Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14023
Corporate Office Properties Trust
(Exact name of registrant as specified in its charter)
Maryland
23-2947217
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
6711 Columbia Gateway Drive, Suite 300, Columbia, MD
21046
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (443) 285-5400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes x No
As of October 17, 2011, 71,986,146 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1:
Financial Statements:
Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (unaudited)
3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)
4
Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)
5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited)
6
Notes to Consolidated Financial Statements (unaudited)
8
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4:
Controls and Procedures
45
PART II: OTHER INFORMATION
Legal Proceedings
Item 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
46
Defaults Upon Senior Securities
Removed and Reserved
Item 5:
Other Information
Item 6:
Exhibits
47
SIGNATURES
49
2
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
September 30,
December 31,
2011
2010
Assets
Properties, net:
Operating properties, net
$
2,772,303
2,802,773
Properties under construction or development
696,914
642,682
Total properties, net
3,469,217
3,445,455
Assets held for sale, net
72,767
—
Cash and cash equivalents
11,504
10,102
Restricted cash and marketable securities
39,232
22,582
Accounts receivable (net of allowance for doubtful accounts of $3,404 and $2,796, respectively)
20,991
18,938
Deferred rent receivable
87,148
79,160
Intangible assets on real estate acquisitions, net
97,954
113,735
Deferred leasing and financing costs, net
70,791
60,649
Prepaid expenses and other assets
95,788
93,896
Total assets
3,965,392
3,844,517
Liabilities and equity
Liabilities:
Debt, net
2,420,073
2,323,681
Accounts payable and accrued expenses
114,834
99,699
Rents received in advance and security deposits
28,241
31,603
Dividends and distributions payable
35,029
32,986
Deferred revenue associated with operating leases
15,621
14,802
Distributions received in excess of investment in unconsolidated real estate joint venture
5,953
5,545
Interest rate derivatives
30,629
4,226
Other liabilities
7,389
8,837
Total liabilities
2,657,769
2,521,379
Commitments and contingencies (Note 16)
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Preferred Shares of beneficial interest with an aggregate liquidation preference of $216,333 ($0.01 par value; 15,000,000 shares authorized and 8,121,667 shares issued and outstanding at September 30, 2011 and December 31, 2010)
81
Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 71,986,936 at September 30, 2011 and 66,931,582 at December 31, 2010)
720
669
Additional paid-in capital
1,663,850
1,511,844
Cumulative distributions in excess of net income
(416,342
)
(281,794
Accumulated other comprehensive loss
(28,618
(4,163
Total Corporate Office Properties Trust’s shareholders’ equity
1,219,691
1,226,637
Noncontrolling interests in subsidiaries:
Common units in the Operating Partnership
60,583
69,337
Preferred units in the Operating Partnership
8,800
Other consolidated entities
18,549
18,364
Noncontrolling interests in subsidiaries
87,932
96,501
Total equity
1,307,623
1,323,138
Total liabilities and equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
(in thousands, except per share data)
For the Three Months
For the Nine Months
Ended September 30,
Revenues
Rental revenue
99,068
90,264
293,547
266,334
Tenant recoveries and other real estate operations revenue
22,825
20,810
65,395
59,337
Construction contract and other service revenues
18,729
13,608
67,854
77,038
Total revenues
140,622
124,682
426,796
402,709
Expenses
Property operating expenses
47,655
43,013
141,287
128,331
Depreciation and amortization associated with real estate operations
35,719
29,503
97,720
84,368
Construction contract and other service expenses
18,171
13,347
65,698
75,148
Impairment losses
57,824
General and administrative expenses
6,154
6,079
19,251
17,905
Business development expenses
1,050
2,886
2,126
3,506
Total operating expenses
108,749
94,828
383,906
309,258
Operating income
31,873
29,854
42,890
93,451
Interest expense
(25,381
(26,174
(78,412
(74,042
Interest and other (loss) income
(242
395
3,682
1,942
Loss on early extinguishment of debt
(1,655
(1,680
Income (loss) from continuing operations before equity in (loss) income of unconsolidated entities and income taxes
4,595
4,075
(33,520
21,351
Equity in (loss) income of unconsolidated entities
(159
648
(223
371
Income tax benefit (expense)
457
(27
6,043
(75
Income (loss) from continuing operations
4,893
4,696
(27,700
21,647
Discontinued operations
2,577
1,753
(12,120
4,276
Income (loss) before gain on sales of real estate
7,470
6,449
(39,820
25,923
Gain on sales of real estate, net of income taxes
2,477
2,717
2,829
Net income (loss)
8,926
(37,103
28,752
Net (income) loss attributable to noncontrolling interests:
(178
(363
3,188
(1,254
(165
(495
(561
434
(1,038
233
Net income (loss) attributable to Corporate Office Properties Trust
6,566
8,832
(35,448
27,236
Preferred share dividends
(4,025
(12,076
Net income (loss) attributable to Corporate Office Properties Trust common shareholders
2,541
4,807
(47,524
15,160
Net income (loss) attributable to Corporate Office Properties Trust:
4,138
7,206
(24,106
23,284
Discontinued operations, net
2,428
1,626
(11,342
3,952
Basic earnings per common share (1)
0.05
(0.54
0.18
0.03
(0.16
0.07
Net income (loss) attributable to COPT common shareholders
0.08
(0.70
0.25
Diluted earnings per common share (1)
0.17
0.24
(1)
Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.
Consolidated Statements of Equity
Preferred Shares
Common Shares
Additional Paid-in Capital
Cumulative Distributions in Excess of Net Income (Loss)
Accumulated Other Comprehensive Loss
Noncontrolling Interests
Total
Balance at December 31, 2009 (58,342,673 common shares outstanding)
583
1,238,704
(209,941
(1,907
93,112
1,120,632
Issuance of 4.25% Exchangeable Senior Notes
18,149
Conversion of common units to common shares (620,598 shares)
8,964
(8,970
Costs associated with common shares issued to the public
(19
Exercise of share options (271,242 shares)
4,394
4,397
Share-based compensation
8,724
8,726
Restricted common share redemptions (103,721 shares)
(3,862
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT
(1,347
1,347
Adjustments related to derivatives designated as cash flow hedges
(2,954
(206
(3,160
Net income
1,516
Dividends
(82,990
Distributions to owners of common and preferred units in the Operating Partnership
(5,945
Contributions from noncontrolling interests in other consolidated entities
9,510
Acquisition of noncontrolling interests in other consolidated entities
(2,344
(2,118
(4,462
Balance at September 30, 2010 (59,406,247 common shares outstanding)
594
1,271,363
(265,695
(4,861
88,246
1,089,728
Balance at December 31, 2010 (66,931,582 common shares outstanding)
Conversion of common units to common shares (83,506 shares)
1
1,275
(1,276
Common shares issued to the public (4,600,000 shares)
145,315
145,361
Exercise of share options (185,714 shares)
2,393
2,395
9,536
9,538
Restricted common share redemptions (112,683 shares)
(3,948
(2,542
2,542
(24,455
(2,562
(27,017
Net loss
(99,100
(5,894
(23
284
261
Distributions to noncontrolling interests in other consolidated entities
(8
Balance at September 30, 2011 (71,986,936 common shares outstanding)
Consolidated Statements of Cash Flows
(in thousands)
For the Nine Months Ended
Cash flows from operating activities
Revenues from real estate operations received
350,593
324,445
Construction contract and other service revenues received
73,382
92,817
Property operating expenses paid
(143,481
(138,379
Construction contract and other service expenses paid
(73,009
(107,016
General and administrative and business development expenses paid
(15,921
(13,726
Interest expense paid
(69,237
(63,298
Previously accreted interest expense paid
(17,314
Interest and other income received
377
709
Payments in connection with early extinguishment of debt
(350
Income taxes paid
(174
Net cash provided by operating activities
104,866
95,552
Cash flows from investing activities
Purchases of and additions to properties
Construction, development and redevelopment
(169,873
(240,092
Acquisitions of operating properties
(32,806
(103,277
Tenant improvements on operating properties
(27,421
(11,259
Other capital improvements on operating properties
(11,575
(5,870
Proceeds from sales of properties
27,312
27,580
Proceeds from sale of equity method investment
5,773
Mortgage and other loan receivables funded or acquired
(20,401
(1,729
Mortgage and other loan receivables payments received
5,203
Leasing costs paid
(10,357
(7,717
Investment in unconsolidated entities
(250
(4,500
Other
(3,330
(2,241
Net cash used in investing activities
(237,725
(349,105
Cash flows from financing activities
Proceeds from debt, including issuance of exchangeable senior notes
1,548,619
825,475
Repayments of debt
Scheduled principal amortization
(10,647
(10,389
Other repayments
(1,432,050
(459,614
Deferred financing costs paid
(12,771
(7,086
Net proceeds from issuance of common shares
147,781
4,378
Acquisition of noncontrolling interests in consolidated entities
Dividends paid
(97,047
(81,376
Distributions paid
(5,937
(6,100
Restricted share redemptions
60
Net cash provided by financing activities
134,261
257,024
Net increase in cash and cash equivalents
1,402
3,471
Beginning of period
8,262
End of period
11,733
Reconciliation of net (loss) income to net cash provided by operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and other amortization
102,963
89,830
72,347
Settlement of previously accreted interest expense
Amortization of deferred financing costs
5,090
4,175
Increase in deferred rent receivable
(7,587
(3,295
Amortization of net debt discounts
4,778
4,360
Gain on sales of real estate
(4,166
(3,921
Gain on equity method investment
(2,452
8,156
1,670
18
(2,194
Changes in operating assets and liabilities:
Increase in accounts receivable
(1,311
(1,648
(Increase) decrease in restricted cash and marketable securities and prepaid expenses and other assets
(5,162
8,165
Decrease in accounts payable, accrued expenses and other liabilities
(11,699
(31,696
Decrease in rents received in advance and security deposits
(3,362
(5,702
Supplemental schedule of non-cash investing and financing activities:
Increase in accrued capital improvements, leasing and other investing activity costs
25,314
4,308
Increase in property, debt and other liabilities in connection with acquisitions
3,040
74,244
Increase in property and noncontrolling interests in connection with property contribution by a noncontrolling interest in a joint venture
9,000
Decrease in fair value of derivatives applied to AOCL and noncontrolling interests
27,064
3,206
Dividends/distribution payable
29,899
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares
1,276
8,970
7
Notes to Consolidated Financial Statements
1. Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company,” “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses primarily on strategic customer relationships and specialized tenant requirements in the United States Government and defense information technology sectors and data centers serving such sectors. We acquire, develop, manage and lease office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in strong markets that we believe possess growth opportunities. As of September 30, 2011, our investments in real estate included the following:
· 246 wholly owned operating office properties totaling 20.2 million square feet;
· 16 wholly owned office properties under construction, development or redevelopment that we estimate will total approximately 2.1 million square feet upon completion, including three partially operational properties included above;
· wholly owned land parcels totaling 1,520 acres that we believe are potentially developable into approximately 13.1 million square feet;
· a wholly owned, partially operational, wholesale data center which upon completion is expected to have an initial stabilization critical load of 18 megawatts; and
· partial ownership interests in a number of other real estate projects in operations, under construction or development or held for future development.
