 

6,874

 

8,280

 

(2,147

)

2002

 

3/24/2004

 

46591 Expedition Drive (O)

 

Lexington Park, MD

 

 

1,200

 

7,199

 

656

 

1,200

 

7,855

 

9,055

 

(1,083

)

2005

 

3/24/2004

 

4851 Stonecroft Boulevard (O)

 

Chantilly, VA

 

 

1,878

 

11,558

 

21

 

1,878

 

11,579

 

13,457

 

(2,379

)

2004

 

8/14/2002

 

4940 Campbell Drive (O)

 

White Marsh, MD

 

 

1,379

 

3,858

 

987

 

1,379

 

4,845

 

6,224

 

(933

)

1990

 

1/9/2007

 

4969 Mercantile Road (O)

 

White Marsh, MD

 

 

1,308

 

4,456

 

62

 

1,308

 

4,518

 

5,826

 

(678

)

1983

 

1/9/2007

 

4979 Mercantile Road (O)

 

White Marsh, MD

 

 

1,299

 

4,686

 

84

 

1,299

 

4,770

 

6,069

 

(727

)

1985

 

1/9/2007

 

5020 Campbell Boulevard (O)

 

White Marsh, MD

 

 

1,014

 

3,136

 

781

 

1,014

 

3,917

 

4,931

 

(673

)

1986 - 1988

 

1/9/2007

 

5022 Campbell Boulevard (O)

 

White Marsh, MD

 

 

624

 

1,924

 

332

 

624

 

2,256

 

2,880

 

(496

)

1986 - 1988

 

1/9/2007

 

5024 Campbell Boulevard (O)

 

White Marsh, MD

 

 

767

 

2,420

 

250

 

767

 

2,670

 

3,437

 

(702

)

1986 - 1988

 

1/9/2007

 

5026 Campbell Boulevard (O)

 

White Marsh, MD

 

 

700

 

2,138

 

45

 

700

 

2,183

 

2,883

 

(396

)

1986 - 1988

 

1/9/2007

 

525 Babcock Road (O)(10)

 

Colorado Springs, CO

 

 

355

 

397

 

79

 

355

 

476

 

831

 

(89

)

1967

 

7/12/2007

 

5325 Nottingham Drive (O)

 

White Marsh, MD

 

 

816

 

3,976

 

485

 

816

 

4,461

 

5,277

 

(763

)

2002

 

1/9/2007

 

5355 Nottingham Drive (O)

 

White Marsh, MD

 

 

761

 

3,562

 

1,616

 

761

 

5,178

 

5,939

 

(1,380

)

2005

 

1/9/2007

 

5520 Research Park Drive (O)

 

Catonsville, MD

 

 

 

20,066

 

 

 

20,066

 

20,066

 

(1,679

)

2009

 

4/4/2006

 

5522 Research Park Drive (O)

 

Catonsville, MD

 

 

 

4,550

 

 

 

4,550

 

4,550

 

(614

)

2007

 

3/8/2006

 

565 Space Center Drive (O)(10)

 

Colorado Springs, CO

 

 

644

 

6,284

 

352

 

644

 

6,636

 

7,280

 

(107

)

2009

 

7/8/2005

 

5725 Mark Dabling Boulevard (O)

 

Colorado Springs, CO

 

12,882

 

900

 

11,397

 

2,832

 

900

 

14,229

 

15,129

 

(4,567

)

1984

 

5/18/2006

 

5755 Mark Dabling Boulevard (O)

 

Colorado Springs, CO

 

10,208

 

799

 

10,324

 

3,597

 

799

 

13,921

 

14,720

 

(3,464

)

1989

 

5/18/2006

 

5775 Mark Dabling Boulevard (O)

 

Colorado Springs, CO

 

12,477

 

1,035

 

12,440

 

1,658

 

1,035

 

14,098

 

15,133

 

(4,260

)

1984

 

5/18/2006

 

5825 University Research Court (O)

 

College Park, MD

 

16,292

 

 

22,190

 

11

 

 

22,201

 

22,201

 

(2,118

)

