UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one) | |||
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |||
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For the quarterly period ended | |||
| |||
or | |||
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |||
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For the transition period from to | |||
Commission file number 1-14023
(Exact name of registrant as specified in its charter)
Maryland |
| 23-2947217 |
(State or other jurisdiction of |
| (IRS Employer |
|
|
|
8815 Centre Park Drive, Suite 400, Columbia MD |
| 21045 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (410) 730-9092
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.
ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ýYes o No
On November 7, 2003, 29,550,631April 30, 2004, 33,963,316 shares of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued.
TABLE OF CONTENTS
FORMForm 10-Q
2
PART I:I: FINANCIAL INFORMATION
ITEM 1.1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
(Dollars in thousands)
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
|
| (unaudited) |
|
|
|
| (unaudited) |
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Investment in real estate: |
|
|
|
|
|
|
|
|
|
| ||||
Operating properties, net |
| $ | 1,127,960 |
| $ | 1,008,178 |
|
| $ | 1,191,104 |
| $ | 1,116,847 |
|
Property held for sale, net |
| — |
| 16,792 |
| |||||||||
Projects under construction or development |
| 52,956 |
| 34,567 |
|
| 94,618 |
| 67,149 |
| ||||
Total commercial real estate properties, net |
| 1,180,916 |
| 1,059,537 |
|
| 1,285,722 |
| 1,183,996 |
| ||||
Investments in and advances to unconsolidated real estate joint ventures |
| 9,576 |
| 7,999 |
|
| 1,059 |
| 5,262 |
| ||||
Investment in real estate, net |
| 1,190,492 |
| 1,067,536 |
|
| 1,286,781 |
| 1,189,258 |
| ||||
Cash and cash equivalents |
| 13,372 |
| 5,991 |
|
| 9,536 |
| 9,481 |
| ||||
Restricted cash |
| 7,878 |
| 9,739 |
|
| 13,528 |
| 11,030 |
| ||||
Accounts receivable, net |
| 7,049 |
| 3,509 |
|
| 9,708 |
| 13,047 |
| ||||
Investments in and advances to other unconsolidated entities |
| 1,621 |
| 1,621 |
|
| 1,621 |
| 1,621 |
| ||||
Deferred rent receivable |
| 16,728 |
| 13,698 |
|
| 18,673 |
| 17,903 |
| ||||
Intangible assets on real estate acquisitions, net |
| 55,577 |
| 55,692 |
| |||||||||
Deferred charges, net |
| 39,595 |
| 23,199 |
|
| 19,551 |
| 17,723 |
| ||||
Prepaid and other assets |
| 21,237 |
| 11,260 |
|
| 14,719 |
| 14,311 |
| ||||
Furniture, fixtures and equipment, net |
| 2,006 |
| 1,676 |
|
| 2,316 |
| 2,010 |
| ||||
Total assets |
| $ | 1,299,978 |
| $ | 1,138,229 |
|
| $ | 1,432,010 |
| $ | 1,332,076 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Mortgage and other loans payable |
| $ | 759,298 |
| $ | 705,056 |
|
| $ | 829,755 |
| $ | 738,698 |
|
Accounts payable and accrued expenses |
| 15,450 |
| 11,670 |
|
| 29,217 |
| 23,126 |
| ||||
Rents received in advance and security deposits |
| 11,503 |
| 8,253 |
|
| 11,842 |
| 10,112 |
| ||||
Dividends and distributions payable |
| 11,637 |
| 9,794 |
|
| 12,991 |
| 12,098 |
| ||||
Deferred revenue associated with acquired operating leases |
| 9,799 |
| 11,758 |
|
| 8,734 |
| 9,630 |
| ||||
Fair value of derivatives |
| 726 |
| 494 |
|
| 429 |
| 467 |
| ||||
Other liabilities |
| 7,114 |
| 1,821 |
|
| 3,184 |
| 7,768 |
| ||||
Total liabilities |
| 815,527 |
| 748,846 |
|
| 896,152 |
| 801,899 |
| ||||
Minority interests: |
|
|
|
|
|
|
|
|
|
| ||||
Preferred units in the Operating Partnership |
| — |
| 24,367 |
| |||||||||
Common units in the Operating Partnership |
| 80,411 |
| 76,519 |
|
| 79,245 |
| 79,796 |
| ||||
Other consolidated real estate joint ventures |
| 5,498 |
| — |
| |||||||||
Total minority interests |
| 80,411 |
| 100,886 |
|
| 84,743 |
| 79,796 |
| ||||
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
| ||||
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
| ||||
Preferred Shares of beneficial interest ($0.01 par value; 15,000,000 shares authorized) |
|
|
|
|
| |||||||||
1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (1,250,000 shares issued with an aggregate liquidation preference of $31,250 at September 30, 2003 and December 31, 2002) |
| 13 |
| 13 |
| |||||||||
544,000 designated as Series D Cumulative Convertible Redeemable Preferred Shares of beneficial interest (544,000 shares issued with an aggregate liquidation preference of $13,600 at September 30, 2003 and December 31, 2002) |
| 5 |
| 5 |
| |||||||||
1,265,000 designated as Series E Cumulative Redeemable Preferred Shares of beneficial interest (1,150,000 shares issued with an aggregate liquidation preference of $28,750 at September 30, 2003 and December 31, 2002) |
| 11 |
| 11 |
| |||||||||
1,425,000 designated as Series F Cumulative Redeemable Preferred Shares of beneficial interest (1,425,000 shares issued with an aggregate liquidation preference of $35,625 at September 30, 2003 and December 31, 2002) |
| 14 |
| 14 |
| |||||||||
2,200,000 designated as Series G Cumulative Redeemable Preferred Shares of beneficial interest (2,200,000 shares issued with an aggregate liquidation preference of $35,625 at September 30, 2003 and December 31, 2002) |
| 22 |
| — |
| |||||||||
Common Shares of beneficial interest ($0.01 par value; 45,000,000 shares authorized, shares issued of 29,527,436 at September 30, 2003 and 23,772,732 at December 31, 2002) |
| 296 |
| 238 |
| |||||||||
Preferred Shares of beneficial interest ($0.01 par value; 10,000,000 shares authorized) |
|
|
|
|
| |||||||||
1,725,000 designated as Series B Cumulative Redeemable Preferred Shares of beneficial interest (1,250,000 shares issued with an aggregate liquidation preference of $31,250 at March 31, 2004 and December 31, 2003) |
| 13 |
| 13 |
| |||||||||
544,000 designated as Series D Cumulative Convertible Redeemable Preferred Shares of beneficial interest (544,000 shares issued at December 31, 2003 with an aggregate liquidation preference of $13,600 at December 31, 2003) |
| — |
| 5 |
| |||||||||
1,265,000 designated as Series E Cumulative Redeemable Preferred Shares of beneficial interest (1,150,000 shares issued with an aggregate liquidation preference of $28,750 at March 31, 2004 and December 31, 2003) |
| 11 |
| 11 |
| |||||||||
1,425,000 designated as Series F Cumulative Redeemable Preferred Shares of beneficial interest (1,425,000 shares issued with an aggregate liquidation preference of $35,625 at March 31, 2004 and December 31, 2003) |
| 14 |
| 14 |
| |||||||||
2,200,000 designated as Series G Cumulative Redeemable Preferred Shares of beneficial interest (2,200,000 shares issued with an aggregate liquidation preference of $55,000 at March 31, 2004 and December 31, 2003) |
| 22 |
| 22 |
| |||||||||
2,000,000 designated as Series H Cumulative Redeemable Preferred Shares of beneficial interest (2,000,000 shares issued with an aggregate liquidation preference of $50,000 at March 31, 2004 and December 31, 2003) |
| 20 |
| 20 |
| |||||||||
Common Shares of beneficial interest ($0.01 par value; 45,000,000 shares authorized, shares issued of 31,142,779 at March 31, 2004 and 29,563,867 at December 31, 2003) |
| 312 |
| 296 |
| |||||||||
Additional paid-in capital |
| 445,717 |
| 313,786 |
|
| 499,132 |
| 494,299 |
| ||||
Cumulative distributions in excess of net income |
| (35,968 | ) | (21,067 | ) |
| (41,123 | ) | (38,483 | ) | ||||
Value of unearned restricted common share grants |
| (4,107 | ) | (2,739 | ) |
| (5,543 | ) | (4,107 | ) | ||||
Treasury shares, at cost (166,600 shares) |
| (1,415 | ) | (1,415 | ) |
| (1,415 | ) | (1,415 | ) | ||||
Accumulated other comprehensive loss |
| (548 | ) | (349 | ) |
| (328 | ) | (294 | ) | ||||
Total shareholders’ equity |
| 404,040 |
| 288,497 |
|
| 451,115 |
| 450,381 |
| ||||
Total liabilities and shareholders’ equity |
| $ | 1,299,978 |
| $ | 1,138,229 |
|
| $ | 1,432,010 |
| $ | 1,332,076 |
|
See accompanying notes to consolidated financial statements.