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), of which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). A summary of our Operating Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of September 30, 2011 follows:
Common Units
94
%
Series G Preferred Units
100
Series H Preferred Units
Series I Preferred Units
0
Series J Preferred Units
Series K Preferred Units
Three of our trustees also controlled, either directly or through ownership by other entities or family members, an additional 5% of the Operating Partnership’s common units (“common units”) as of September 30, 2011.
In addition to owning real estate, the Operating Partnership also owns entities that provide real estate services such as property management, construction and development and heating and air conditioning services primarily for our properties but also for third parties.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which we have a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all significant intercompany balances and transactions in consolidation.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations.
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.
These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2010 included in our 2010 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in our 2010 Annual Report on Form 10-K.
Reclassifications
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to amend measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. This guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011. We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require 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. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
In September 2011, the FASB issued guidance on the testing of goodwill for impairment that will permit us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance eliminates the requirement to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We are in the process of evaluating this guidance and currently do not believe that it will have a material effect on our consolidated financial statements.
3. Fair Value Measurements
For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2010 Annual Report on Form 10-K.
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2011 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
9
Quoted Prices in
Active Markets for
Significant Other
Significant
Identical Assets
Observable Inputs
Unobservable Inputs
Description
(Level 1)
(Level 2)
(Level 3)
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
5,393
Common stocks
845
Preferred stocks
314
271
200
Common stock (1)
18,450
Warrants to purchase common shares in KEYW (2)
121
25,473
25,594
Deferred compensation plan liability (3)
7,023
Liabilities
37,652
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. We own warrants to purchase common shares in The KEYW Holding Corporation (“KEYW”).
(3)
Included in the line entitled “other liabilities” 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. 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 7 for mortgage loans receivable, Note 8 for debt and Note 9 for interest rate derivatives.
4. Properties, net
Operating properties, net consisted of the following (in thousands):
Land
486,538
501,210
Buildings and improvements
2,839,071
2,804,595
Less: accumulated depreciation
(553,306
(503,032
Properties under construction or development consisted of the following (in thousands):
248,945
256,487
Construction in progress, excluding land
447,969
386,195
10
Strategic Reallocation Plan and Impairment Losses
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 during the next three years (the “Strategic Reallocation Plan”). We subsequently identified additional properties with an increased likelihood of a shortened holding period. While we expect to recognize gains on the dispositions of some of these properties, we also determined that the carrying amounts of certain of these properties (the “Impaired Properties”) will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, during the second quarter of 2011, we recognized aggregate non-cash impairment losses of $44.6 million (including $14.5 million classified as discontinued operations and excluding $4.6 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values.
The properties to be disposed of pursuant to the Strategic Reallocation Plan consist primarily of office properties in certain submarkets in the Greater Baltimore, Suburban Maryland and St. Mary’s County regions that no longer fit our strategic focus. We expect that net proceeds from the execution of the Strategic Reallocation Plan after the repayment of debt secured by the properties will approximate $200 million. We expect to invest the proceeds in properties that will serve customers in the United States Government, defense information technology and related data sectors. We completed the sale of the following properties under the Strategic Reallocation Plan during the nine months ended September 30, 2011 (dollars in thousands):
Number
Date of
of
Rentable
Gain on
Project Name
Location
Sale
Buildings
Square Feet
Sale Price
1344 & 1348 Ashton Road and 1350 Dorsey Road
Hanover, Maryland
5/24/2011
39,000
3,800
150
216 Schilling Circle
Hunt Valley, Maryland
8/23/2011
36,000
4,700
175
Towson Portfolio
Towson, Maryland
9/29/2011
179,000
16,000
1,124
254,000
24,500
1,449
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 our property 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 believe that these disclosures by the Army are likely to cause further delays in the resolution of certain existing litigation related to the property, and that they also increase 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 will not likely 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.
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
251
Building and improvements
26,824
Intangible assets on real estate acquisitions
6,338
33,413
Intangible assets recorded in connection with the above acquisitions included the following (dollars in thousands):
11
Weighted
Average
Amortization
Period
(in Years)
Tenant relationship value
3,072
In-place lease value
2,800
Above-market leases
466
We expensed $152,000 in the nine months ended September 30, 2011 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations.
2011 Construction and Redevelopment Activities
During the nine months ended September 30, 2011, we had two newly constructed office properties totaling 228,000 square feet, including one in the Baltimore/Washington Corridor and one in Greater Baltimore, become fully operational (79,000 of these square feet were placed into service in 2010) and placed into service 61,000 square feet in one partially operational office property in the Baltimore/Washington Corridor.
As of September 30, 2011, we had construction underway on ten office properties totaling 1.2 million square feet, including four in the Baltimore/Washington Corridor, two in Greater Baltimore, one in San Antonio, one in Northern Virginia, one in Huntsville, Alabama and one in St. Mary’s County. We also had redevelopment underway on two office properties totaling 297,000 square feet, including one in Northern Virginia and one in Greater Philadelphia.
5. Real Estate Joint Ventures
During the nine months ended September 30, 2011, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting. Information pertaining to this joint venture investment is set forth below (dollars in thousands):
Maximum
Investment Balance at (1)
Date
Nature of
Exposure
September 30, 2011
December 31, 2010
Acquired
Ownership
Activity
to Loss (2)
(5,953
(5,545
9/29/2005
20
Operates 16 buildings
The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5.2 million at September 30, 2011 and December 31, 2010 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same.
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).
The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):
Properties, net
60,332
61,521
Other assets
3,645
4,174
63,977
65,695
Liabilities (primarily debt)
67,780
67,454
Owners’ equity
(3,803
(1,759
Total liabilities and owners’ equity
12
The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands):
1,905
2,094
5,719
6,283
(904
(902
(2,869
(2,728
(984
(899
(2,983
(2,846
Depreciation and amortization expense
(578
(826
(1,753
(2,561
(533
(1,886
(1,852
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at September 30, 2011 (dollars in thousands):
September 30, 2011 (1)
% at
Pledged
9/30/2011
M Square Associates, LLC
6/26/2007
50
Operating two buildings and developing others (2)
60,190
48,435
44,735
LW Redstone Company, LLC
3/23/2010
85
Developing business park (3)
38,854
2,453
Arundel Preserve #5, LLC
7/2/2007
Operating one building (4)
29,552
28,590
16,908
COPT-FD Indian Head, LLC
10/23/2006
75
Developing land parcel (5)
6,524
MOR Forbes 2 LLC
12/24/2002
Operating one building (6)
3,988
139,108
77,025
64,140
(1) Excludes amounts eliminated in consolidation.