2008

 

1/29/2008

 

5850 University Research Court (O)

 

College Park, MD

 

22,183

 

 

30,273

 

57

 

 

30,330

 

30,330

 

(2,236

)

2008

 

1/29/2008

 

655 Space Center Drive (O)(10)

 

Colorado Springs, CO

 

 

745

 

15,445

 

59

 

745

 

15,504

 

16,249

 

 

2008

 

7/8/2005

 

6700 Alexander Bell Drive (O)

 

Columbia, MD

 

4,000

 

1,755

 

7,019

 

4,628

 

1,755

 

11,647

 

13,402

 

(4,568

)

1988

 

5/14/2001

 

6708 Alexander Bell Drive (O)

 

Columbia, MD

 

6,320

 

897

 

3,588

 

1,592

 

897

 

5,180

 

6,077

 

(2,440

)

1988

 

5/14/2001

 

6711 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

2,683

 

23,239

 

314

 

2,683

 

23,553

 

26,236

 

(3,503

)

2006 - 2007

 

9/28/2000

 

6716 Alexander Bell Drive (O)

 

Columbia, MD

 

 

1,242

 

4,969

 

2,525

 

1,242

 

7,494

 

8,736

 

(3,394

)

1990

 

12/31/1998

 

 

F-91



 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Gross Amounts Carried At Close of
Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

6721 Columbia Gateway Drive (O)

 

Columbia, MD

 

29,252

 

1,753

 

34,090

 

 

1,753

 

34,090

 

35,843

 

(3,233

)

2009

 

9/28/2000

 

6724 Alexander Bell Drive (O)

 

Columbia, MD

 

10,939

 

449

 

5,039

 

579

 

449

 

5,618

 

6,067

 

(1,787

)

2001

 

5/14/2001

 

6731 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

2,807

 

19,098

 

1,648

 

2,807

 

20,746

 

23,553

 

(6,546

)

2002

 

3/29/2000

 

6740 Alexander Bell Drive (O)

 

Columbia, MD

 

 

1,424

 

5,696

 

3,045

 

1,424

 

8,741

 

10,165

 

(3,933

)

1992

 

12/31/1998

 

6741 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

675

 

1,711

 

114

 

675

 

1,825

 

2,500

 

(195

)

2008

 

9/28/2000

 

6750 Alexander Bell Drive (O)

 

Columbia, MD

 

 

1,263

 

12,461

 

3,351

 

1,263

 

15,812

 

17,075

 

(5,893

)

2001

 

12/31/1998

 

6760 Alexander Bell Drive (O)

 

Columbia, MD

 

 

890

 

3,561

 

1,979

 

890

 

5,540

 

6,430

 

(2,582

)

1991

 

12/31/1998

 

6940 Columbia Gateway Drive (O)

 

Columbia, MD

 

17,300

 

3,545

 

9,916

 

3,162

 

3,545

 

13,078

 

16,623

 

(5,274

)

1999

 

11/13/1998

 

6950 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

3,596

 

14,269

 

1,033

 

3,596

 

15,302

 

18,898

 

(5,975

)

1998

 

10/22/1998

 

7000 Columbia Gateway Drive (O)

 

Columbia, MD

 

15,800

 

3,131

 

12,103

 

622

 

3,131

 

12,725

 

15,856

 

(3,246

)

1999

 

5/31/2002

 

7015 Albert Einstein Drive (O)

 

Columbia, MD

 

2,486

 

2,058

 

6,093

 

826

 

2,058

 

6,919

 

8,977

 

(2,179

)

1999

 

12/1/2005

 

7061 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

729

 

3,094

 

571

 

729

 

3,665

 

4,394

 

(1,460

)

2000

 

8/30/2001

 

7063 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

902

 

3,684

 

1,043

 

902

 

4,727

 

5,629

 

(2,058

)

2000

 

8/30/2001

 

7065 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

919

 

3,763

 

1,263

 

919

 

5,026

 

5,945

 

(1,923

)

2000

 

8/30/2001

 

7067 Columbia Gateway Drive (O)

 