3
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
|
| For the three months ended |
| For the nine months ended |
|
| For the three months ended |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
Real Estate Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Rental revenue |
| $ | 40,210 |
| $ | 33,769 |
| $ | 112,921 |
| $ | 97,328 |
|
| $ | 43,194 |
| $ | 35,989 |
|
Tenant recoveries and other revenue |
| 5,238 |
| 4,296 |
| 14,923 |
| 11,634 |
|
| 5,777 |
| 5,529 |
| ||||||
Revenue from real estate operations |
| 45,448 |
| 38,065 |
| 127,844 |
| 108,962 |
|
| 48,971 |
| 41,518 |
| ||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property operating |
| 13,075 |
| 11,994 |
| 37,830 |
| 31,896 |
|
| 15,039 |
| 13,654 |
| ||||||
Interest |
| 10,436 |
| 10,489 |
| 30,608 |
| 28,072 |
|
| 10,262 |
| 10,135 |
| ||||||
Amortization of deferred financing costs |
| 773 |
| 559 |
| 1,957 |
| 1,793 |
|
| 859 |
| 589 |
| ||||||
Depreciation and other amortization |
| 9,462 |
| 7,357 |
| 26,735 |
| 21,941 |
|
| 10,359 |
| 8,044 |
| ||||||
Expenses from real estate operations |
| 33,746 |
| 30,399 |
| 97,130 |
| 83,702 |
|
| 36,519 |
| 32,422 |
| ||||||
Earnings from real estate operations before equity in income (loss) of unconsolidated real estate joint ventures |
| 11,702 |
| 7,666 |
| 30,714 |
| 25,260 |
| |||||||||||
Equity in income (loss) of unconsolidated real estate joint ventures |
| 95 |
| 138 |
| (91 | ) | 134 |
| |||||||||||
Earnings from real estate operations before equity in loss of unconsolidated real estate joint ventures |
| 12,452 |
| 9,096 |
| |||||||||||||||
Equity in loss of unconsolidated real estate joint ventures |
| (88 | ) | (153 | ) | |||||||||||||||
Earnings from real estate operations |
| 11,797 |
| 7,804 |
| 30,623 |
| 25,394 |
|
| 12,364 |
| 8,943 |
| ||||||
Service operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Revenues |
| 1,769 |
| 1,107 |
| 3,364 |
| 3,194 |
| |||||||||||
Expenses |
| (1,027 | ) | (1,077 | ) | (2,784 | ) | (3,353 | ) | |||||||||||
Equity in loss of unconsolidated Service Companies |
| — |
| (15 | ) | — |
| (20 | ) | |||||||||||
Construction contract revenues |
| 6,137 |
| 3,931 |
| |||||||||||||||
Other service revenues |
| 1,721 |
| 538 |
| |||||||||||||||
Construction contract expenses |
| (5,818 | ) | (3,788 | ) | |||||||||||||||
Other expenses |
| (1,298 | ) | (762 | ) | |||||||||||||||
Income (loss) from service operations |
| 742 |
| 15 |
| 580 |
| (179 | ) |
| 742 |
| (81 | ) | ||||||
General and administrative expenses |
| (1,937 | ) | (815 | ) | (5,651 | ) | (4,925 | ) |
| (2,286 | ) | (1,948 | ) | ||||||
Income before gain on sales of real estate, minority interests, income taxes and discontinued operations |
| 10,602 |
| 7,004 |
| 25,552 |
| 20,290 |
|
| 10,820 |
| 6,914 |
| ||||||
Gain on sales of real estate |
| 23 |
| 796 |
| 448 |
| 1,742 |
| |||||||||||
(Loss) gain on sales of real estate |
| (222 | ) | 404 |
| |||||||||||||||
Income before minority interests, income taxes and discontinued operations |
| 10,625 |
| 7,800 |
| 26,000 |
| 22,032 |
|
| 10,598 |
| 7,318 |
| ||||||
Minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common units in the Operating Partnership |
| (1,833 | ) | (1,429 | ) | (4,386 | ) | (3,946 | ) |
| (1,452 | ) | (1,215 | ) | ||||||
Preferred units in the Operating Partnership |
| — |
| (572 | ) | (1,049 | ) | (1,716 | ) |
| — |
| (572 | ) | ||||||
Other consolidated entities |
| — |
| 104 |
| — |
| 59 |
| |||||||||||
Income before income taxes and discontinued operations |
| 8,792 |
| 5,903 |
| 20,565 |
| 16,429 |
|
| 9,146 |
| 5,531 |
| ||||||
Income tax (expense) benefit, net of minority interests |
| (221 | ) | (9 | ) | (181 | ) | 43 |
|
| (153 | ) | 21 |
| ||||||
Income before discontinued operations |
| 8,571 |
| 5,894 |
| 20,384 |
| 16,472 |
|
| 8,993 |
| 5,552 |
| ||||||
Income from discontinued operations, net of minority interests |
| 11 |
| 268 |
| 2,423 |
| 869 |
|
| — |
| 2,435 |
| ||||||
Net income |
| 8,582 |
| 6,162 |
| 22,807 |
| 17,341 |
|
| 8,993 |
| 7,987 |
| ||||||
Preferred share dividends |
| (3,157 | ) | (2,533 | ) | (8,224 | ) | (7,600 | ) |
| (4,456 | ) | (2,533 | ) | ||||||
Repurchase of preferred units in excess of recorded book value |
| — |
| — |
| (11,224 | ) | — |
| |||||||||||
Net income available to common shareholders |
| $ | 5,425 |
| $ | 3,629 |
| $ | 3,359 |
| $ | 9,741 |
|
| $ | 4,537 |
| $ | 5,454 |
|
Basic earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income before discontinued operations |
| $ | 0.19 |
| $ | 0.15 |
| $ | 0.04 |
| $ | 0.40 |
|
| $ | 0.15 |
| $ | 0.13 |
|
Discontinued operations |
| — |
| 0.01 |
| 0.09 |
| 0.04 |
|
| — |
| 0.10 |
| ||||||
Net income |
| $ | 0.19 |
| $ | 0.16 |
| $ | 0.13 |
| $ | 0.44 |
| |||||||
Net income available to common shareholders |
| $ | 0.15 |
| $ | 0.23 |
| |||||||||||||
Diluted earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income before discontinued operations |
| $ | 0.18 |
| $ | 0.14 |
| $ | 0.03 |
| $ | 0.38 |
|
| $ | 0.14 |
| $ | 0.12 |
|
Discontinued operations |
| — |
| 0.01 |
| 0.09 |
| 0.04 |
|
| — |
| 0.10 |
| ||||||
Net income |
| $ | 0.18 |
| $ | 0.15 |
| $ | 0.12 |
| $ | 0.42 |
| |||||||
Net income available to common shareholders |
| $ | 0.14 |
| $ | 0.22 |
|
See accompanying notes to consolidated financial statements.