(2) This joint venture’s properties are in College Park, Maryland (in the Suburban Maryland region).
(3) This joint venture’s property is in Huntsville, Alabama.
(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.
(6) This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.
6. Intangible Assets on Real Estate Acquisitions
Intangible assets on real estate acquisitions consisted of the following (in thousands):
Gross Carrying
Accumulated
Net Carrying
Amount
156,477
97,818
58,659
162,708
92,380
70,328
48,556
22,569
25,987
50,320
21,603
28,717
Above-market cost arrangements
12,415
2,489
9,926
1,387
11,028
10,909
8,555
2,354
10,802
8,193
2,609
Market concentration premium
1,333
305
1,028
280
1,053
229,690
131,736
237,578
123,843
Amortization of the intangible asset categories set forth above totaled $20.7 million in the nine months ended September 30, 2011 and $18.8 million in the nine months ended September 30, 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: 26 years; above-market leases: five years; and market concentration premium: 31 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: $5.7 million for the three months ending December 31, 2011; $18.5 million for 2012; $14.3 million for 2013; $12.0 million for 2014; $10.0 million for 2015; and $8.6 million for 2016.
13
7. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
Mortgage and other investing receivables
35,830
18,870
Prepaid expenses
24,769
19,995
Furniture, fixtures and equipment, net
10,181
Construction contract costs incurred in excess of billings
6,579
9,372
Deferred tax asset
5,676
276
Investment in KEYW
22,779
12,632
11,100
Investment in The KEYW Holding Corporation
Our investment in KEYW consists of common stock and warrants to purchase additional shares of common stock of KEYW. We owned 2.6 million shares, or approximately 10%, of KEYW’s common stock at September 30, 2011 and 3.1 million shares, or approximately 12%, at December 31, 2010. The carrying value of our equity method investment in these common shares was $22.3 million at December 31, 2010, which was included in prepaid expenses and other assets on our consolidated balance sheet as of such date. In March 2011, we entered into a sales plan that complies with the requirements of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended, to sell up to 1.6 million shares of our KEYW common stock in 2011; we completed the sale of 500,000 shares under this plan in the three months ended June 30, 2011, resulting in $2.1 million in gain recognized. We subsequently suspended this plan effective June 30, 2011. We used the equity method of accounting for our investment in the common stock until the resignation of our 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. Our investment in these common shares had a fair value of $18.3 million at September 30, 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 recognized an unrealized loss on our investment in KEYW’s common stock of $883,000 during the three months ended September 30, 2011.
At September 30, 2011 and December 31, 2010, we owned warrants to purchase 50,000 additional shares of KEYW common stock at an exercise price of $9.25 per share. We account for these warrants as derivatives reported at fair value using the Black-Scholes option-pricing model. The estimated fair value of these warrants was $121,000, or $2.42 per warrant, at September 30, 2011 and $466,000, or $9.32 per warrant, at December 31, 2010.
Mortgage and Other Investing Receivables
Mortgage and other investing receivables consisted of the following (in thousands):
Mortgage loans receivable
21,065
14,227
Notes receivable from City of Huntsville
14,765
4,643
Our mortgage loans receivable reflected above consists of three loans secured by properties in the Baltimore/Washington Corridor and Greater Baltimore. Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture. We did not have an allowance for credit losses in connection with these receivables at September 30, 2011 or December 31, 2010. The fair value of our mortgage and other investing receivables totaled $36.0 million at September 30, 2011 and $18.8 million at December 31, 2010.
14
Operating Notes Receivable
We had operating notes receivable due from tenants with terms exceeding one year totaling $628,000 at September 30, 2011 and $655,000 at December 31, 2010. We carried allowances for estimated losses for most of these balances.
8. Debt
Our debt consisted of the following (dollars in thousands):
Scheduled
Carrying Value at
Maturity
Availability at
Stated Interest Rates
Dates at
at September 30, 2011
Mortgage and Other Secured Loans:
Fixed rate mortgage loans (1)
N/A
1,055,540
1,173,358
5.20% - 7.87% (2)
2012 - 2034 (3)
Revolving Construction Facility (4)
142,339
Variable rate secured loans
39,397
310,555
LIBOR + 2.25% (5)
2015
Other construction loan facilities
104,900
22,710
16,753
LIBOR + 2.75% (6)
2012 - 2013
Total mortgage and other secured loans
1,117,647
1,643,005
Revolving Credit Facility (7)
1,000,000
671,000
295,000
LIBOR + 1.75% to 2.50% (8)
September 1, 2014 (9)
Term Loan Facility (10)
500,000
400,000
LIBOR + 1.65% to 2.40% (11)
September 1, 2015 (9)
Unsecured notes payable
5,022
1,947
0% (12)
2015 - 2026
Exchangeable Senior Notes:
4.25% Exchangeable Senior Notes
226,404
223,846
4.25%
April 2030 (13)
3.5% Exchangeable Senior Notes (14)
159,883
Total debt
(1) Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $2.6 million at September 30, 2011 and $3.2 million at December 31, 2010.
(2) The weighted average interest rate on these loans was 6.01% at September 30, 2011.
(3) A loan with a balance of $4.5 million at September 30, 2011 that matures in 2034 may be repaid in March 2014, subject to certain conditions.
(4) As described further below, this facility was extinguished on September 1, 2011.
(5) The interest rate on the loan outstanding at September 30, 2011 was 2.47%.
(6) The weighted average interest rate on these loans was 2.92% at September 30, 2011.
(7) As described further below, we entered into a credit agreement providing for a new unsecured revolving credit facility effective on September 1, 2011, after which our previously existing facility was extinguished.
(8) The weighted average interest rate on the Revolving Credit Facility was 2.2% at September 30, 2011.
(9) This loan may be extended for a one-year period at our option, subject to certain conditions.
(10) As described further below, this loan was entered into effective on September 1, 2011.
(11) The interest rate on this loan was 2.13% at September 30, 2011.
(12) These notes may carry interest rates that were below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates. The carrying value of these notes reflects an unamortized discount totaling $1.9 million at September 30, 2011 and $1.1 million at December 31, 2010.
(13) As described further in our 2010 Annual Report on Form 10-K, these notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at the Operating Partnership’s discretion, our common shares at an exchange rate (subject to adjustment) of 20.8318 shares per one thousand dollar principal amount of the notes (exchange rate is as of September 30, 2011 and is equivalent to an exchange price of $48.00 per common share). The carrying value of these notes included a principal amount of $240.0 million and an unamortized discount totaling $13.6 million at September 30, 2011 and $16.2 million at December 31, 2010. 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 September 30, 2011 and December 31, 2010 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):
15
Interest expense at stated interest rate
2,550
7,650
4,930
Interest expense associated with amortization of discount
866
815
2,558
1,618
3,416
3,365
10,208
6,548
(14) 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. As described further in our 2010 Annual Report on Form 10-K, these notes had an exchange settlement feature that provided that the notes were, under certain circumstances, be 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, our common shares or a combination of cash and our common shares. The carrying value of these notes at December 31, 2010 included a principal amount of $162.5 million and an unamortized discount totaling $2.6 million. The effective interest rate under the notes, including amortization of the issuance costs, was 5.97%. Because the closing price of our common shares at September 30, 2011 and December 31, 2010 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):
1,169
1,421
4,013
4,265
664
941
2,617
2,781
1,833
2,362
6,630
7,046
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 joint 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 is $1.0 billion, including a $100.0 million letter of credit subfacility and a $100.0 million swingline facility (same-day draw requests), with a right for us to increase the lenders’ aggregate commitment to $1.5 billion, provided that there is no default under the facility. 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, 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 variable interest rate on the facility is based on one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.75% to 2.50%, as determined by our leverage levels at different points in time; or (2)(a) the greater of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the Credit Agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.75% to 1.50%, as determined by our leverage levels at different points in time. 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 of September 30, 2011, the maximum amount of borrowing capacity under this facility totaled $1.0 billion, of which $323.1 million was available.
Effective September 1, 2011, we entered into an unsecured term loan agreement (“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 one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels at different points in time; or (2)(a) the greater of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the Term Loan Agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.65% to 1.40%, as determined by our leverage levels at different points in time. The term loan 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%.
Upon entry into the Revolving Credit Facility and Term Loan Agreement 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.