Columbia, MD

 

 

1,829

 

11,823

 

2,415

 

1,829

 

14,238

 

16,067

 

(4,340

)

2001

 

8/30/2001

 

7125 Columbia Gateway Drive (L)

 

Columbia, MD

 

 

3,361

 

128

 

279

 

3,361

 

407

 

3,768

 

 

1973/1999

(8)

6/29/2006

 

7125 Columbia Gateway Drive (O)

 

Columbia, MD

 

33,779

 

17,126

 

46,994

 

6,583

 

17,126

 

53,577

 

70,703

 

(10,556

)

1973/1999

 

6/29/2006

 

7130 Columbia Gateway Drive (O)

 

Columbia, MD

 

6,519

 

1,350

 

4,359

 

1,784

 

1,350

 

6,143

 

7,493

 

(1,577

)

1989

 

9/19/2005

 

7134 Columbia Gateway Drive (O)

 

Columbia, MD

 

2,949

 

704

 

1,971

 

299

 

704

 

2,270

 

2,974

 

(499

)

1990

 

9/19/2005

 

7138 Columbia Gateway Drive (O)

 

Columbia, MD

 

5,406

 

1,104

 

3,518

 

1,961

 

1,104

 

5,479

 

6,583

 

(2,174

)

1990

 

9/19/2005

 

7142 Columbia Gateway Drive (O)

 

Columbia, MD

 

6,280

 

1,342

 

3,978

 

1,326

 

1,342

 

5,304

 

6,646

 

(1,406

)

1994

 

9/19/2005

 

7150 Columbia Gateway Drive (O)

 

Columbia, MD

 

4,850

 

1,032

 

3,429

 

321

 

1,032

 

3,750

 

4,782

 

(867

)

1991

 

9/19/2005

 

7150 Riverwood Drive (O)

 

Columbia, MD

 

 

1,821

 

4,388

 

972

 

1,821

 

5,360

 

7,181

 

(1,163

)

2000

 

1/10/2007

 

7160 Riverwood Drive (O)

 

Columbia, MD

 

 

2,732

 

7,006

 

1,503

 

2,732

 

8,509

 

11,241

 

(2,688

)

2000

 

1/10/2007

 

7170 Riverwood Drive (O)

 

Columbia, MD

 

 

1,283

 

3,096

 

594

 

1,283

 

3,690

 

4,973

 

(726

)

2000

 

1/10/2007

 

7175 Riverwood Drive (O)

 

Columbia, MD

 

 

1,788

 

4,133

 

 

1,788

 

4,133

 

5,921

 

 

1996

(7)

7/27/2005

 

7200 Redstone Gateway (O)

 

Huntsville, MD

 

 

 

4,531

 

 

 

4,531

 

4,531

 

 

 

(7)

3/23/2010

 

7200 Riverwood Road (O)

 

Columbia, MD

 

 

4,089

 

16,356

 

3,001

 

4,089

 

19,357

 

23,446

 

(6,741

)

1986

 

10/13/1998

 

7205 Riverwood Drive (O)

 

Columbia, MD

 

 

1,367

 

14,300

 

 

1,367

 

14,300

 

15,667

 

 

 

(7)

7/27/2005

 

7272 Park Circle Drive (O)

 

Hanover, MD

 

5,232

 

1,479

 

6,300

 

1,798

 

1,479

 

8,098

 

9,577

 

(1,663

)

1991/1996

 

1/10/2007

 

7318 Parkway Drive (O)

 

Hanover, MD

 

 

972

 

3,888

 

812

 

972

 

4,700

 

5,672

 

(1,582

)

1984

 

4/16/1999

 

7320 Parkway Drive (O)

 

Hanover, MD

 

7,000

 

905

 

3,570

 

1,575

 

905

 

5,145

 

6,050

 

(1,557

)

1983

 

4/4/2002

 

745 Space Center Drive (O)(10)

 

Colorado Springs, CO

 

 

654

 

7,521

 

15

 

654

 

7,536

 

8,190

 

(171

)

2006

 

7/8/2005

 