4
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
|
| For the nine months ended |
|
| For the three months ended |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 22,807 |
| $ | 17,341 |
|
| $ | 8,993 |
| $ | 7,987 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Minority interests |
| 6,383 |
| 6,024 |
|
| 1,405 |
| 2,805 |
| ||||
Depreciation and other amortization |
| 26,754 |
| 22,402 |
|
| 10,359 |
| 8,063 |
| ||||
Amortization of deferred financing costs |
| 1,957 |
| 1,793 |
|
| 859 |
| 589 |
| ||||
Amortization of value of acquired operating leases |
| (1,465 | ) | (1,916 | ) | |||||||||
Equity in (income) loss of unconsolidated entities |
| 91 |
| (114 | ) | |||||||||
Gain on sales of real estate, including amounts in discontinued operations |
| (3,443 | ) | (1,742 | ) | |||||||||
Amortization of value of acquired operating leases to rental revenue |
| (309 | ) | (549 | ) | |||||||||
Equity in loss of unconsolidated entities |
| 88 |
| 153 |
| |||||||||
Loss (gain) on sales of real estate, including amounts in discontinued operations |
| 222 |
| (3,415 | ) | |||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Increase in deferred rent receivable |
| (3,629 | ) | (2,024 | ) |
| (763 | ) | (1,179 | ) | ||||
Increase in accounts receivable, restricted cash and prepaid and other assets |
| (5,677 | ) | (2,536 | ) | |||||||||
Increase in accounts payable, accrued expenses, rents received in advance and security deposits |
| 8,889 |
| 1,671 |
| |||||||||
Decrease (increase) in accounts receivable, restricted cash and prepaid and other assets |
| 685 |
| (2,607 | ) | |||||||||
(Decrease) increase in accounts payable, accrued expenses, rents received in advance and security deposits |
| (5,408 | ) | 2,743 |
| |||||||||
Other |
| 790 |
| 932 |
|
| 1,317 |
| 564 |
| ||||
Net cash provided by operating activities |
| 53,457 |
| 41,831 |
|
| 17,448 |
| 15,154 |
| ||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
| ||||
Purchases of and additions to commercial real estate properties |
| (183,697 | ) | (129,013 | ) |
| (60,024 | ) | (26,427 | ) | ||||
Proceeds from sales of properties |
| 36,904 |
| 8,611 |
|
| — |
| 36,965 |
| ||||
Investments in and advances to unconsolidated real estate joint ventures |
| (735 | ) | 1,779 |
|
| (4 | ) | (944 | ) | ||||
Leasing commissions paid |
| (2,061 | ) | (5,109 | ) | |||||||||
(Increase) decrease in advances to certain real estate joint ventures |
| (4,134 | ) | 2,583 |
| |||||||||
Leasing costs paid |
| (552 | ) | (463 | ) | |||||||||
Advances to certain real estate joint ventures |
| (515 | ) | — |
| |||||||||
Other |
| (1,680 | ) | (521 | ) |
| (3,298 | ) | (5,358 | ) | ||||
Net cash used in investing activities |
| (155,403 | ) | (121,670 | ) | |||||||||
Net cash (used in) provided by investing activities |
| (64,393 | ) | 3,773 |
| |||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from mortgage and other loans payable |
| 206,057 |
| 254,217 |
|
| 189,125 |
| 27,540 |
| ||||
Repayments of mortgage and other loans payable |
| (169,055 | ) | (153,551 | ) |
| (129,549 | ) | (41,608 | ) | ||||
Deferred financing costs paid |
| (1,277 | ) | (1,852 | ) |
| (1,948 | ) | (206 | ) | ||||
Increase (decrease) in other liabilities |
| 4,000 |
| (11,336 | ) | |||||||||
Increase in other liabilities associated with financing activities |
| — |
| 4,000 |
| |||||||||
Net proceeds from issuance of common shares |
| 81,388 |
| 25,364 |
|
| 2,189 |
| 566 |
| ||||
Net proceeds from issuance of preferred shares |
| 53,240 |
| — |
| |||||||||
Repurchase of preferred units |
| (35,591 | ) | — |
| |||||||||
Dividends paid |
| (24,595 | ) | (21,354 | ) |
| (10,732 | ) | (8,066 | ) | ||||
Distributions paid |
| (7,126 | ) | (7,716 | ) |
| (2,085 | ) | (2,131 | ) | ||||
Other |
| 2,286 |
| (2,909 | ) |
| — |
| 1,269 |
| ||||
Net cash provided by financing activities |
| 109,327 |
| 80,863 |
| |||||||||
Net cash provided by (used in) financing activities |
| 47,000 |
| (18,636 | ) | |||||||||
Net increase in cash and cash equivalents |
| 7,381 |
| 1,024 |
|
| 55 |
| 291 |
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
| ||||
Beginning of year |
| 5,991 |
| 6,640 |
| |||||||||
Beginning of period |
| 9,481 |
| 5,991 |
| |||||||||
End of period |
| $ | 13,372 |
| $ | 7,664 |
|
| $ | 9,536 |
| $ | 6,282 |
|
See accompanying notes to consolidated financial statements.
5
Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial StatementsStatemen
ts
(Dollars in thousands, except per share data)
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully- integratedfully-integrated and self-managed real estate investment trust (“REIT”). We focus principally on the ownership, management, leasing, acquisition and development of suburban office properties located in select submarkets in the Mid-Atlantic region of the United States. COPT is qualified as a REIT as defined in the Internal Revenue Code of 1986 and is the successor to a corporation organized in 1988. As of September 30, 2003,March 31, 2004, our portfolio included 118 operating129 office properties, including three propertiesone property owned through a joint ventures.venture.
We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), for 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, 2003March 31, 2004 follows:
|
| % Owned | |
| |||
Common Units |
|
| % |
Series B |
|
| |
|
| 100 | % |
Series E Preferred Units |
| 100 | % |
Series F Preferred Units |
| 100 | % |
Series G Preferred Units |
| 100 | % |
Series H Preferred Units | 100 | % |
The Operating Partnership also owns 100% of Corporate Office Management, Inc. (“COMI”) (together with its subsidiaries defined as the “Service Companies”). COMI’s consolidated subsidiaries are set forth below:
Entity Name |
| Type of Service Business | |
Corporate Realty Management, LLC (“CRM”) |
| Real Estate Management | |
Corporate Development Services, LLC (“CDS”) |
| Construction and Development | |
Corporate Cooling and Controls, LLC (“CC&C”) |
| Heating and Air Conditioning |
COMI owns 100% of these entities.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete Consolidated Financial Statements are not included herein. These interim financial statements should be read together with the financial statements and notes thereto included in our 20022003 Annual Report on Form 10-K. The interim financial statements on the previous pages reflect all adjustments which we believe are necessary for the fair presentation of our financial position and results of operations for the interim periods presented. These adjustments are of a normal recurring nature. The results of operations for such interim periods are not necessarily indicative of the results for a full year.
We use four different accounting methods to report our investments in entities: the consolidation method, the equity method, the cost method and the financing method.
6
Consolidation Method
We use the consolidation method when we own all or most of the outstanding voting interests in an entity and can control its operations. This means the accounts of the entity are combined with our accounts. We eliminate balances and transactions between companies when we consolidate these accounts. Our Consolidated Financial Statements include the accounts of:
6
• COPT;
• the Operating Partnership and its subsidiary partnerships and LLCs;
• the Service Companies; and
• Corporate Office Properties Holdings, Inc. (of which we own 100%).
See the section in Note 3 entitled “Recent Accounting Pronouncements” for a description of Financial Accounting Standards Board (“FASB”) Interpretation No. 46,46R, “Consolidation of Variable Interest Entities” (“FIN 46”46R”). FIN 4646R affects our determination of when to use the consolidation method of accounting.