16
We capitalized interest costs of $4.5 million in the three months ended September 30, 2011, $3.9 million in the three months ended September 30, 2010, $13.1 million in the nine months ended September 30, 2011 and $12.0 million in the nine months ended September 30, 2010.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
Carrying
Estimated
Fair Value
Fixed-rate debt
1,286,966
1,290,506
1,559,034
1,579,022
Variable-rate debt
1,133,107
1,132,081
764,647
769,247
2,422,587
2,348,269
9. Interest Rate Derivatives
The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):
Fair Value at
Notional
Fixed
Floating Rate
Effective
Expiration
Rate
Index
120,000
1.7600
One-Month LIBOR
1/2/2009
5/1/2012
(981
(2,062
100,000
1.9750
1/1/2010
(943
(2,002
3.8415
Three-Month LIBOR
9/30/2021
(15,766
75,000
3.8450
(11,847
50,000
0.5025
1/3/2011
1/3/2012
(26
(64
0.4400
1/4/2011
(18
(34
40,000
3.8300
11/2/2010
11/2/2015
(1,022
644
(30,629
(3,582
(1) These instruments have a cash settlement date of March 30, 2012.
(2) The notional amount of this instrument is scheduled to amortize to $36.2 million.
Each of these interest rate swaps 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):
Derivatives Designated as
Hedging Instruments
Balance Sheet Location
Interest rate swaps
(4,226
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):
Amount of loss recognized in AOCL (effective portion)
(21,869
(1,530
(30,463
(5,844
Amount of loss reclassified from AOCL into interest expense (effective portion)
(1,179
(887
(3,446
(2,684
Over the next 12 months, we estimate that approximately $3.7 million will be reclassified from AOCL as an increase to interest expense.
17
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 September 30, 2011, the fair value of interest rate derivatives in a liability position related to these agreements was $30.6 million, excluding the effects of accrued interest. As of September 30, 2011, 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 $31.8 million.
10. Shareholders’ Equity
We completed a public offering of 4.6 million common shares in May 2011 at a price of $33.00 per share for net proceeds of $145.7 million after underwriter discounts but before offering expenses.
During the nine months ended September 30, 2011, holders of 83,506 common units in our Operating Partnership converted their units into common shares on the basis of one common share for each common unit.
We declared dividends per common share of $0.4125 in the three months ended September 30, 2011 and September 30, 2010, $1.2375 in the nine months ended September 30, 2011 and $1.1975 in the nine months ended September 30, 2010.
See Note 12 for disclosure of common share activity pertaining to our share-based compensation plans.
The table below sets forth activity in the accumulated other comprehensive loss component of shareholders’ equity (in thousands):
Beginning balance
Amount of loss reclassified from AOCL to income (effective portion)
3,446
2,684
Adjustment to AOCL attributable to noncontrolling interests
2,562
206
Ending balance
The table below sets forth total comprehensive (loss) income and total comprehensive (loss) income attributable to COPT (in thousands):
Amount of loss recognized in AOCL
Amount of loss reclassified from AOCL to income
1,179
887
Total comprehensive (loss) income
(13,220
8,283
(64,120
25,592
Net (income) loss attributable to noncontrolling interests
(94
1,655
(1,516
Other comprehensive loss attributable to
noncontrolling interests
1,206
1,594
245
Total comprehensive (loss) income attributable to COPT
(12,918
8,236
(60,871
24,321
11. Information by Business Segment
As of September 30, 2011, we had nine primary office property segments (comprised of: the Baltimore/Washington Corridor; Greater Baltimore; Northern Virginia; Colorado Springs; Suburban Maryland; San Antonio; Washington, DC — Capitol Riverfront; Greater Philadelphia; and St. Mary’s and King George Counties). We also had a wholesale data center segment.
The table below reports segment financial information for our real estate operations (in thousands). Our segment entitled “Other” includes assets and operations not specifically associated with the other defined segments, including certain properties as well as corporate assets and investments in unconsolidated entities. We measure the performance of our segments through a measure we define as net operating income from real estate operations (“NOI from real estate operations”), which is derived by subtracting property expenses from revenues from real estate operations. We believe that NOI from real estate operations is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, impairment losses, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties.
Baltimore/ Washington Corridor
Greater Baltimore
Northern Virginia
Colorado Springs
Suburban Maryland
San Antonio
Washington, DC - Capitol Riverfront
Greater Philadelphia
St. Mary’s & King George Counties
Wholesale Data Center
Three Months Ended September 30, 2011
Revenues from real estate operations
54,744
18,193
18,640
6,037
5,648
7,701
4,507
1,701
3,508
1,283
3,167
125,129
19,905
7,621
7,364
2,573
2,021
3,897
1,808
462
1,143
1,054
864
48,712
NOI from real estate operations
34,839
10,572
11,276
3,464
3,627
3,804
2,699
1,239
2,365
229
2,303
76,417
Additions to properties, net
22,208
2,706
20,402
1,293
4,372
1,021
(262
4,786
2,795
21,941
30,094
111,356
Three Months Ended September 30, 2010
51,946
18,288
18,949
6,176
5,243
5,609
135
1,793
3,431
162
3,296
115,028
18,945
7,828
7,195
2,380
2,618
2,697
232
1,152
956
44,304
33,001
10,460
11,754
3,796
2,625
2,912
1,561
2,279
(89
2,340
70,724
19,097
14,578
7,302
1,373
5,701
92,816
2,187
3,445
111,510
531
259,568
Nine Months Ended September 30, 2011
160,856
53,651
55,359
17,869
16,582
22,453
13,349
5,315
10,606
3,769
8,567
368,376
59,620
23,430
22,409
7,086
6,973
10,974
5,092
3,129
2,591
2,484
145,071
101,236
30,221
32,950
10,783
9,609
11,479
8,257
4,032
7,477
1,178
6,083
223,305
65,551
20,390
39,716
2,712
7,935
5,710
433
10,819
9,939
61,322
38,176
262,703
Segment assets at September 30, 2011
1,414,086
551,942
571,940
261,255
176,336
159,238
114,249
133,077
104,732
190,495
288,042
Nine Months Ended September 30, 2010
154,627
52,980
55,780
18,662
16,524
13,775
4,505
10,550
10,315
338,015
57,953
24,149
21,214
6,928
7,518
6,426
1,795
3,300
3,160
132,744
96,674
28,831
34,566
11,734
9,006
7,349
2,710
7,250
7,155
205,271
67,313
29,737
44,896
3,454
16,199
18,518
14,318
405,290
Segment assets at September 30, 2010
1,382,234
584,429
487,898
266,228
175,181
151,058
122,737
121,695
96,813
115,722
233,377
3,737,372
19
The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):
Segment revenues from real estate operations
Less: Revenues from discontinued operations (Note 14)
(3,236
(3,954
(9,434
(12,344
The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands):
Segment property operating expenses
Less: Property operating expenses from discontinued operations (Note 14)
(1,057
(1,291
(3,784
(4,413
Total property operating expenses
As previously discussed, we provide real estate services such as property management, construction and development and heating and air conditioning 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):
(18,171
(13,347
(65,698
(75,148
NOI from service operations
558
2,156
1,890
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to income (loss) from continuing operations as reported on our consolidated statements of operations (in thousands):
Other adjustments:
Depreciation and other amortization associated with real estate operations
(35,719
(29,503
(97,720
(84,368
(57,824
(6,154
(6,079
(19,251
(17,905
(1,050
(2,886
(2,126
(3,506
Interest expense on continuing operations
NOI from discontinued operations
(2,179
(2,663
(5,650
(7,931
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. We did not allocate interest expense, depreciation and amortization, impairment losses and losses on early extinguishment of debt 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, interest and other income, equity in (loss) income of unconsolidated entities, income taxes and noncontrolling interests because these items represent general corporate items not attributable to segments.
12. Share-Based Compensation
Performance Share Units (“PSUs”)
On March 3, 2011, our Board of Trustees granted 56,883 PSUs to executives. The PSUs have a performance period beginning on the grant date and concluding on the earlier of March 2, 2014 or the date of: (1) termination by the Company 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 the Company’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
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:
21
· 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 the Company for cause, all PSUs are forfeited. PSUs do not carry voting rights.
We computed a grant date fair value of $49.15 per PSU using a Monte Carlo model, which included assumptions of, among other things, the following: baseline common share value of $35.17; expected volatility for our common shares of 61.1%; and risk-free interest rate of 1.32%. We are recognizing the grant date fair value in connection with these PSU awards over a three-year period that commenced on March 3, 2011.
The PSUs granted to our executives on March 4, 2010, as described in our 2010 Annual Report on Form 10-K, were also outstanding at September 30, 2011.
Restricted Shares
During the nine months ended September 30, 2011, certain employees as well as nonemployee members of our Board of Trustees were granted a total of 314,359 restricted shares with a weighted average grant date fair value of $33.92 per share. Restricted shares 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. The grants of restricted shares to nonemployee Trustees vest on the first anniversary of the grant date provided that the Trustee remains in his or her position. During the nine months ended September 30, 2011, forfeiture restrictions lapsed on 317,685 previously issued common shares; these shares had a weighted average grant date fair value of $32.94 per share, and the aggregate intrinsic value of the shares on the vesting dates was $11.1 million.