7467 Ridge Road (O)

 

Hanover, MD

 

 

1,629

 

6,517

 

1,924

 

1,629

 

8,441

 

10,070

 

(3,346

)

1990

 

4/28/1999

 

7700 Potranco Road (O)

 

San Antonio, TX

 

 

14,020

 

38,804

 

7

 

14,020

 

38,811

 

52,831

 

(5,703

)

1982/1985

 

3/30/2005

 

7700-1 Potranco Road (O)

 

San Antonio, TX

 

 

 

1,066

 

 

 

1,066

 

1,066

 

(108

)

2007

 

3/30/2005

 

7700-5 Potranco Road (O)

 

San Antonio, TX

 

 

 

1,884

 

 

 

1,884

 

1,884

 

(154

)

2009

 

3/30/2005

 

7740 Milestone Parkway (O)

 

Hanover, MD

 

17,548

 

3,825

 

34,363

 

61

 

3,825

 

34,424

 

38,249

 

(2,265

)

2009

 

7/2/2007

 

7770 Backlick Road (O)

 

Springfield, VA

 

931

 

6,387

 

71,600

 

8

 

6,387

 

71,608

 

77,995

 

(157

)

2012

(7)

3/10/2010

 

800 International Drive (O)

 

Linthicum, MD

 

8,408

 

775

 

3,099

 

947

 

775

 

4,046

 

4,821

 

(1,662

)

1988

 

4/30/1998

 

8000 Potranco Road (O)

 

San Antonio, TX

 

 

1,964

 

21,178

 

 

1,964

 

21,178

 

23,142

 

(1,149

)

2010

 

1/20/2006

 

8003 Corporate Drive (O)

 

White Marsh, MD

 

 

611

 

1,611

 

53

 

611

 

1,664

 

2,275

 

(311

)

1999

 

1/9/2007

 

8007 Corporate Drive (O)

 

White Marsh, MD

 

 

1,434

 

3,336

 

307

 

1,434

 

3,643

 

5,077

 

(727

)

1995

 

1/9/2007

 

8010 Corporate Drive (O)

 

White Marsh, MD

 

 

1,349

 

3,262

 

1,672

 

1,349

 

4,934

 

6,283

 

(842

)

1998

 

1/9/2007

 

8013 Corporate Drive (O)

 

White Marsh, MD

 

 

642

 

1,536

 

1,809

 

642

 

3,345

 

3,987

 

(432

)

1990

 

1/9/2007

 

8015 Corporate Drive (O)

 

White Marsh, MD

 

 

446

 

1,116

 

243

 

446

 

1,359

 

1,805

 

(306

)

1990

 

1/9/2007

 

 

F-92



 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Gross Amounts Carried At Close of
Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

8019 Corporate Drive (O)

 

White Marsh, MD

 

 

680

 

1,898

 

738

 

680

 

2,636

 

3,316

 

(555

)

1990

 

1/9/2007

 

8020 Corporate Drive (O)

 

White Marsh, MD

 

 

2,184

 

3,767

 

2,199

 

2,184

 

5,966

 

8,150

 

(954

)

1997

 

1/9/2007

 

8023 Corporate Drive (O)

 

White Marsh, MD

 

 

651

 

1,603

 

5

 

651

 

1,608

 

2,259

 

(267

)

1990

 

1/9/2007

 

8030 Potranco Road (O)

 

San Antonio, TX

 

 

1,964

 

21,298

 

 

1,964

 

21,298

 

23,262

 

(1,148

)

2010

 

1/20/2006

 

8094 Sandpiper Circle (O)

 

White Marsh, MD

 

 

1,960

 

3,716

 

369

 

1,960

 

4,085

 

6,045

 

(820

)

1998

 

1/9/2007

 

8098 Sandpiper Circle (O)

 

White Marsh, MD

 

 

1,797

 

3,651

 

633

 

1,797

 

4,284

 

6,081

 

(558

)

1998

 

1/9/2007

 

8100 Potranco Road (L)

 

San Antonio, TX

 

 

1,964

 