Equity Method
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. Under the equity method, we report:
• our ownership interest in the entity’s capital as an investment on our Consolidated Balance Sheets; and
• our percentage share of the earnings or losses from the entity in our Consolidated Statements of Operations.
See the section in Note 3 entitled “Recent Accounting Pronouncements” for a description of FIN 46.46R. FIN 4646R affects our determination of when to use the equity method of accounting.
Cost Method
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over the entity’s operations. Under the cost method, we report:
• the cost of our investment in the entity as an investment on our Consolidated Balance Sheets; and
• distributions to us of the entity’s earnings in our Consolidated Statements of Operations.
Financing Method
We use the financing method of accounting for certain real estate joint ventures. We use this method when we contribute a parcel of land into a real estate joint venture and have an option to acquire our partner’s joint venture interest for a pre-determined purchase price. Details of the financing method of accounting are described below:
• the costs associated with a land parcel at the time of its contribution into a joint venture are reported as commercial real estate properties on our Consolidated Balance Sheets;
• the cash received from a joint venture in connection with our land contribution is reported as other liabilities on our Consolidated Balance Sheets. The liability is accreted towards the pre-determined purchase price over the life of our option to acquire our partner’s interest in the joint venture. We also report interest expense in connection with the accretion of the liability;
• as construction of a building on the land parcel is completed and operations of the building commence, we report 100% of the revenues and expenses associated with the property on our Consolidated Statements of Operations; and
• construction costs and debt activity for the real estate project relating to periods after the land contribution are not reported by us.
At the time we exercise the option to acquire our partner’s joint venture interest, we begin consolidating the accounts of the entity with our accounts. See the section in Note 3 entitled “Recent Accounting Pronouncements” for a description of FIN 46.46R. FIN 4646R affects our determination of when to use the financing method of accounting.
Reclassification
We reclassified certain amounts from the prior period to conform to the current period presentation of our Consolidated Financial Statements. These reclassifications did not affect consolidated net income or shareholders’ equity. See the section in Note 3 entitled “Recent Accounting Pronouncements” for a description of (1) ourreclassification in connection with our accounting under Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and (2) our reclassification of 2002 losses on early retirement of debt in connection with our adoption of Statement of Financial Accounting Standards No. 145, “Rescission ofFASB
7
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (“SFAS No. 145”) on January 1, 2003.
Use of Estimates in the Preparation of Financial Statements
We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions affect various matters, including:
• the reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements;
• the disclosure of contingent assets and liabilities at the dates of the financial statements; and
• the reported amounts of revenues and expenses in our Consolidated Statements of Operations during the reporting periods.
These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are often beyond management’s control. As a result, actual amounts could differ from these estimates.
Our accounts receivable are reported net of an allowance for bad debts of $538 at March 31, 2004 and $548 at December 31, 2003.
As discussed previously, we consolidate the accounts of our Operating Partnership and its subsidiaries into our financial statements. However, we do not own 100% of the Operating Partnership. Our Operating PartnershipWe also diddo not own 11%100% of one of its subsidiary partnerships until September 11, 2002, when it acquired that remaining interest. In addition, COMI did not own 20% of one of its subsidiaries, CC&C, until May 31, 2002, when it acquired that remaining interest.four consolidated real estate joint ventures. The amounts reported for minority interests on our Consolidated Balance Sheets represent the portion of these consolidated entities’ equity that we do not own. The amounts reported for minority interests on our Consolidated Statements of Operations represent the portion of these consolidated entities’ net income not allocated to us.
Common units of the Operating Partnership (“common units”) are substantially similar to our common shares of beneficial interest (“common shares”). Common units are also exchangeable into our common shares, subject to certain conditions.
The only preferred units in the Operating Partnership not owned by us during the reporting periods were 1,016,662 Series C Preferred Units. These units were convertible, subject to certain conditions, into common units on the basis of 2.381 common units for each Series C Preferred Unit. These units were repurchased by the Operating Partnership on June 16, 2003 for $36,068 (including $477 for accrued and unpaid distributions), or $14.90 per common share on an as-converted basis. As a result of the repurchase, we recognized an $11,224 reduction to net income available to common shareholders associated with the excess of the repurchase price over the sum of the recorded book value of the units and the accrued and unpaid return to the unitholder.2003.
Earnings Per Share (“EPS”)
We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Our computation of diluted EPS is similar except that:
• the denominator is increased to include 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
• the numerator is adjusted to add back any convertible preferred dividends and any other changes in income or loss that would result from the assumed conversion into common shares.
Our computation of diluted EPS does not assume conversion of securities into our common shares if conversion of those securities would increase our diluted EPS in a given period.year. A summary of the numerator and denominator for purposes of basic and diluted EPS calculations is set forth below (dollars and shares in thousands, except per share data):
8
|
| For the three months |
| For the nine months |
|
| For the three months |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Numerator for basic EPS on net income available to common shareholders |
| $ | 5,425 |
| $ | 3,629 |
| $ | 3,359 |
| $ | 9,741 |
|
| $ | 4,537 |
| $ | 5,454 |
|
Subtract: Income from discontinued operations, net |
| (11 | ) | (268 | ) | (2,423 | ) | (869 | ) | |||||||||||
Less: Income from discontinued operations, net |
| — |
| (2,435 | ) | |||||||||||||||
Numerator for basic EPS before discontinued operations |
| 5,414 |
| 3,361 |
| 936 |
| 8,872 |
|
| 4,537 |
| 3,019 |
| ||||||
Add: Series D Preferred Share dividends |
| 136 |
| 136 |
| — |
| 408 |
| |||||||||||
Subtract: Income on dilutive options |
| — |
| (6 | ) | — |
| — |
| |||||||||||
Add: Convertible preferred share dividends |
| 21 |
| 136 |
| |||||||||||||||
Numerator for diluted EPS before discontinued operations |
| 5,550 |
| 3,491 |
| 936 |
| 9,280 |
|
| 4,558 |
| 3,155 |
| ||||||
Add: Income from discontinued operations, net |
| 11 |
| 268 |
| 2,423 |
| 869 |
|
| — |
| 2,435 |
| ||||||
Numerator for diluted EPS on net income available to common shareholders |
| $ | 5,561 |
| $ | 3,759 |
| $ | 3,359 |
| $ | 10,149 |
|
| $ | 4,558 |
| $ | 5,590 |
|
Denominator (all weighted averages): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Denominator for basic EPS (common shares) |
| 28,832 |
| 23,029 |
| 25,886 |
| 22,215 |
|
| 29,814 |
| 23,323 |
| ||||||
Assumed conversion of share options |
| 1,480 |
| 923 |
| 1,257 |
| 873 |
|
| 1,749 |
| 972 |
| ||||||
Assumed conversion of Series D Preferred Shares |
| 1,197 |
| 1,197 |
| — |
| 1,197 |
| |||||||||||
Assumed conversion of convertible preferred shares |
| 539 |
| 1,197 |
| |||||||||||||||
Denominator for diluted EPS |
| 31,509 |
| 25,149 |
| 27,143 |
| 24,285 |
|
| 32,102 |
| 25,492 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income before discontinued operations |
| $ | 0.19 |
| $ | 0.15 |
| $ | 0.04 |
| $ | 0.40 |
|
| $ | 0.15 |
| $ | 0.13 |
|
Income from discontinued operations |
| $ | — |
| $ | 0.01 |
| $ | 0.09 |
| $ | 0.04 |
|
| — |
| 0.10 |
| ||
Net income available to common shareholders |
| $ | 0.19 |
| $ | 0.16 |
| $ | 0.13 |
| $ | 0.44 |
|
| $ | 0.15 |
| $ | 0.23 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income before discontinued operations |
| $ | 0.18 |
| $ | 0.14 |
| $ | 0.03 |
| $ | 0.38 |
|
| $ | 0.14 |
| $ | 0.12 |
|
Income from discontinued operations |
| $ | — |
| $ | 0.01 |
| $ | 0.09 |
| $ | 0.04 |
|
| — |
| 0.10 |
| ||
Net income available to common shareholders |
| $ | 0.18 |
| $ | 0.15 |
| $ | 0.12 |
| $ | 0.42 |
|
| $ | 0.14 |
| $ | 0.22 |
|
Our diluted EPS computations above do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods:
|
| Weighted average shares in denominator |
|
| Weighted average shares in denominator |
| ||||||||
|
| For the three months |
| For the nine months |
|
| 2004 |
| 2003 |
| ||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| |||||
Conversion of weighted average common units |
| 8,863 |
| 8,990 |
| |||||||||
Conversion of weighted average convertible preferred units |
| — |
| 2,421 |
| |||||||||
Restricted common shares |
| 149 |
| 330 |
| |||||||||
Conversion of share options |
| 6 |
| 55 |
| 50 |
| 67 |
|
| 5 |
| 48 |
|
Conversion of weighted average common units |
| 8,909 |
| 9,149 |
| 8,954 |
| 9,381 |
| |||||
Conversion of weighted average preferred units |
| — |
| 2,421 |
| 1,472 |
| 2,421 |
| |||||
Conversion of weighted average preferred shares |
| — |
| — |
| 1,197 |
| — |
| |||||
Restricted common shares |
| 161 |
| 317 |
| 132 |
| 317 |
|
We and the Service Companies recognize expense from share options issued to employees using the intrinsic value method. As a result, we do not record compensation expense for share option grants except as set forth below:
• When the exercise price of a share option grant is less than the market price of our common shares on the option grant date, we recognize compensation expense equal to the difference between the exercise price and the grant-date market price; this compensation expense is recognized over the service period to which the options relate.