Options
During the nine months ended September 30, 2011, 185,714 options to purchase common shares (“options”) were exercised. The weighted average exercise price of these options was $12.85 per share, and the aggregate intrinsic value of the options exercised was $3.9 million.
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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 tax consisted of the following (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
Deferred
Federal
(427
(39
(4,993
State
(95
(9
(1,105
(6
(522
(48
(6,098
(32
Current
53
62
97
65
55
118
Total income tax (benefit) expense
(457
27
(6,043
86
Reported on line entitled income tax (benefit) expense
Reported on line entitled gain on sale of real estate, net
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.
Our TRS’s combined Federal and state effective tax rate was 38.6% for the three and nine months ended September 30, 2011 and 34.7% for the three and nine months ended September 30, 2010.
14. Discontinued Operations and Assets Held for Sale
Income from discontinued operations primarily includes revenues and expenses associated with the following:
· 11101 McCormick Road property in the Greater Baltimore region that was sold on February 1, 2010;
· 431 and 437 Ridge Road properties in Central New Jersey (included in the Other region) that were sold on September 8, 2010;
· 1344 and 1348 Ashton Road properties and 1350 Dorsey Road property in the Baltimore/Washington Corridor that were sold on May 24, 2011;
· 216 Schilling Circle in the Greater Baltimore region that was sold on August 23, 2011;
· the four properties comprising the Towson Portfolio in the Greater Baltimore region that were sold on September 29, 2011; and
· 15 operating properties that were classified as held for sale as of September 30, 2011.
The table below sets forth the components of discontinued operations reported on our consolidated statements of operations (in thousands):
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Revenue from real estate operations
3,236
3,954
9,434
12,344
Expenses from real estate operations:
1,057
1,291
3,784
4,413
Depreciation and amortization
313
1,242
3,381
3,528
14,523
Expenses from real estate operations
1,370
2,533
21,688
7,941
Operating income from real estate operations
1,866
(12,254
4,403
(248
(452
(975
(1,208
(340
1,299
784
1,081
The table below sets forth the components of assets held for sale on our consolidated balance sheets as of September 30, 2011 (in thousands):
70,278
974
543
Deferred leasing costs, net
972
Assets held for sale
15. Earnings Per Share (“EPS”)
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common shares outstanding during the period. Our computation of diluted EPS is similar except that:
· the denominator is increased to include: (1) the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into our common shares were converted; and (2) the effect of dilutive potential common shares 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 shares that we added to the denominator.
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Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):
Numerator:
Gain on sales of real estate, net
(Income) loss from continuing operations attributable to noncontrolling interests
(755
33
877
(1,192
Income from continuing operations attributable to restricted shares
(267
(781
(807
Numerator for basic EPS from continuing operations attributable to COPT common shareholders
(149
2,914
(36,963
10,401
Dilutive effect of common units in the Operating Partnership on diluted EPS from continuing operations
(2,410
Numerator for diluted EPS from continuing operations attributable to COPT common shareholders
(39,373
Discontinued operations attributable to noncontrolling interests
(127
778
(324
Numerator for basic EPS on net income (loss) attributable to COPT common shareholders
4,540
(48,305
14,353
Dilutive effect of common units in the Operating Partnership
(3,188
Numerator for diluted EPS on net income (loss) attributable to COPT common shareholders
(51,493
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
71,312
58,656
68,718
58,333
Dilutive effect of share-based compensation awards
296
367
Dilutive effect of common units
4,371
Denominator for diluted EPS
58,952
73,089
58,700
Basic EPS:
Income (loss) from continuing operations attributable to COPT common shareholders
Discontinued operations attributable to COPT common shareholders
Diluted EPS:
25
Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods (in thousands):
Weighted Average Shares
Excluded from Denominator
Conversion of common units
4,336
4,453
4,674
Conversion of convertible preferred units
176
Conversion of convertible preferred shares
The following share-based compensation securities were excluded from the computation of diluted EPS because their effect was antidilutive:
· weighted average restricted shares for the three months ended September 30, 2011 and 2010 of 629,000 and 667,000, respectively, and for the nine months ended September 30, 2011 and 2010 of 635,000 and 664,000, respectively; and
· weighted average options for the three months ended September 30, 2011 and 2010 of 697,000 and 650,000, respectively, and for the nine months ended September 30, 2011 and 2010 of 655,000 and 616,000, respectively.
As discussed in Note 8, we have outstanding senior notes that have an exchange settlement feature but did not affect our diluted EPS reported above since the weighted average closing price of our 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.
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 $65 million. We are entitled to recover 20% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement so long as we continue to manage the properties. In the event that we no longer
26
manage the properties, the percentage that we are entitled to recover is increased to 80%. Management estimates that the aggregate fair value of the guarantees is not material and 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 1.8 million square feet of office space on 63 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 September 30, 2011.
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 $4.3 million liability through September 30, 2011 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 of three New Jersey properties that we no longer own. 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 declares the remediation to be complete. Under the lease 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 for 15 years after the tenant’s acquisition of the property from us. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a specialty office real estate investment trust (“REIT”) that focuses primarily on strategic customer relationships and specialized tenant requirements in the United States Government and defense information technology sectors and data centers serving such sectors. We acquire, develop, manage and lease office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in strong markets that we believe possess growth opportunities.
During the nine months ended September 30, 2011, we:
· had a decrease in net income attributable to common shareholders of $62.7 million as compared to the nine months ended September 30, 2010, due in large part to impairment losses of $44.6 million on properties identified for disposition primarily under our Strategic Reallocation Plan (defined below) and $27.7 million on our property in Cascade, Maryland that was formerly the Army base known as Fort Ritchie;
· had a decrease of $2.8 million from the nine months ended September 30, 2010 in our net operating income (“NOI”) from continuing real estate operations (defined below) attributable to our Same Office Properties (also defined below);
· finished the period with occupancy of our portfolio of wholly owned office properties at 88.0%;
· placed into service an aggregate of 211,000 square feet in three newly constructed office properties;
· issued 4.6 million common shares at a public offering price of $33.00 per share for net proceeds of $145.7 million after underwriting discounts but before offering expenses;
· 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 during the next three years (the “Strategic Reallocation Plan”);
· entered into a credit agreement providing for an unsecured revolving credit facility (the “Revolving Credit Facility”) with an aggregate lender commitment of $1.0 billion, with a right for us to further increase such commitment during the term to a maximum of $1.5 billion, subject to certain conditions. The facility matures on September 1, 2014, and may be extended by one year at our option, subject to certain conditions; and
· entered into an unsecured term loan agreement under which we borrowed $400.0 million, with a right for us to borrow an additional $100.0 million, subject to certain conditions. The term loan matures on September 1, 2015, and may be extended by one year at our option, subject to certain conditions.
In this section, we discuss our financial condition and results of operations as of and for the three and nine months ended September 30, 2011. This section includes discussions on, among other things:
· our results of operations and why various components of our consolidated statements of operations changed for the three and nine months ended September 30, 2011 compared to the same periods in 2010;
· our cash flows;
· how we expect to generate cash for short and long-term capital needs; and
· our commitments and contingencies at September 30, 2011.
You should refer to our consolidated financial statements as you read this section.
This section contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy
and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to:
· general economic and business conditions, which will, among other things, affect office property demand and rents, tenant creditworthiness, interest rates and financing availability;
· adverse changes in the real estate markets, including, among other things, increased competition with other companies;
· our ability to borrow on favorable terms;
· risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development and operating costs may be greater than anticipated;
· risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
· changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of impairment losses;
· our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;
· governmental actions and initiatives, including risks associated with the impact of a government shutdown such as a reduction in rental revenues or non-renewal of leases;
· the dilutive effects of issuing additional common shares; and
· environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
Occupancy and Leasing
Wholly Owned Office Properties
The tables below set forth occupancy information pertaining to our portfolio of wholly owned operating office properties.
Occupancy rates at period end
88.0
88.2
Baltimore/Washington Corridor
90.8
89.5
91.9
83.8
85.0
100.0
76.7
76.2
97.4
98.5
St. Mary’s and King George Counties
87.4
86.8
71.0
71.4
89.9
Average contractual annual rental rate per square foot at period end (1)
26.20
25.56
(1) Includes estimated expense reimbursements.
29
Occupied
19,990
17,628
Square feet vacated upon lease expiration (1)
(749
Square feet retenanted after lease expiration (2)
597
Square feet constructed
247
331
Acquisition
174
Dispositions
(253
(216
Other changes
20,205
17,779
(1) Includes lease terminations and space reductions occurring in connection with lease renewals.
(2) Excludes retenanting of vacant square feet acquired or developed.