1,396

 

 

1,964

 

1,396

 

3,360

 

 

 

(8)

6/14/2005

 

8110 Corporate Drive (O)

 

White Marsh, MD

 

 

2,285

 

10,117

 

489

 

2,285

 

10,606

 

12,891

 

(2,202

)

2001

 

1/9/2007

 

8140 Corporate Drive (O)

 

White Marsh, MD

 

 

2,158

 

8,457

 

2,018

 

2,158

 

10,475

 

12,633

 

(3,046

)

2003

 

1/9/2007

 

849 International Drive (O)

 

Linthicum, MD

 

11,692

 

1,356

 

5,426

 

3,081

 

1,356

 

8,507

 

9,863

 

(4,043

)

1988

 

2/23/1999

 

8621 Robert Fulton Drive (O)

 

Columbia, MD

 

11,000

 

2,317

 

12,642

 

199

 

2,317

 

12,841

 

15,158

 

(2,314

)

2005 - 2006

 

6/10/2005

 

8661 Robert Fulton Drive (O)

 

Columbia, MD

 

6,200

 

1,510

 

3,764

 

1,042

 

1,510

 

4,806

 

6,316

 

(1,518

)

2002

 

12/30/2003

 

8671 Robert Fulton Drive (O)

 

Columbia, MD

 

7,600

 

1,718

 

4,280

 

1,941

 

1,718

 

6,221

 

7,939

 

(2,148

)

2002

 

12/30/2003

 

870 Elkridge Landing Road (O)

 

Linthicum, MD

 

18,900

 

2,003

 

9,442

 

6,689

 

2,003

 

16,131

 

18,134

 

(7,148

)

1981

 

8/3/2001

 

881 Elkridge Landing Road (O)

 

Linthicum, MD

 

11,812

 

1,034

 

4,137

 

1,049

 

1,034

 

5,186

 

6,220

 

(1,991

)

1986

 

4/30/1998

 

891 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,165

 

4,772

 

1,777

 

1,165

 

6,549

 

7,714

 

(2,674

)

1984

 

7/2/2001

 

900 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,993

 

7,972

 

2,887

 

1,993

 

10,859

 

12,852

 

(4,722

)

1982

 

4/30/1998

 

900 International Drive (O)

 

Linthicum, MD

 

8,008

 

981

 

3,922

 

834

 

981

 

4,756

 

5,737

 

(1,964

)

1986

 

4/30/1998

 

901 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,156

 

4,437

 

1,558

 

1,156

 

5,995

 

7,151

 

(2,148

)

1984

 

7/2/2001

 

911 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,215

 

4,861

 

2,024

 

1,215

 

6,885

 

8,100

 

(2,789

)

1985

 

4/30/1998

 

920 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

2,081

 

9,683

 

687

 

2,081

 

10,370

 

12,451

 

(4,084

)

1982

 

7/2/2001

 

921 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,044

 

4,176

 

639

 

1,044

 

4,815

 

5,859

 

(1,989

)

1983

 

4/30/1998

 

930 International Drive (O)

 

Linthicum, MD

 

8,488

 

1,013

 

4,053

 

1,100

 

1,013

 

5,153

 

6,166

 

(2,203

)

1986

 

4/30/1998

 

938 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

1,209

 

4,748

 

476

 

1,209

 

5,224

 

6,433

 

(1,615

)

1984

 

7/2/2001

 

939 Elkridge Landing Road (O)

 

Linthicum, MD

 

 

939

 

3,756

 

1,790

 

939

 

5,546

 

6,485

 

(2,452

)

1983

 

4/30/1998

 

940 Elkridge Landing Road (L)

 

Linthicum, MD

 

 

1,104

 

4,718

 

170

 

1,104

 

4,888

 

5,992

 

(4,884

)

 

(8)

7/2/2001

 

9651 Hornbaker Road (D)

 

Manassas, VA

 

 

6,050

 

196,428

 

253

 

6,050

 

196,681

 

202,731

 

(2,809

)

2010

 

9/14/2010

 

9690 Deereco Road (O)

 