• In 1999, we reduced the exercise price of 360,500 share options from $9.25 to $8.00. We recognize compensation expense on the share price appreciation and future vesting associated with the re-priced share options. As of September 30, 2003, 7,700March 31, 2004, 4,400 of these shares options were outstanding.
9
• We recognize compensation expense on share options granted to employees of CRM and CC&C prior to January 1, 2001 equal to the difference between the exercise price of such share options and the market price of our common shares on January 1, 2001, to the extent such amount relates to service periods remaining after January 1, 2001.
9
We grant common shares subject to forfeiture restrictions to certain employees. We recognize compensation expense for such grants over the service periods to which the grants relate. We compute compensation expense for common share grants based on the value of such grants, as determined by the value of our common shares on the applicable measurement date, as defined below:
• When forfeiture restrictions on grants only require the recipient to remain employed by us over defined periods of time for such restrictions to lapse, the measurement date is the date the shares are granted.
• When forfeiture restrictions on grants require (1) that the recipient remain employed by us over defined periods of time and (2) that the Company meet certain performance criteria for such restrictions to lapse, the measurement date is the date that the performance criteria are deemed to be met.
Expenses from stock-based compensation are reflected in our Consolidated Statements of Operations as follows:
|
| For the three months |
| For the nine months |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Increase (decrease) in general and administrative expenses |
| $ | 269 |
| $ | (464 | ) | $ | 753 |
| $ | 312 |
|
Decrease (increase) in income from service operations |
| 98 |
| (404 | ) | 289 |
| (23 | ) | ||||
|
| For the three months |
| ||||
|
| 2004 |
| 2003 |
| ||
Increase in general and administrative expenses |
| $ | 359 |
| $ | 230 |
|
Decrease in income from service operations |
| 139 |
| 91 |
| ||
The following table summarizes our operating results as if we elected to account for our stock-based compensation under the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation:”
|
| For the three months |
| For the nine months |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Net income available to common shareholders, as reported |
| $ | 5,425 |
| $ | 3,629 |
| $ | 3,359 |
| $ | 9,741 |
|
Stock-based compensation expense (revenue), net of related tax |
| 247 |
| (496 | ) | 676 |
| 186 |
| ||||
Stock-based compensation expense determined under the fair |
| (222 | ) | (125 | ) | (618 | ) | (702 | ) | ||||
Net income available to common shareholders, pro forma |
| $ | 5,450 |
| $ | 3,008 |
| $ | 3,417 |
| $ | 9,225 |
|
Basic earnings per share on net income available to |
| $ | 0.19 |
| $ | 0.16 |
| $ | 0.13 |
| $ | 0.44 |
|
Basic earnings per share on net income available to |
| $ | 0.19 |
| $ | 0.13 |
| $ | 0.13 |
| $ | 0.42 |
|
Diluted earnings per share on net income available to |
| $ | 0.18 |
| $ | 0.15 |
| $ | 0.12 |
| $ | 0.42 |
|
Diluted earnings per share on net income available to |
| $ | 0.18 |
| $ | 0.12 |
| $ | 0.13 |
| $ | 0.40 |
|
|
| For the three months |
| ||||
|
| 2004 |
| 2003 |
| ||
Net income available to common shareholders, as reported |
| $ | 4,537 |
| $ | 5,454 |
|
Add: Stock-based compensation expense, net of related tax effects and minority interests, included in the determination of net income available to common shareholders |
| 337 |
| 202 |
| ||
Less: Stock-based compensation expense determined under the fair value based method, net of related tax effects and minority interests |
| (279 | ) | (188 | ) | ||
Net income available to common shareholders, pro forma |
| $ | 4,595 |
| $ | 5,468 |
|
Basic earnings per share on net income available to common shareholders, as reported |
| $ | 0.15 |
| $ | 0.23 |
|
Basic earnings per share on net income available to common shareholders, pro forma |
| $ | 0.15 |
| $ | 0.23 |
|
Diluted earnings per share on net income available to common shareholders, as reported |
| $ | 0.14 |
| $ | 0.22 |
|
Diluted earnings per share on net income available to common shareholders, pro forma |
| $ | 0.14 |
| $ | 0.22 |
|
The stock-based compensation expense under the fair value method, as reported in the above table, was computed using the Black-Scholes option-pricing model.
Recent Accounting Pronouncements
On July 1, 2001, we adopted SFAS 141. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also requires upon the acquisition of
10
operating real estate that value be assigned to in-place operating leases. The effect of SFAS 141 on the Company’s accounting for in-place operating leases is as follows:
• Value is assigned to in-place operating leases to the extent that the future cash flows under the contractual lease terms are above or below market at the time of acquisition (the “lease to market value”). For example, if we acquire a property and the leases in place for that property carry rents below the market rent for such leases at the time of acquisition, we classify the amount equal to the difference as deferred revenue and increase the amount of the acquisition classified as investment in real estate. Conversely, if the leases in place for that property carry rents above the market rent, we classify the amount equal to the difference as a deferred asset, and decrease the amount of the acquisition classified as investment in real estate. Deferred revenue or deferred assets recorded in connection with in-place operating leases of acquired properties are amortized into rental revenue over the lives of the leases.
• Value is assigned to the deemed cost avoidance of acquiring in-place operating leases. For example, when a new lease is entered into, the lessor typically incurs a number of origination costs in connection with the leases; such costs include tenant improvements and leasing costs. When a property is acquired with in-place leases, the origination costs for such leases were already incurred by the prior owner. Therefore, to recognize the value of these costs in recording a property acquisition, we assign value to the tenant improvements and leasing costs associated with the remaining term of in-place operating leases. The value assigned reduces the amount of the acquisition attributable to the base building’s acquisition cost. The value assigned to the tenant improvements and leasing costs is depreciated or amortized over the lives of the leases. Since the depreciation period for tenant improvements and amortization period for leasing costs is less than the depreciation period attributable to a base building’s acquisition cost, the effect of SFAS 141 is to increase depreciation and amortization expense until the tenant improvements and leasing costs have been fully depreciated or amortized, and to decrease depreciation and amortization expense afterwards.