Much of the leasing that we expected to execute through September 30, 2011 at our newly constructed office buildings and at our wholesale data center was delayed in large part due to the delay until April 15 of an approved Federal budget for fiscal 2011. The resulting operation of the government under continuing resolutions effectively froze new government and program contractor leasing although we did accomplish some of this office leasing in the third quarter of 2011. We are closely monitoring developments relating to the United States Government’s fiscal 2012 budget. Continued delays in the approval of a fiscal 2012 budget could delay leasing activity that we expect to complete in 2012. In addition, Federal spending cuts in 2012 and future years could reduce demand for new office space at our business parks. Conversely, if military construction spending is cut, government demand to lease space in our business parks could increase if the government decides to lease space instead of build it.
While we expect a challenging lease environment to continue at least through 2012, we believe that the overall fundamentals for office leasing for us were either at, or near, bottom by March 31, 2011. We also believe that our customer and market strategies are competitive advantages in the current leasing environment since we expect the United States Government and defense information technology sectors to fuel economic growth in many of our regions. Federal agencies have recently relocated to government installations at Fort George G. Meade (in the Baltimore/Washington Corridor), Aberdeen Proving Ground (in the Greater Baltimore region), San Antonio, Redstone Arsenal (in Huntsville, Alabama) and Fort Belvoir (in Springfield, Virginia) primarily in connection with mandates by the Base Realignment and Closure Commission of the United States Congress (“BRAC”). In addition, the newly-formed United States Cyber Command is located at Fort George G. Meade. We expect program contractors supporting those agencies to locate near these installations. We expect the demand created by these government installations will, over the longer term, help stabilize the leasing markets in these regions and will provide future growth for us due to the installations’ proximity to many of our properties. While there has been increased speculation regarding future reductions in United States defense spending, we do not believe that such spending decreases, were they to occur, would significantly affect existing defense information technology programs at the installations adjacent to our business parks. We also believe, however, that uncertainty related to the timing and level of defense spending or the effects of congressional inaction has caused and will cause program contractors to be cautious about executing new leases.
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Partially Owned Office Properties
The table below sets forth occupancy information pertaining to operating office properties in which we have a partial ownership interest:
Occupancy Rates at
Geographic Region
Interest
Greater Harrisburg, Pennsylvania (1)
70.9
74.3
Suburban Maryland (2)
86.3
88.3
Baltimore/Washington Corridor (3)
6.0
(1) Includes 16 properties totaling 671,000 square feet.
(2) Includes three properties totaling 298,000 square feet.
(3) Includes one property with 144,000 square feet.
Our shell-complete wholesale data center property, which is expected to have an initial stabilization critical load of 18 megawatts, had three megawatts in operations at September 30, 2011 and December 31, 2010 that was leased to tenants with further expansion rights of up to a combined five megawatts.
Results of Operations
One manner in which we evaluate the operating performance of our properties is through a measure we define as NOI from real estate operations, which is derived by subtracting property operating expenses from revenues from real estate operations. We believe that NOI from real estate operations is an important supplemental measure of performance for a REIT’s operating real estate because it provides a measure of the core operations that is unaffected by depreciation, amortization, impairment losses, financing and general and administrative expenses; this measure is particularly useful in our opinion in evaluating the performance of geographic segments, same-office property groupings and individual properties. The amount of NOI from real estate operations included in income from continuing operations is referred to herein as NOI from continuing real estate operations. We view our NOI from continuing real estate operations as being comprised of the following primary categories:
· operating properties owned and 100% operational throughout the current and prior year reporting periods, excluding operating properties held for future disposition. We define these as changes from “Same Office Properties”;
· operating properties acquired during the current and prior year reporting periods;
· constructed properties placed into service that were not 100% operational throughout the current and prior year reporting periods; and
· operating properties held for future disposition that are included in continuing operations.
The primary manner in which we evaluate the operating performance of our construction contract and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers 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.
We believe that operating income, as reported on our consolidated statements of operations, is the most directly comparable GAAP measure for both NOI from continuing real estate operations and NOI from service operations. Since both of these measures exclude certain items includable in operating income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures.
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The table below reconciles NOI from continuing real estate operations and NOI from service operations to operating income reported on our consolidated statement of operations (in thousands):
NOI from continuing real estate operations
74,238
68,061
217,655
197,340
Depreciation and amortization associated with continuing real estate operations
General and administrative expense
Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010
Variance
121,893
111,074
5,121
15,940
4,642
6,216
4,824
(1,836
13,921
2,019
793
(637
484
Income from continuing operations
197
824
(2,477
(1,456
Net income attributable to noncontrolling interests
(810
Net income attributable to COPT common shareholders
(2,266
32
NOI from Continuing Real Estate Operations
Same Office Properties
99,387
99,019
368
Acquired properties
8,010
1,613
6,397
Constructed properties placed in service
8,534
4,119
4,415
Operating properties held for future disposition
5,671
6,023
(352
291
300
37,534
37,147
387
3,460
467
2,993
2,376
1,250
1,126
2,638
2,807
(169
1,647
1,342
61,853
61,872
4,550
1,146
3,404
6,158
2,869
3,289
3,033
3,216
(183
(1,356
(1,042
(314
6,177
As the table above indicates, most of our change in NOI from continuing real estate operations was attributable to the additions of properties through acquisition and construction activities.
Depreciation and Amortization Associated with Real Estate Operations
The increase in depreciation and amortization expense associated with real estate operations included $3.7 million related to a property the useful life of which was shortened due to our execution of a redevelopment plan on the property.
The decrease in gain on sales of real estate was attributable to the sale of a land parcel in Central New Jersey during the prior period.
Comparison of the Nine Months Ended September 30, 2011 to the Nine Months Ended September 30, 2010
358,942
325,671
33,271
(9,184
24,087
12,956
13,352
(9,450
1,346
(1,380
74,648
(50,561
(4,370
Interest and other income
1,740
(594
6,118
(Loss) income from continuing operations
(49,347
(16,396
(112
(65,855
Net loss (income) attributable to noncontrolling interests
3,171
Net (loss) income attributable to COPT common shareholders
(62,684
34
(Dollars in thousands)
295,368
296,587
(1,219
21,995
1,654
20,341
23,665
5,991
17,674
16,905
19,299
(2,394
1,009
2,140
(1,131
112,728
111,175
1,553
9,422
473
8,949
5,915
1,987
3,928
8,106
8,641
(535
5,116
6,055
(939
182,640
185,412
(2,772
12,573
1,181
11,392
17,750
4,004
13,746
8,799
10,658
(1,859
(4,107
(3,915
(192
20,315
With regard to changes in NOI from continuing real estate operations attributable to Same Office Properties:
· the decrease in revenues included the following:
· a $1.7 million decrease in rental revenue attributable primarily to changes in occupancy and rental rates between the two periods (average occupancy of Same Office Properties was 89.7% in the current period versus 90.6% in the prior period); and
· a $736,000 decrease in net revenue from the early termination of leases; offset in part by
· a $1.2 million increase in tenant recoveries and other revenue; and
· the increase in property operating expenses included the following:
· a $1.5 million increase in heating and air conditioning repairs and maintenance that was predominantly attributable to an increase in heating and air conditioning systems utilization at a property in San Antonio;
· a $1.8 million increase in costs for asset and property management labor, much of which was due to an increase in the size of our employee base supporting certain properties;
· a $1.0 million increase in interior and other repairs and maintenance; offset in part by
· a $3.3 million decrease in snow removal expenses due primarily to record snowfall in Maryland and Northern Virginia in the prior period.
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Depreciation and amortization expense associated with real estate operations increased due primarily to expense attributable to properties added into operations through acquisition and construction activities.
We recognized the impairment losses described below in the current period:
· in connection primarily with the Strategic Reallocation Plan approved in April 2011, we determined that the carrying amounts of certain properties identified for disposition (the “Impaired Properties”) will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, during the second quarter of 2011, we recognized aggregate non-cash impairment losses of $44.6 million (including $14.5 million classified as discontinued operations and excluding $4.6 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values.
· on February 15 and 17, 2011, the Army provided us disclosures regarding the past testing and use of tactical defoliants/herbicides at Fort Ritchie. Upon receipt of these disclosures, we commenced a review of our development plans and prospects for the property. We believe that these disclosures by the Army are likely to cause further delays in the resolution of certain existing litigation related to the property, and that they also increase 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 will not likely be recovered from those cash flows, we recognized a non-cash impairment loss of $27.7 million for the amount by which the carrying value of the property exceeded its estimated fair value.
The increase in interest expense included the effect of a $216.6 million increase in our average outstanding debt resulting from our financing of acquisition and construction activities.
The increase in interest and other income was due primarily to $1.6 million in gain recognized on our investment in common stock of The KEYW Holding Corporation (“KEYW”). We used the equity method of accounting for our investment in KEYW common stock until the resignation of our 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.
Income tax (benefit) expense
The increase in income tax benefit was due primarily to a $4.6 million benefit on an impairment loss recognized by our taxable REIT subsidiary in connection with the Strategic Reallocation Plan.
