COPT Defense Properties Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Properties, Net

Properties, Net

9 Months Ended

Sep. 30, 2015

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



	September 30, 2015			December 31, 2014
Land	$	466,701		$	439,355
Buildings and improvements	3,141,889			3,015,216
Less: Accumulated depreciation	(675,747		)	(703,083		)
Operating properties, net	$	2,932,843		$	2,751,488

During the nine months ended September 30, 2014, we recognized $12.9 million in additional depreciation expense resulting from our revision of the useful life of a property in Greater Philadelphia, Pennsylvania (“Greater Philadelphia”) that was removed from service for redevelopment.

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



	September 30, 2015		December 31, 2014
Land	$	207,748	$	214,977
Development in progress, excluding land	207,009		330,449
Projects in development or held for future development	$	414,757	$	545,426

As of September 30, 2015, we had 18 operating properties in Greater Baltimore and one in Northern Virginia classified as held for sale. The table below sets forth the components of assets held for sale on our consolidated balance sheet for these properties (in thousands):



	September 30, 2015
Properties, net	$	142,817
Deferred rent receivable	3,998
Intangible assets on real estate acquisitions, net	799
Deferred leasing costs, net	2,053
Lease incentives, net	905
Assets held for sale, net	$	150,572

As of December 31, 2014, we had two land parcels in the Greater Baltimore region classified as held for sale with aggregate carrying amounts of $14.3 million that were sold during the nine months ended September 30, 2015.

2015 Acquisitions

In the nine months ended September 30, 2015, we acquired the following operating properties:


•	250 W. Pratt Street, a 367,000 square foot office property in Baltimore, Maryland that was 96.2% leased, for $61.9 million on March 19, 2015;


•	2600 Park Tower Drive, a 237,000 square foot office property in Vienna, Virginia (in the Northern Virginia region) that was 100% leased, for $80.5 million on April 15, 2015; and


•	100 Light Street, a 558,000 square foot office property in Baltimore, Maryland that was 93.5% leased, and its structured parking garage, 30 Light Street, for $121.2 million on August 7, 2015. In connection with that acquisition, we assumed a $55.0 million mortgage loan with a fair value at assumption of $55.5 million.

The table below sets forth the allocation of the aggregate acquisition costs of these properties (in thousands):



Land, operating properties	$	55,076
Building and improvements	139,520
Intangible assets on real estate acquisitions	75,846
Total assets	270,442
Below-market leases	(6,820		)
Total acquisition cost	$	263,622

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



			Weighted Average Amortization Period (in Years)
Tenant relationship value	$	31,208	12
In-place lease value	35,231		7
Above-market leases	6,720		4
Below-market cost arrangements	2,687		40
	$	75,846	10

These properties contributed revenues of $6.9 million for the three months ended September 30, 2015 and $11.2 million for the nine months ended September 30, 2015, and contributed net income from continuing operations of $487,000 for the three months ended September 30, 2015 and $697,000 for the nine months ended September 30, 2015. We expensed operating property acquisition costs of $2.7 million during the three months ended September 30, 2015 and $4.1 million during the nine months ended September 30, 2015 that are included in business development expenses and land carry costs on our consolidated statements of operations.

We accounted for these acquisitions as business combinations. We included the results of operations for the acquisitions in our consolidated statements of operations from their respective purchase dates through September 30, 2015. The following table presents pro forma information for COPT and subsidiaries as if these acquisitions had occurred on January 1, 2014. This pro forma information also includes adjustments to reclassify the operating property acquisition costs disclosed above from the 2015 periods in which they were incurred to the nine months ended September 30, 2014. The pro forma financial information was prepared for comparative purposes only and is not necessarily indicative of what would have occurred had these acquisitions been made at that time or of results which may occur in the future (in thousands, except per shares amounts).



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
	(Unaudited)				(Unaudited)
Pro forma total revenues	$	152,736	$	162,085	$	498,657	$	467,224
Pro forma net income attributable to COPT common shareholders	$	88,836	$	19,683	$	112,941	$	19,266
Pro forma EPS:
Basic	$	0.94	$	0.22	$	1.20	$	0.22
Diluted	$	0.94	$	0.22	$	1.20	$	0.22

2015 Dispositions

In the nine months ended September 30, 2015, we completed the following dispositions of operating properties:


•	1550 Westbranch Drive, a 160,000 square foot office property in McLean, Virginia (in the Northern Virginia region) for $27.8 million on July 27, 2015; and

•

15000 and 15010 Conference Center Drive, two office properties in Chantilly, Virginia (in the Northern Virginia region) totaling 665,000 square feet. On August 28, 2015, ownership in these properties was transferred to the mortgage lender on a $150.0 million nonrecourse mortgage loan that was secured by the properties and we removed the debt obligation and accrued interest from our balance sheet. The properties had an estimated fair value of $99 million on the transfer date. Upon completion of this transfer, we recognized a gain on early extinguishment of debt of $84.8 million, representing the difference between the mortgage loan and accrued interest payable extinguished over the carrying value of the properties transferred as of the transfer date and related closing costs.

We also sold land during the nine months ended September 30, 2015 for $18.1 million and recognized gains of $4.0 million on the sales.

2015 Construction Activities

During the nine months ended September 30, 2015, we placed into service an aggregate of 897,000 square feet in seven newly constructed office properties located in Northern Virginia, San Antonio, Texas (“San Antonio”), Huntsville, Alabama (“Huntsville”) and the Baltimore/Washington Corridor, and 170,000 square feet in two properties redeveloped in Greater Philadelphia and St. Mary’s County, Maryland. As of September 30, 2015, we had six office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.0 million square feet upon completion (including one partially operational property), including four in Northern Virginia and two in the Baltimore/Washington Corridor. We also had four office properties under redevelopment that we estimate will total 156,000 square feet upon completion, all of which were located in the Baltimore/Washington Corridor.