• In recognition of what we believe to be the positions of the Securities and Exchange Commission with respect to SFAS 141, value is also assigned to other intangible assets for acquisitions of operating real estate occurring subsequent to March 31, 2003. These other intangible assets are computed by valuing the property on an as if vacant basis and subtracting from the total acquisition cost the sum of the (1) as if vacant value, (2) lease to market value and (3) value assigned to tenant improvements and leasing costs described above. The other intangible assets are amortized over the estimated useful lives of the assets; the useful lives of these assets are shorter than the depreciation periods of the base buildings.
We reclassified certain items in connection with our accounting under SFAS 141 in the quarter ended March 31, 2003. The primary effects of the reclassification to our Consolidated Financial Statements were as follows:
• since the in-place operating leases of properties acquired since July 1, 2001 were on average at below market rents, the application of SFAS 141 resulted in our recording of net deferred revenue; and
• we recognized additional rental revenue in 2002 associated with the amortization of the deferred revenue described above and recognized offsetting depreciation and amortization expense on tenant improvements and leasing costs associated with in-place operating leases.
We changed our presentation of the effects of SFAS 141 on the results of operations from the presentation included in our 2002 Annual Report on Form 10-K by reclassifying the depreciation of tenant improvements and amortization of leasing costs associated with in-place operating leases of acquired properties from rental revenue to depreciation and amortization expense. We believe that the revised presentation of the results of operations more closely reflects the economic substance of an acquisition transaction. This change in classification increases rental revenues for the periods reported, with an offsetting increase to depreciation and amortization expense. The reclassification described above changes certain financial statements line items in the Consolidated Financial Statements, as well as certain presentations of operating results and measures of performance that include rental revenue but exclude depreciation and amortization expense, that appear in our previous filings pertaining to 2002. However, such changes do not affect net income, EPS or net cash flows. The table below sets forth the additional revenue recognized pursuant to these reclassifications under SFAS 141:
|
| For the three months |
| For the nine months |
| ||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
Additional revenue recognized under SFAS 141 |
| $ | 347 |
| $ | 366 |
| $ | 1,465 |
| $ | 1,916 |
|
11
On January 1, 2003, we adopted SFAS 145. SFAS 145 generally eliminates the requirement that gains and losses from the retirement of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. SFAS 145 also eliminates previously existing inconsistencies between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects similar to those of sale-leaseback transactions. Certain aspects of the standard were effective for certain types of transactions occurring after May 15, 2002, although we had no such transactions. Upon adoption, we reclassified all prior period losses on early retirement of debt from the line on the Consolidated Statements of Operations entitled “extraordinary item” to the line entitled “amortization of deferred financing costs.” These reclassifications did not result in changes to net income available to common shareholders or basic and diluted EPS on net income available to common shareholders. Losses from retirement of debt reclassified totaled $2 for the three months ended September 30, 2002 and $201 for the nine months ended September 30, 2002.
On January 1, 2003, we adopted FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) on a prospective basis for guarantees issued or modified after December 31, 2002. FIN 45 clarifies the requirements of Statements of Financial Accounting Standards No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. It requires that a guarantor recognize a liability for the fair value of the obligation it assumes under that guarantee. Since our adoption of FIN 45’s provisions was prospective, we were not affected for our guarantees previously in place. However, since we expect to continue to enter into guarantee arrangements covered within the scope of FIN 45 as we have in the past, we expect to be affected in the future primarily by having to record liabilities associated with such arrangements.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). In December 2003, FASB issued FIN 46.No. 46R which replaced FIN 46 and clarified Accounting Research Bulletin 51 (“ARB 51”). FIN 46R provides guidance in identifying situations in which an entity is controlled by its owners without such owners owning most of the outstanding voting rights in the entity; it defines the entity in such situations as a variable interest entity (“VIE”). Situations identified by FIN 4646R include when the equity owners do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 4646R then provides guidance in determining when an owner of a VIE should use the consolidation
10
method in accounting for its investment in the VIE. It also provides for additional disclosure requirements for certain owners of VIEs. We adopted FIN 4646R immediately for all VIEs created subsequent to January 31, 2003. We expect to adopt FIN 462003 and effective March 31, 2004 for VIEs created prior to February 1, 2003 effective October 1, 2003, although we were required to adopt certain disclosure requirements for purposes of these Consolidated Financial Statements. While we are currently reviewing the provisions2003. In connection with our adoption of FIN 46 and assessing the impact upon adoption for VIEs created prior to February 1, 2003,46R, we currently believe that we will be requiredbegan to use the consolidation method of accounting effective March 31, 2004 for our investments in the following unconsolidated real estate joint ventures: Gateway 67,MOR Forbes 2 LLC, Gateway 70 LLC and MOR Forbes 2 LLC. We also believe that we may be required to useMontpelier 3 LLC, which were previously accounted for using the consolidationequity method of accounting, for our investments in NBP 140, LLC and MOR Montpelier 3 LLC. See Note 5 for disclosures pertaining to our unconsolidated real estate joint ventures. In addition, we believe that we may be required to use the consolidation method of accounting for our investment in NBP 220, LLC, a real estate joint venture that we are currently accountingwhich was previously accounted for using the financing method of accounting (see Notes 2Note 2). The effect of consolidating these joint ventures on our Consolidated Balance Sheet as of March 31, 2004 is set forth below.
Operating properties |
| $ | 2,176 |
|
Projects under construction or development |
| 17,959 |
| |
Investments in and advances to unconsolidated real estate joint ventures |
| (3,957 | ) | |
Restricted cash |
| 10 |
| |
Accounts receivable, net |
| 145 |
| |
Deferred rent receivable |
| 7 |
| |
Deferred charges, net |
| 1,026 |
| |
Prepaid and other assets |
| (3,263 | ) | |
Mortgage and other loans payable |
| (10,171 | ) | |
Accounts payable and accrued expenses |
| (2,737 | ) | |
Rents received in advance and security deposits |
| (347 | ) | |
Other liabilities |
| 4,650 |
| |
Minority interests-other consolidated real estate entities |
| (5,498 | ) | |
|
| $ | — |
|
The consolidation of these joint ventures had no effect on our Consolidated Statements of Operations for the three months ended March 31, 2004 and 4).2003. The following table sets forth condensed combined balance sheets asstatements of September 30, 2003operations for NBP 220 and the unconsolidatedjoint ventures that we began consolidating effective March 31, 2004:
Revenues |
| $ | 118 |
|
Property operating expenses |
| (41 | ) | |
Interest expense |
| (14 | ) | |
Depreciation and amortization expense |
| (44 | ) | |
Net income |
| $ | 19 |
|
Additional information regarding our real estate joint ventures that we believe we will consolidate or may consolidate effective October 1, 2003:is available in Note 5 to the Consolidated Financial Statements.
Commercial real estate property |
| $ | 42,009 |
|
Other assets |
| 1,852 |
| |
Total assets |
| $ | 43,861 |
|
|
|
|
|
|
Liabilities |
| $ | 25,109 |
|
Owners’ equity |
| 18,752 |
| |
Total liabilities and owners’ equity |
| $ | 43,861 |
|
Most of the entities that we will consolidate or may consolidate effective October 1, 2003 own real estate under development or construction; as a result, these entities did not earn significant revenue or incur significant expenses during the nine months ended September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
12
liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003, except in the case of evaluating investments in certain finite life entities, in which case the effective date is to be determined. Our adoption of SFAS 150 on July 1, 2003 did not effect our consolidated financial statements. With regard to the effect of the adoption of SFAS 150 at a future date for investments in certain finite life entities, we will not know the effect upon adoption until pending amendments are finalized by the FASB.