The decrease in discontinued operations was due primarily to $14.5 million in impairment losses recognized in connection with the Strategic Reallocation Plan described above.
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Funds from Operations
Funds from operations (“FFO”) is defined as net income computed using GAAP, excluding gains on sales of previously depreciated operating properties, plus real estate-related depreciation and amortization. Gains from sales of newly-developed properties less accumulated depreciation, if any, required under GAAP are included in FFO on the basis that development services are the primary revenue generating activity; we believe that inclusion of these development gains is in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains related to sales of previously depreciated operating properties and excluding real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income is the most directly comparable GAAP measure to FFO.
Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (3) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (4) Basic FFO allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that the numerator for diluted EPS is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Diluted FFO, as adjusted for comparability is defined as Diluted FFO adjusted to exclude operating property acquisition costs, gain or loss on early extinguishment of debt and impairment losses, net of associated income tax. We believe that the excluded items are not reflective of normal operations and, as a result, we believe that a measure that excludes these items is a useful supplemental measure in evaluating our operating performance. We believe that the numerator to diluted EPS is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted
37
FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share (“EPS”) in evaluating net income available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
The computations for all of the above measures on a diluted basis assume the conversion of common units in our Operating Partnership but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period.
The table below sets forth the computation of the above stated measures for the three and nine months ended September 30, 2011 and 2010 and provides reconciliations to the GAAP measures associated with such measures (dollars and shares in thousands, except per share data):
38
Add: Real estate-related depreciation and amortization
36,032
30,745
101,101
87,896
Add: Depreciation and amortization on unconsolidated real estate entities
116
166
350
512
Less: Gain on sales of previously depreciated operating properties, net of income taxes
(1,299
(784
(1,449
(1,081
FFO
42,319
39,053
62,899
116,079
Noncontrolling interests-preferred units in the Operating Partnership
Noncontrolling interests-other consolidated entities
Depreciation and amortization allocable to noncontrolling interests in other consolidated entities
(276
(666
(566
(1,245
Basic and Diluted FFO allocable to restricted shares
(263
(353
(782
(1,078
Basic and Diluted FFO
37,029
34,278
47,942
101,418
Operating property acquisition costs
77
2,664
152
2,954
Income tax benefit from impairment loss
(4,598
1,995
2,020
Diluted FFO, as adjusted for comparability
39,101
36,942
117,863
104,372
Weighted average common shares
Conversion of weighted average common units
Weighted average common shares/units - Basic FFO
75,648
63,109
63,007
52
147
Weighted average common shares/units - Diluted FFO
75,700
63,405
73,236
63,374
Diluted FFO per share
0.49
0.54
0.65
1.60
Diluted FFO per share, as adjusted for comparability
0.52
0.58
1.61
1.65
Numerator for diluted EPS
Income allocable to noncontrolling interests-common units in the Operating Partnership
178
363
1,254
Real estate-related depreciation and amortization
Depreciation and amortization of unconsolidated real estate entities
Numerator for diluted EPS allocable to restricted shares
262
267
781
807
Basic and diluted FFO allocable to restricted shares
Gain on sales of previously depreciated operating properties, net of income taxes
Weighted average common units
Anti-dilutive EPS effect of share-based compensation awards
Denominator for diluted FFO per share measures
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Investing and Financing Activities During the Nine Months Ended September 30, 2011
During the nine months ended September 30, 2011, we placed into service an aggregate of 211,000 square feet in newly constructed space in three office properties. These properties included two properties totaling 228,000 square feet that became fully operational in 2011 (79,000 of these square feet were placed into service in 2010). Costs incurred on these properties through September 30, 2011 totaled $45.3 million.
On August 9, 2011, we acquired a 138,000 square foot office property in Huntsville, Alabama that was 100% leased for $33.4 million. This acquisition was financed primarily using borrowings from our Revolving Credit Facility.
The table below sets forth the major components of our additions to properties for the nine months ended September 30, 2011, including properties held for sale (in thousands):
195,807
30,025
Acquisition of operating properties
27,075
Capital improvements on operating properties
9,796
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment.
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 the Strategic Reallocation Plan. The properties to be disposed of pursuant to the Strategic Reallocation Plan consist primarily of office properties in certain submarkets in the Greater Baltimore, Suburban Maryland and St. Mary’s County regions that no longer fit our strategic focus. We expect that net proceeds from the execution of the Strategic Reallocation Plan after the repayment of debt secured by the properties will approximate $200 million. We expect to invest the proceeds in properties that will serve customers in the United States Government, defense information technology and related data sectors. During the nine months ended September 30, 2011, we completed the sale of eight properties under the plan totaling 254,000 square feet for $24.5 million, resulting in net proceeds of $19.0 million after repayment of related secured debt.
On April 5, 2011, we entered into two forward starting swaps for an aggregate notional amount of $175.0 million to lock in the LIBOR swap rate in anticipation of our obtaining a ten-year term, fixed rate financing. Both agreements are effective on September 30, 2011, expire on September 30, 2021 and have a cash settlement date on March 30, 2012. These swaps are designated as cash flow hedges.
In May 2011, we issued 4.6 million common shares at a public offering price of $33.00 per share, for net proceeds of $145.7 million after underwriting discount but before offering expenses. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes.
Effective September 1, 2011, we entered into 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 new facility is $1.0 billion, including a $100.0 million letter of credit subfacility and a $100.0 million swingline facility (same-day draw requests), with a right for us to increase the lenders’ aggregate commitment to $1.5 billion, provided that there is no default under the facility. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement. The new Revolving Credit Facility matures on September 1, 2014, 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 variable interest rate on the facility is based on one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.75% to 2.50%, as determined by our leverage levels at different points in time; or (2)(a) the greater
40
of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.75% to 1.50%, as determined by our leverage levels at different points in time. 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 of September 30, 2011, the maximum amount of borrowing capacity under this facility totaled $1.0 billion, of which $323.1 million was available.
Effective September 1, 2011, we entered into an unsecured term loan agreement (“Term Loan Agreement”) with the same group of lenders as the new 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 one of the following, to be selected by us: (1) the LIBOR rate for the interest period designated by us (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels at different points in time; or (2)(a) the greater of: (i) the prime rate of the lender then acting as the administrative agent, (ii) the Federal Funds Rate, as defined in the Term Loan Agreement, plus 0.50% or (iii) the LIBOR rate for a one-month interest period plus 1.0%; plus (b) 0.65% to 1.40%, as determined by our leverage levels at different points in time. The term loan 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%.
Upon entry into the new Revolving Credit Facility and Term Loan Agreement 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.
On September 15, 2011, we repurchased our 3.5% Exchangeable Senior Notes due 2026 at 100% of their principal amount of $162.5 million, using primarily borrowings from our Revolving Credit Facility, after the holders of the notes surrendered them for repurchase pursuant to the terms of the notes and the related indenture.
Cash Flows
We expect to continue to use cash flow provided by operations as the primary source to meeting our short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, dividends to our shareholders, distributions to our noncontrolling interest holders of preferred and common units in the Operating Partnership and capital improvements and leasing costs. Our net cash flow provided by operating activities increased $9.3 million when comparing the nine months ended September 30, 2011 and 2010 due primarily to: (1) an increase in revenues received from real estate operations attributable to newly acquired and newly constructed properties and the timing of cash flow associated with third-party construction projects in the prior period; offset in part by (2) $17.3 million in previously accreted interest paid in connection with our repurchase of the 3.5% Exchangeable Senior Notes. Our net cash flow used in investing activities decreased $111.4 million when comparing the nine months ended September 30, 2011 and 2010 due primarily to a decrease in acquisitions relative to the prior period. Our cash flow provided by financing activities decreased $122.8 million when comparing the nine months ended September 30, 2011 and 2010 due primarily to a $249.6 million decrease in cash flow from debt, net of repayments, due in large part to the decrease in cash required to fund property acquisitions, offset in part by a $143.4 million increase in net proceeds from common share issuances in the current period.
Liquidity and Capital Resources
Our primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and acquisitions. While we may experience increasing challenges discussed elsewhere herein and in our 2010 Annual Report on Form 10-K due to the current economic environment, we believe that our liquidity and capital resources are adequate for our near-term
41
and longer-term requirements. We maintain sufficient cash and cash equivalents to meet our operating cash requirements and short term investing and financing cash requirements. When we determine that the amount of cash and cash equivalents on hand is more than we need to meet such requirements, we may pay down our Revolving Credit Facility or forgo borrowing under construction loan credit facilities to fund development activities.
We rely primarily on fixed-rate, non-recourse mortgage loans from banks and institutional lenders to finance most of our operating properties. We have also made use of the public equity and debt markets to meet our capital needs, principally to repay or refinance corporate and property secured debt and to provide funds for project development and acquisitions.