Timonium, MD

 

 

3,415

 

13,723

 

5,833

 

3,415

 

19,556

 

22,971

 

(7,927

)

1988

 

12/21/1999

 

980 Technology Court (O)(10)

 

Colorado Springs, CO

 

 

526

 

2,046

 

442

 

526

 

2,488

 

3,014

 

(585

)

1995

 

9/28/2005

 

985 Space Center Drive (O)(10)

 

Colorado Springs, CO

 

 

777

 

12,287

 

1,569

 

777

 

13,856

 

14,633

 

(2,948

)

1989

 

9/28/2005

 

9900 Franklin Square Drive (O)

 

White Marsh, MD

 

 

979

 

3,466

 

202

 

979

 

3,668

 

4,647

 

(734

)

1999

 

1/9/2007

 

9910 Franklin Square Drive (O)

 

White Marsh, MD

 

5,040

 

1,219

 

6,590

 

65

 

1,219

 

6,655

 

7,874

 

(1,457

)

2005

 

1/9/2007

 

9920 Franklin Square Drive (O)

 

White Marsh, MD

 

 

1,058

 

5,293

 

1,429

 

1,058

 

6,722

 

7,780

 

(1,470

)

2006

 

1/9/2007

 

9925 Federal Drive (O)(10)

 

Colorado Springs, CO

 

 

1,129

 

4,334

 

80

 

1,129

 

4,414

 

5,543

 

(97

)

2008

 

9/28/2005

 

9930 Franklin Square Drive (O)

 

White Marsh, MD

 

 

1,137

 

3,921

 

36

 

1,137

 

3,957

 

5,094

 

(795

)

2001

 

1/9/2007

 

9940 Franklin Square Drive (O)

 

White Marsh, MD

 

 

1,052

 

3,382

 

281

 

1,052

 

3,663

 

4,715

 

(732

)

2000

 

1/9/2007

 

9945 Federal Drive (O)(10)

 

Colorado Springs, CO

 

 

1,854

 

849

 

 

1,854

 

849

 

2,703

 

(13

)

2009

 

9/28/2005

 

9950 Federal Drive (O)(10)

 

Colorado Springs, CO

 

 

877

 

5,045

 

1,501

 

877

 

6,546

 

7,423

 

(1,944

)

2001

 

12/22/2005

 

9960 Federal Drive (O)(10)

 

Colorado Springs, CO

 

 

695

 

2,286

 

291

 

695

 

2,577

 

3,272

 

(256

)

2001

 

12/22/2005

 

9965 Federal Drive (L)(10)

 

Colorado Springs, CO

 

 

466

 

 

 

466

 

 

466

 

 

 

(8)

12/22/2005

 

9965 Federal Drive (O)(10)

 

Colorado Springs, CO

 

 

1,401

 

6,061

 

565

 

1,401

 

6,626

 

8,027

 

(907

)

1983/2007

 

1/19/2006

 

999 Corporate Boulevard (O)

 

Linthicum, MD

 

13,533

 

1,187

 

8,332

 

556

 

1,187

 

8,888

 

10,075

 

(3,230

)

2000

 

8/1/1999

 

Aerotech Commerce (L)

 

Colorado Springs, CO

 

 

900

 

 

 

900

 

 

900

 

 

 

(8)

5/19/2006

 

Arborcrest (O)

 

Blue Bell, PA

 

 

21,969

 

83,529

 

1,094

 

21,969

 

84,623

 

106,592

 

(2,686

)

1991

(6)(7)

10/14/1997

 

Arundel Preserve (L)

 

Hanover, MD

 

 

 

5,886

 

 

 

5,886

 

5,886

 

 

 

(8)

 

(9)

Ashburn Crossing—DC-8 (O)

 

Ashburn, VA

 

 

7,291

 

 

 

7,291

 

 

7,291

 

 

 

(7)

12/27/2012

 

Ashburn Crossing—DC-9 (O)

 

Ashburn, VA

 

 

4,192

 

 

 

4,192

 

 

4,192

 

 

 

(7)

12/27/2012

 