Operating properties consisted of the following:
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| |||||
Land |
| $ | 215,226 |
| $ | 191,823 |
|
| $ | 229,558 |
| $ | 216,703 |
| |
Buildings and improvements |
| 1,009,272 |
| 892,533 |
|
| 1,071,701 |
| 1,003,214 |
| |||||
|
| 1,224,498 |
| 1,084,356 |
|
| 1,301,259 |
| 1,219,917 |
| |||||
Less: accumulated depreciation |
| (96,538 | ) | (76,178 | ) |
| (110,155 | ) | (103,070 | ) | |||||
|
| $ | 1,127,960 |
| $ | 1,008,178 |
|
| $ | 1,191,104 |
| $ | 1,116,847 |
|
At December 31, 2002, we were negotiating the saleof our office property and adjacent undeveloped land parcels located in Oxon Hill, Maryland. As a result, these properties were classified as held for sale. The components associated with these properties at December 31, 2002 included the following:
11
|
| December 31, |
| ||
Land - operational |
| $ | 3,434 |
| |
Land - development |
| 357 |
| ||
Buildings and improvements |
| 14,892 |
| ||
|
| 18,683 |
| ||
Less: accumulated depreciation |
| (1,891 | ) | ||
|
| $ | 16,792 |
| |
We sold these properties on March 31, 2003.
Projects we had under construction or development consisted of the following:
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
Land |
| $ | 43,482 |
| $ | 24,641 |
|
| $ | 59,231 |
| $ | 53,356 |
| ||
Construction in progress |
| 9,474 |
| 9,926 |
|
| 35,387 |
| 13,793 |
| ||||||
|
| $ | 52,956 |
| $ | 34,567 |
|
| $ | 94,618 |
| $ | 67,149 |
|
20032004 Acquisitions
We acquired the following office properties during the ninethree months ended September 30, 2003:March 31, 2004:
Project Name |
| Location |
| Date of |
| Number of |
| Total |
| Initial Cost |
| |
2500 Riva Road |
| Annapolis, MD |
| 4/4/2003 |
| 1 |
| 155,000 |
| $ | 18,038 |
|
13200 Woodland Park Drive |
| Herndon, VA |
| 6/2/2003 |
| 1 |
| 404,665 |
| 71,436 |
| |
Dulles Tech |
| Herndon, VA |
| 7/25/2003 |
| 2 |
| 166,821 |
| 27,019 |
| |
Ridgeview |
| Chantilly, VA |
| 7/25/2003 |
| 3 |
| 266,993 |
| 48,508 |
| |
Project Name |
| Location |
| Date of |
| Number of |
| Total |
| Initial Cost |
| |
400 Professional Drive |
| Gaithersburg, MD |
| 3/5/2004 |
| 1 |
| 129,030 |
| $ | 23,182 |
|
Wildewood and Exploration/ Expedition Office Parks |
| St. Mary’s County, MD |
| 3/24/2004 |
| 8 |
| 430,869 |
| 50,101 |
| |
13
On January 24, 2003,In connection with the Wildewood and Exploration/Expedition Office Parks transaction, we completed the first phasealso acquired a parcel of a $29.8 million, 108-acre land parcel acquisition from an affiliate of Constellation Real Estate, Inc. (“Constellation”). The land parcel is located adjacent to an office park that we own in Annapolis Junction, Maryland. The first phase was acquired for $21,339, of which $18,433 was financed by a seller-provided mortgage loan bearing interest at 3%. Since we considered the interest rate on this loan to be below the market rate for similar loans, we discounted the recorded amounts for the acquisition and mortgage loan by $1,516. Under an agreement that was terminated on March 5, 2002, Constellation nominated two members for election to our Board of Trustees; these members still served on our Board of Trustees as of September 30, 2003. The terms of the land parcel acquisition were determined as a result of arms-length negotiations. In management’s opinion, the resulting terms reflected fair value for the property based on management’s knowledge and experience in the real estate market.$1,905.
20032004 Construction/Development
During the nine months ended September 30, 2003, a 123,743 square foot building that was partially operational at December 31, 2002 became 100% operational. The building is located in Columbia, Maryland.
As of September 30, 2003,March 31, 2004, we had construction underway on two new buildings in Annapolis Junction, Maryland, one of which isnew building in Chantilly, Virginia, and one new building through a joint venture in Lanham, Maryland. We also had development underway on two new buildings located in Annapolis Junction, Maryland and the other in Chantilly, Virginia (excluding construction activities of real estate joint ventures accounted for using the equity method of accounting).
2003 Dispositions
On January 31, 2003, we contributed a developed land parcel into a real estate joint venture called NBP 220, LLC (“NBP 220”) and subsequently received a $4,000 distribution. Upon completion of this transaction, we owned a 20% interest in NBP 220. We have the option to acquire our joint venture partner’s interest between September 1, 2004 and February 28, 2005 or prior to that date if certain events defined in the agreement occur. The minimum purchase price would be $4,911. We account for our interest in this joint venture using the financing method of accounting, which is discussed in Note 2 above. Our commitments and contingencies pertaining to NBP 220 are included in Note 16. Our maximum exposure to loss in NBP 220 was $33,113 at September 30, 2003; this amount was derived from the sum of the investment balance, loan guarantees (based on maximum loan balance) and maximum additional unilateral capital contributions required from us (excludes additional amounts that we and our partner are obligated to fund as and when needed proportional to our ownership percentage).
On March 14, 2003, we contributed a 157,394 square foot officeone new building located in Fairfield, New Jersey into a real estate joint venture called Route 46 Partners, LLC in exchange for $19,960 in cash and a 20% interest in the joint venture. Our joint venture partner has preference in receiving distributions of cash flows for a defined return; once our partner receives its defined return, we are entitled to receive distributions for a defined return and, once we receive that return, remaining distributions of cash flows are allocated based on percentages defined in the joint venture agreement. Due primarily to a $3,300 loan we made to an affiliate of our joint venture partner as part of the transaction (a loan that was subsequently repaid in October 2003), we deferred a gain of $1,370 on this transaction. See Notes 5 and 16 for further disclosures related to this joint venture.Chantilly, Virginia.
On March 31, 2003, we sold an office property totaling 181,768 square feet and two adjacent land parcels located in Oxon Hill, Maryland, for a total sale price of $21,288. We recognized a total gain of $3,371 on this sale.
14
5. Investments in and Advances to Unconsolidated Real Estate Joint Ventures
Our investments in and advances to unconsolidated real estate joint ventures accounted for using the equity method of accounting included the following (excluding NBP 220, a real estate joint venture accounted for using the financing method of accounting):following:
|
| September 30, |
| December 31, |
| Date |
| Ownership |
| Nature of |
| Total |
| Maximum |
|
| Balance at |
|
|
|
|
|
|
| Total |
| Maximum |
| ||||||||||
Gateway 67, LLC |
| $ | 4,473 |
| $ | 4,130 |
| 9/28/00 |
| 80 | % | Owns newly-constructed buildings (1) |
| $ | 12,423 |
| $ | 15,073 |
| |||||||||||||||||||
|
| March 31, |
| December 31, |
| Date |
| Ownership |
| Nature of |
| Assets at |
| Exposure |
| |||||||||||||||||||||||
Route 46 Partners, LLC |
| $ | 1,059 |
| $ | 1,055 |
| 3/14/03 |
| 20% |
| Operating building (2) |
| $ | 23,359 |
| $ | 1,379 |
| |||||||||||||||||||
Gateway 70 LLC |
| 2,417 |
| 2,472 |
| 4/5/01 |
| 80 | % | Developing land parcel (1) |
| 3,484 |
| 2,417 |
|
| — |
| 3,017 |
| 4/5/01 |
| See Below |
| Developing land parcel (3) |
| N/A |
| N/A |
| ||||||||
Route 46 Partners, LLC |
| 1,027 |
| — |
| 3/14/03 |
| 20 | % | Operating building (2) |
| 23,704 |
| 1,347 |
| |||||||||||||||||||||||
MOR Forbes 2 LLC |
| 730 |
| 712 |
| 12/24/02 |
| 80 | % | Constructing building (3) |
| 3,404 |
| 5,437 |
|
| — |
| 735 |
| 12/24/02 |
| See Below |
| Constructing building (4) |
| N/A |
| N/A |
| ||||||||
NBP 140, LLC |
| 474 |
| 230 |
| 12/27/01 |
| 10 | % | Constructing building (4) |
| 13,393 |
| 18,574 |
| |||||||||||||||||||||||
MOR Montpelier 3 LLC |
| 455 |
| 455 |
| 2/21/02 |
| 50 | % | Developing land parcel (5) |
| 901 |
| 455 |
|
| — |
| 455 |
| 2/21/02 |
| See Below |
| Developing land parcel (5) |
| N/A |
| N/A |
| ||||||||
|
| $ | 9,576 |
| $ | 7,999 |
|
|
|
|
|
|
| $ | 57,309 |
| $ | 43,303 |
|
| $ | 1,059 |
| $ | 5,262 |
|
|
|
|
|
|
| $ | 23,359 |
| $ | 1,379 |
|
(1) This joint venture’s property is located in Columbia, Maryland.