As discussed further above, our Revolving Credit Facility provides for borrowings of up to $1.0 billion, $323.1 million of which was available at September 30, 2011; this facility is available through September 1, 2014, and may be extended by us 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. We often use our Revolving Credit Facility initially to finance much of our investing activities. We then pay down the facility using proceeds generated from long-term borrowings and equity issuances. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement.
Also as discussed above, we have a Term Loan Agreement 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. In addition, we have construction loan facilities that provide for aggregate borrowings of up to $104.9 million, $82.2 million of which was available at September 30, 2011 to fund future construction costs.
We expect to satisfy our 2011 and 2012 debt maturities and fund the construction of properties under construction at period end or expected to be started during the remainder of 2011 using capacity under our Revolving Credit Facility, Term Loan Agreement and existing construction loan facilities, borrowings under new construction loan facilities that we expect to obtain and by accessing the secured debt market, unsecured debt market and/or public equity market. We are continually evaluating sources of capital and believe that there are satisfactory sources available to meet our capital requirements without necessitating property sales. However, selective dispositions of operating properties and other assets are expected to provide capital resources during the remainder of 2011 and in future years.
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 service and maximum secured indebtedness ratio. As of September 30, 2011, we were in compliance with these financial covenants.
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Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2011 (in thousands):
For the Periods Ending December 31,
2012
2013
2014
Thereafter
Contractual obligations (1)
Debt (2)
Balloon payments due upon maturity
52,876
140,800
822,681
794,734
575,226
2,386,317
Scheduled principal payments
3,261
13,008
10,286
7,099
5,738
7,294
46,686
Interest on debt (3)
24,937
92,836
75,657
66,317
49,773
29,347
338,867
New construction and redevelopment obligations (4)(5)
38,848
30,868
69,716
Third-party construction and development obligations (5)(6)
8,876
8,877
17,753
Capital expenditures for operating properties (5)(7)
19,855
8,121
27,976
Operating leases (8)
170
590
530
446
338
27,080
29,154
Cash settlement of interest rate swaps (9)
27,613
Other purchase obligations (10)
1,154
3,420
2,765
1,846
1,305
323
10,813
Total contractual cash obligations
97,101
238,209
230,038
898,389
851,888
639,270
2,954,895
(1) The contractual obligations set forth in this table generally exclude individual property operations contracts that had a value of less than $20,000. Also excluded are contracts associated with the operations of our properties that may be terminated with notice of one month or less, which is the arrangement that applies to most of our property operations contracts.
(2) Represents scheduled principal amortization payments and maturities only and therefore excludes a net discount of $12.9 million.
(3) Represents interest costs for debt at September 30, 2011 for the terms of such debt. For variable rate debt, the amounts reflected above used September 30, 2011 interest rates on variable rate debt in computing interest costs for the terms of such debt.
(4) Represents contractual obligations pertaining to new construction and redevelopment activities. We expect to finance these costs using primarily a combination of borrowings under our Revolving Credit Facility and by accessing the secured debt market, unsecured debt market and/or public equity market. Construction and redevelopment activities underway at September 30, 2011 included the following:
Expected Year
Number of
Square Feet (in
Remaining Costs
For Costs to be
Properties
thousands)
(in millions)
Incurred Through
Construction of new office properties
1,172
110.5
Redevelopment of existing office properties
297
23.1
(5) Due to the long-term nature of certain construction and development contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable.
(6) Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients. We expect to be reimbursed in full for these costs by our clients.
(7) Represents contractual obligations pertaining to recurring and nonrecurring capital expenditures for our operating properties. We expect to finance these costs primarily using cash flow from operations.
(8) We expect to pay these items using cash flow from operations.
(9) Represents the fair value at September 30, 2011 of interest rate swaps with a cash settlement date of March 30, 2012.
(10) Primarily represents contractual obligations pertaining to managed-energy service contracts in place for certain of our operating properties. We expect to pay these items using cash flow from operations.
Off-Balance Sheet Arrangements
We had no significant changes in our off-balance sheet arrangements from those described in the section entitled “Off-Balance Sheet Arrangements” in our 2010 Annual Report on Form 10-K.
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Inflation
Most of our tenants are obligated to pay their share of a building’s operating expenses to the extent such expenses exceed amounts established in their leases, based on historical expense levels. Some of our tenants are obligated to pay their full share of a building’s operating expenses. These arrangements somewhat reduce our exposure to increases in such costs resulting from inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, the most predominant of which is change in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and other variable rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced.
The following table sets forth as of September 30, 2011 our debt obligations and weighted average interest rates for fixed rate debt by expected maturity date (dollars in thousands):
Long term debt:
Fixed rate debt (1)
3,077
48,393
144,345
157,965
363,596
582,520
1,299,896
Weighted average interest rate
6.23
6.36
5.62
6.41
4.66
6.02
5.66
Variable rate debt
184
17,491
6,741
671,815
436,876
(1) Represents principal maturities only and therefore excludes net discounts of $12.9 million.
The fair market value of our debt was $2.4 billion at September 30, 2011. If interest rates had been 1% lower, the fair value of our debt would have increased by $83.3 million at September 30, 2011.
The following table sets forth information pertaining to interest rate swap contracts in place as of September 30, 2011 and December 31, 2010 and their respective fair values (dollars in thousands):
Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $3.0 million in the nine months ended September 30, 2011 if short-term interest rates had been 1% higher.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2011 were functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance).
Item 1A. Risk Factors
There have been no material changes to the risk factors included in our 2010 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) During the three months ended September 30, 2011, 62,461 of the Operating Partnership’s common units were exchanged for 62,461 common shares in accordance with the Operating Partnership’s Second Amended and Restated Limited Partnership Agreement, as amended. The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
(b) Not applicable
(c) Not applicable
Item 3. Defaults Upon Senior Securities
(a) Not applicable
Item 4. Removed and Reserved
Item 5. Other Information
As described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2011, on August 5, 2011, we entered into a credit agreement and a term loan agreement, both dated and effective as of September 1, 2011, with a group of lenders for which J.P. Morgan Securities LLC and KeyBanc Capital Markets acted as joint 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. These agreements became effective on September 1, 2011, as of which date we repaid in full and terminated: (1) our Second Amended and Restated Credit Agreement, dated October 1, 2007, with a group of lenders for which KeyBanc Capital Markets and Wachovia Capital Markets, LLC act as co-lead arrangers, KeyBank National Association as administrative agent and Wachovia Bank, National Association as syndication agent; and (2) our Construction Loan Agreement, dated May 2, 2008, with a group of lenders for which KeyBanc Capital Markets, Inc. act as arranger, KeyBank National Association as administrative agent, Bank of America, N.A. as syndication agent and Manufacturers and Traders Trust Company as documentation agent.
On October 26, 2011, we discharged all of our obligations under the Indenture, dated as of September 18, 2006, among us and Wells Fargo Bank, National Association, as trustee, relating to our 3.50% Exchangeable Senior Notes due 2026 (the “Notes”), and such indenture was terminated. As previously disclosed, we repurchased all of the outstanding Notes on September 15, 2011, pursuant to the rights of the holders of the Notes to require us to do so.
Item 6. Exhibits
(a) Exhibits:
EXHIBIT NO.
DESCRIPTION
10.1
Credit Agreement, dated as of September 1, 2011, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; J.P. Morgan Securities LLC; KeyBanc Capital Markets; KeyBank National Association; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Royal Bank of Canada; Wells Fargo Bank, National Association; Barclays Bank PLC; PNC Bank, National Association; Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s Current Report on Form 8-K/A dated September 1, 2011 and incorporated herein by reference).
10.2
Term Loan Agreement, dated as of September 1, 2011, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; J.P. Morgan Securities LLC; KeyBanc Capital Markets; KeyBank National Association; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Royal Bank of Canada; Barclays Bank PLC; PNC Bank, National Association; Wells Fargo Bank, National Association; Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s Current Report on Form 8-K/A dated September 1, 2011 and incorporated herein by reference).
10.3
Twenty-Eighth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated September 15, 2011 (filed with the Company’s Current Report on Form 8-K dated September 16, 2011 and incorporated herein by reference).
10.4
Employment Agreement, dated September 15, 2011, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Stephen E. Budorick (filed with the Company’s Current Report on Form 8-K dated September 16, 2011 and incorporated herein by reference).
31.1
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
31.2
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
32.1
Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith).
32.2
Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended).
(Furnished herewith).
101.INS
XBRL Instance Document (furnished herewith).
101.SCH
XBRL Taxonomy Extension Schema Document (furnished herewith).
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith).
101.LAB
XBRL Extension Labels Linkbase (furnished herewith).
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith).
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith).
48
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CORPORATE OFFICE PROPERTIES TRUST
Date: October 28, 2011
By:
/s/ Randall M. Griffin
Randall M. Griffin
Chief Executive Officer
/s/ Stephen E. Riffee
Stephen E. Riffee
Executive Vice President and Chief Financial Officer