Annual report pursuant to Section 13 and 15(d)

Properties, net

v2.4.0.6
Properties, net
 12 Months Ended
Dec. 31, 2012
Real Estate [Abstract]  
Properties, net
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


Each of the above dispositions represent 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



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 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



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.