 

F-93



 

 

 

 

 

 

 

Initial Cost

 

Costs

 

Gross Amounts Carried At Close of
Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building and

 

Capitalized

 

 

 

Building and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Subsequent to

 

 

 

Land

 

 

 

Accumulated

 

Year Built or

 

Date

 

Property (Type)(1)

 

Location

 

Encumbrances(2)

 

Land

 

Improvements

 

Acquisition

 

Land

 

Improvements

 

Total(3)(4)

 

Depreciation(5)

 

Renovated

 

Acquired(6)

 

Ashburn Crossing (L)

 

Ashburn, VA

 

 

4,309

 

3

 

 

4,309

 

3

 

4,312

 

 

 

(8)

12/27/2012

 

Canton Crossing Land (L)

 

Baltimore, MD

 

 

16,085

 

1,820

 

 

16,085

 

1,820

 

17,905

 

 

 

(8)

10/27/2009

 

Canton Crossing Util Distr Ctr (O)

 

Baltimore, MD

 

 

7,300

 

15,550

 

722

 

7,300

 

16,272

 

23,572

 

(1,655

)

2005

 

10/27/2009

 

Columbia Gateway—Southridge (L)

 

Columbia, MD

 

 

6,387

 

2,938

 

 

6,387

 

2,938

 

9,325

 

 

 

(8)

9/20/2004

 

Dahlgren Technology Center (L)

 

Dahlgren, VA

 

 

1,083

 

178

 

 

1,083

 

178

 

1,261

 

 

 

(8)

3/16/2005

 

Expedition VII (L)

 

Lexington Park, MD

 

 

705

 

726

 

 

705

 

726

 

1,431

 

 

 

(8)

3/24/2004

 

Indian Head (L)

 

Bryans Road, MD

 

 

6,436

 

 

 

6,436

 

 

6,436

 

 

 

(8)

10/23/2006

 

InterQuest (L)

 

Colorado Springs, CO

 

 

14,515

 

8

 

 

14,515

 

8

 

14,523

 

 

 

(8)

9/28/2005

 

M Square Research Park (L)

 

College Park, MD

 

 

 

3,602

 

 

 

3,602

 

3,602

 

 

 

(8)

1/29/2008

 

National Business Park (L)

 

Annapolis Junction, MD

 

 

2,372

 

6,354

 

 

2,372

 

6,354

 

8,726

 

 

 

(8)

11/14/2003

 

National Business Park North (L)

 

Jessup, MD

 

 

25,654

 

25,069

 

 

25,654

 

25,069

 

50,723

 

 

 

(8)

6/29/2006

 

North Gate Business Park (L)

 

Aberdeen, MD

 

 

6,486

 

10,717

 

 

6,486

 

10,717

 

17,203

 

 

 

(8)

9/14/2007

 

Northwest Crossroads (L)

 

San Antonio, TX

 

 

7,430

 

836

 

 

7,430

 

836

 

8,266

 

 

 

(8)

1/20/2006

 

Old Annapolis Road (O)

 

Columbia, MD

 

 

1,637

 

5,500

 

2,103

 

1,637

 

7,603

 

9,240

 

(2,333

)

1974/1985

 

12/14/2000

 

Patriot Park (L)

 

Colorado Springs, CO

 

 

8,768

 

248

 

 

8,768

 

248

 

9,016

 

 

 

(8)

7/8/2005

 

Patriot Ridge (L)

 

Springfield, VA

 

 

18,517

 

10,873

 

 

18,517

 

10,873

 

29,390

 

 

 

(8)

3/10/2010

 

Redstone Gateway (L)

 

Huntsville, AL

 

 

 

13,700

 

 

 

13,700

 

13,700

 

 

 

(8)

3/23/2010

 

Route 15/Biggs Ford Road (L)

 

Frederick, MD

 

 

8,703

 

526

 

 

8,703

 

526

 

9,229

 

 

 

(8)

8/28/2008

 

Sentry Gateway (L)

 

San Antonio, TX

 

 

8,275

 

3,621

 

 

