COPT Defense Properties Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Properties, net

Properties, net

12 Months Ended

Dec. 31, 2015

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



	December 31,
	2015			2014
Land	$	463,305		$	439,355
Buildings and improvements	3,157,587			3,015,216
Less: accumulated depreciation	(700,363		)	(703,083		)
Operating properties, net	$	2,920,529		$	2,751,488

In 2014, we recognized $12.9 million in additional depreciation expense resulting from our shortening of the useful life of a property in Greater Philadelphia, Pennsylvania (included in our Regional Office segment) that was removed from service for redevelopment.

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



	December 31,
	2015		2014
Land	$	207,774	$	214,977
Development in progress, excluding land	221,445		330,449
Projects in development or held for future development	$	429,219	$	545,426

As of December 31, 2015, we had 13 operating properties in White Marsh, Maryland (included in our Regional Office segment), two operating properties in San Antonio (included in our Other segment) and land in Northern Virginia and Colorado Springs 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):



	December 31, 2015
Properties, net	$	90,188
Deferred rent receivable	2,891
Intangible assets on real estate acquisitions, net	1,591
Deferred leasing costs, net	1,391
Lease incentives, net	721
Assets held for sale, net	$	96,782

As of December 31, 2014, we had two land parcels in White Marsh, Maryland classified as held for sale with aggregate carrying amounts of $14.3 million that were sold in 2015.

2015 Acquisitions

In 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 $61.8 million on March 19, 2015;


•	2600 Park Tower Drive, a 237,000 square foot office property in Vienna, Virginia 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 purchase price of these properties to the value of the acquired assets and liabilities (in thousands):



Land, operating properties	$	55,076
Building and improvements	139,540
Intangible assets on real estate acquisitions	75,729
Total assets	270,345
Below-market leases	(6,808		)
Total acquisition cost	$	263,537

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



			Weighted Average Amortization Period (in Years)
Tenant relationship value	$	31,183	12
In-place lease value	35,139		7
Above-market leases	6,720		4
Below-market cost arrangements	2,687		40
	$	75,729	10

These properties contributed revenues of $20.2 million and net income from continuing operations of $1.2 million in 2015. We expensed operating property acquisition costs of $4.1 million in 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 December 31, 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 year ended December 31, 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 Year Ended December 31,
	For the Year Ended December 31,
	2015		2014
	(Unaudited)
Pro forma total revenues	$	641,982	$	623,013
Pro forma net income attributable to COPT common shareholders	$	167,079	$	20,796
Pro forma EPS:
Basic	$	1.77	$	0.23
Diluted	$	1.77	$	0.23

2015 Dispositions

In 2015, we completed dispositions of the following operating properties (dollars in thousands):



Project Name	City, State	Segment	Date of Disposition	Number of Buildings	Total Rentable Square Feet	Transaction Value (1)		Gain on Disposition
1550 Westbranch Drive	McLean, VA	Regional Office	7/27/2015	1	160,000	$	27,800	$	—
15000 and 15010 Conference Center Drive	Chantilly, VA	Northern VA Defense/IT	8/28/2015	2	665,000	167,335		—
13200 Woodland Park Road	Herndon, VA	Regional Office	10/27/2015	1	397,000	84,000		42,515
9900, 9910 and 9920 Franklin Square Drive	White Marsh, MD	Regional Office	11/9/2015	3	135,000	24,150		6,468
9690 Deereco Road and 375 W. Padonia Road	Timonium, MD	Regional Office	12/17/2015	2	240,000	44,500		15,050
				9	1,597,000	$	347,785	$	64,033


(1)	Each of these properties were sold except for 15000 and 15010 Conference Center Drive, the disposition of which was completed in connection with a debt extinguishment, as discussed further below.

We also sold land in 2015 for $18.1 million and recognized gains of $4.0 million on the sales.

On August 28, 2015, ownership in 15000 and 15010 Conference Center Drive 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. 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.

2015 Construction Activities

In 2015, we placed into service an aggregate of 897,000 square feet in seven newly constructed office properties and 170,000 square feet in two redeveloped properties. As of December 31, 2015, we had nine office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.3 million square feet upon completion and four office properties under redevelopment that we estimate will total 156,000 square feet upon completion.

2014 Dispositions

In 2014, we completed dispositions of the following operating properties (dollars in thousands):



Project Name	City, State	Segment	Date of Sale	Number of Buildings	Total Rentable Square Feet	Transaction Value		Gain on Disposition
4969 and 4979 Mercantile Road	White Marsh, MD	Regional Office	7/14/2014	2	96,721	$	5,960	$	2,124
9930 and 9940 Franklin Square	White Marsh, MD	Regional Office	7/30/2014	2	71,992	10,475		2,303
5020, 5022, 5024 and 5026 Campbell Boulevard	White Marsh, MD	Regional Office	8/4/2014	4	134,245	12,400		666
				8	302,958	$	28,835	$	5,093

We also sold land in 2014 for $28.3 million and recognized gains of $5.6 million on the sales.

2014 Construction Activities

In 2014, we placed into service an aggregate of 692,000 square feet in five newly constructed office properties.

2013 Dispositions

In 2013, we completed dispositions of the following operating properties (dollars in thousands):



Project Name	City, State	Segment	Date of Sale	Number of Buildings	Total Rentable Square Feet	Transaction Value (1)		Gain on Disposition
920 Elkridge Landing Road	Linthicum, MD	Fort Meade/BW Corridor	6/25/2013	1	103,000	$	6,900	$	—
4230 Forbes Boulevard	Lanham, MD	Regional Office	12/11/2013	1	56,000	5,600		1,507
December 2013 Colorado Springs Portfolio Disposition	Colorado Springs, CO	Colorado Defense/IT and Regional Office	12/12/2013	15	1,165,000	133,925		1,164
December 2013 Portfolio Conveyance	Colorado Springs, CO and Linthicum, MD	Various (2)	12/23/2013	14	1,021,000	146,876		—
				31	2,345,000	$	293,301	$	2,671


(1)	Each of these properties were sold except for the December 2013 Portfolio Conveyance, the disposition of which was completed in connection with a debt extinguishment, as described further below.


(2)	Included properties in our Fort Meade/BW Corridor, Colorado Defense/IT and Regional Office segments.

We also disposed of a non-operating property in 2013 for an aggregate transaction value of $3.5 million. In addition to the gains on dispositions reflected above, we recognized impairment losses on certain of these assets that are disclosed in Note 3.

On December 23, 2013, the mortgage lender on a $146.5 million nonrecourse mortgage loan that was secured by the December 2013 Portfolio Conveyance accepted a deed in lieu of foreclosure on the properties. As a result, we transferred title to the properties to the mortgage lender and we were relieved of the debt obligation plus accrued interest. Upon completion of this transfer, we recognized a gain on extinguishment of debt of $67.8 million, representing the excess of the mortgage loan and interest payable extinguished over the carrying values of the properties transferred as of the transfer date (which included the effect of previous impairment losses) and related closing costs.

2013 Construction Activities

In 2013, we placed into service an aggregate of 812,000 square feet in eight newly constructed office properties.