8,275

 

3,621

 

11,896

 

 

 

(8)

3/30/2005

 

West Nursery Road (L)

 

Linthicum, MD

 

 

1,441

 

53

 

 

1,441

 

53

 

1,494

 

 

 

(8)

10/28/2009

 

Westfields—Park Center (L)

 

Herndon, VA

 

 

3,609

 

2,640

 

 

3,609

 

2,640

 

6,249

 

 

 

(8)

7/18/2002

 

Westfields Corporate Center (L)

 

Herndon, VA

 

 

7,141

 

1,342

 

 

7,141

 

1,342

 

8,483

 

 

 

(8)

7/31/2002

 

White Marsh (L)

 

White Marsh, MD

 

 

30,322

 

10,385

 

 

30,322

 

10,385

 

40,707

 

 

 

(8)

1/9/2007

 

Woodland Park (L)

 

Herndon, VA

 

 

9,614

 

81

 

 

9,614

 

81

 

9,695

 

 

 

(8)

4/29/2004

 

Other Developments, including intercompany eliminations (V)

 

Various

 

 

7

 

(152

)

(438

)

7

 

(590

)

(583

)

689

 

Various

 

Various

 

 

 

 

 

$

1,015,130

 

$

681,001

 

$

2,893,547

 

$

285,412

 

$

681,001

 

$

3,178,959

 

$

3,859,960

 

$

(568,176

)

 

 

 

 

 


(1)                                  A legend for the Property Type follows: (O) = Office Property; (L) = Land held or pre-construction; (D) = Data Center; and (V) = Various.

 

(2)                                  Excludes our term loan facilities of $770.0 million, senior exchangeable notes of $230.9 million, unsecured notes payable of $1.8 million, and net premiums on the remaining loans of $1.3 million.

 

(3)                                  The aggregate cost of these assets for Federal income tax purposes was approximately $3.4 billion at December 31, 2012.

 

(4)                                  As discussed in Note 5 to our Consolidated Financial Statements, we recognized impairment losses of $46.1 million in connection with our property in Greater Philadelphia, Pennsylvania and $19.0 million, including exit costs, in connection with certain properties included in our Strategic Reallocation Plan.

 

(5)                                  The estimated lives over which depreciation is recognized follow: Building and land improvements: 10 - 40 years; and tenant improvements: related lease terms.

 

(6)                                  The acquisition date of multi-parcel properties reflects the date of the earliest parcel acquisition.

 

(7)                                  Under construction or redevelopment at December 31, 2012.

 

(8)                                  Held or under pre-construction at December 31, 2012.

 

(9)                                  Development in progress in anticipation of acquisition at December 31, 2012.

 

(10)                            Included in our Strategic Reallocation Plan and classified as held for sale as of December 31, 2012.

 

F-94



 

The following table summarizes our changes in cost of properties for the years ended December 31, 2012, 2011 and 2010 (in thousands):

 

 

 

2012

 

2011

 

2010

 

Beginning balance

 

$

4,038,932

 

$

3,948,487

 

$

3,452,512

 

Acquisitions of operating properties

 

33,684

 

26,887

 

187,052

 

Improvements and other additions

 

214,418

 

304,079

 

338,358

 

Sales

 

(291,491

)

(75,315

)

(29,430

)

Impairments

 

(121,557

)

(165,206

)

 

Other dispositions

 

(13,891

)

 

 

Other

 

(135

)

 

(5

)

Ending balance

 

$

3,859,960

 

$

4,038,932

 

$

3,948,487

 

 

The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands):

 

 

 

2012

 

2011

 

2010

 

Beginning balance

 

$

577,601

 

$

503,032

 

$

422,612

 

Depreciation expense

 

93,158

 

99,173

 

88,048

 

Sales

 

(40,346

)

(9,640

)

(7,764

)

Impairments

 

(58,855

)

(15,039

)

 

Other dispositions

 

(3,247

)

 

 

Other

 

(135

)

75

 

136

 

Ending balance

 

$

568,176

 

$

577,601

 

$

503,032

 

 

F-95