(2) This joint venture’s property is located in Fairfield, New Jersey.
(3) This joint venture’s property is located in Lanham, Maryland.
(4) This joint venture’s property is located in Annapolis Junction, Maryland.
(5) This joint venture’s property is located in Laurel, Maryland.
(6) Derived from the sum of our investment balance, loan guarantees (based on maximum loan balance) and maximum additional unilateral capital contributions required from us. Not reported above are additional amounts that we and our partners are required to fund as and when needed by these joint ventures; these funding requirements are proportional to our ownership percentage, exceptpercentage.
(2) This joint venture’s property is located in Fairfield, New Jersey.
(3) This joint venture’s property is located in Columbia, Maryland.
(4) This joint venture’s property is located in Lanham, Maryland.
(5) This joint venture’s property is located in Laurel, Maryland.
As discussed in Note 3, we adopted FIN 46R effective March 31, 2004 for VIEs created prior to February 1, 2003. Upon this adoption, we began using the caseconsolidation method of NBP 140, LLC,accounting for the following joint ventures that had previously been accounted for using either the equity or financing methods of accounting:
12
|
| Date |
| Ownership |
| Nature of |
| Total |
| Collateralized |
| ||
NBP 220, LLC |
| 1/31/03 |
| 20% |
| Constructing building (1) |
| 17,103 |
| 16,168 |
| ||
MOR Forbes 2 LLC |
| 12/24/02 |
| 50% |
| Constructing building (2) |
| 4,442 |
| 4,188 |
| ||
Gateway 70 LLC |
| 4/5/01 |
| 80% |
| Developing land parcel (3) |
| 3,722 |
| 3,722 |
| ||
MOR Montpelier 3 LLC |
| 2/21/02 |
| 50% |
| Developing land parcel (4) |
| 947 |
| 947 |
| ||
|
|
|
|
|
|
|
| $ | 26,214 |
| $ | 25,025 |
|
(1) This joint venture’s property is located in which we are required to fund 50% of additional fundings.Annapolis Junction, Maryland.
(2) This joint venture’s property is located in Lanham, Maryland.
(3) This joint venture’s property is located in Columbia, Maryland.
(4) This joint venture’s property is located in Laurel, Maryland.
Our commitments and contingencies pertaining to our unconsolidated real estate joint ventures are disclosed in Note 16. The following table sets forth a condensed combined balance sheetssheet for theseour one unconsolidated real estate joint ventures:venture as of March 31, 2004:
|
| September 30, |
| December 31, |
| ||||||
Commercial real estate property |
| $ | 54,605 |
| $ | 25,463 |
|
| $ | 21,745 |
|
Other assets |
| 2,704 |
| 493 |
|
| 1,614 |
| |||
Total assets |
| $ | 57,309 |
| $ | 25,956 |
|
| $ | 23,359 |
|
|
|
|
|
|
|
|
|
|
|
| |
Liabilities |
| $ | 34,712 |
| $ | 12,636 |
|
| $ | 14,716 |
|
Owners’ equity |
| 22,597 |
| 13,320 |
|
| 8,643 |
| |||
Total liabilities and owners’ equity |
| $ | 57,309 |
| $ | 25,956 |
|
| $ | 23,359 |
|
While we are currently reviewing the provisions of FIN 46 and assessing the impact upon adoption, we believe that we will be required to use the consolidation method of accounting for our investments in the following unconsolidated real estate joint ventures: Gateway 67, LLC, Gateway 70 LLC and MOR Forbes 2 LLC. We also concluded that we may be required to use the consolidation method of accounting for our investments in NBP 140, LLC and MOR Montpelier 3 LLC. See Note 3 for disclosures pertaining to the potential effect of adopting FIN 46 for these joint ventures.
6. Accounts Receivable
Our accounts receivable are reported net of an allowance for bad debts of $542 at September 30, 2003 and $767 at December 31, 2002.
1513
Our investments in and advances to other unconsolidated entities include the following:
|
| September 30, |
| December 31, |
| Date |
| Ownership |
| Investment |
| ||
TractManager, Inc. (1) |
| $ | 1,621 |
| $ | 1,621 |
| Various 2000 |
| 5 | % | Cost |
|
|
| March 31, |
| December 31, |
| Date |
| Ownership |
| Investment |
| ||
TractManager, Inc. (1) |
| $ | 1,621 |
| $ | 1,621 |
| Various 2000 |
| 5 | % | Cost |
|
(1) TractManager, Inc. has developed an Internet-based contract imaging and management system for sale to real estate owners and healthcare providers.
��
Intangible assets on real estate acquisitions consisted of the following:
|
| March 31, |
| December 31, |
| ||
Tenant value |
| $ | 49,770 |
| $ | 46,613 |
|
Lease to market value |
| 7,985 |
| 7,819 |
| ||
Lease cost portion of deemed cost avoidance |
| 5,993 |
| 5,294 |
| ||
Market concentration premium |
| 1,333 |
| 1,333 |
| ||
Subtotal |
| 65,081 |
| 61,059 |
| ||
Accumulated amortization |
| (9,504 | ) | (5,367 | ) | ||
Deferred charges, net |
| $ | 55,577 |
| $ | 55,692 |
|
Deferred charges consisted of the following:
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
Deferred leasing costs |
| $ | 24,917 |
| $ | 22,180 |
|
| $ | 22,135 |
| $ | 20,712 |
|
Intangible assets recorded in connection with real estate acquisitions |
| 18,687 |
| 1,281 |
| |||||||||
Deferred financing costs |
| 12,742 |
| 11,458 |
|
| 15,379 |
| 13,263 |
| ||||
Goodwill |
| 1,880 |
| 1,880 |
|
| 1,880 |
| 1,880 |
| ||||
Deferred other |
| 155 |
| 155 |
|
| 155 |
| 155 |
| ||||
|
| 58,381 |
| 36,954 |
|
| 39,549 |
| 36,010 |
| ||||
Accumulated amortization (1) |
| (18,786 | ) | (13,755 | ) |
| (19,998 | ) | (18,287 | ) | ||||
Deferred charges, net |
| $ | 39,595 |
| $ | 23,199 |
|
| $ | 19,551 |
| $ | 17,723 |
|
(1) IncludesIncluded accumulated amortization associated with goodwill of $151 at September 30, 2003 and December 31, 2002.$151.
The following table sets forth our derivative contracts and their respective fair values:
Nature of Derivative |
| Notional |
| One-Month |
| Effective |
| Expiration |
| Fair Value at |
| Fair Value at |
|
| Notional |
| One-Month |
| Effective |
| Expiration |
| Fair Value at |
| Fair Value at |
| ||||||||
Interest rate swap |
| $ | 50.0 |
| 2.308 | % | 1/2/2003 |
| 1/3/2005 |
| $ | (662 | ) | $ | (482 | ) | ||||||||||||||||||
Interest rate swap |
| 50.0 |
| 1.520 | % | 1/7/2003 |
| 1/2/2004 |
| (64 | ) | — |
|
| $ | 50.0 |
| 2.308 | % | 1/2/2003 |
| 1/3/2005 |
| $ | (429 | ) | $ | (467 | ) | |||||
Interest rate swap |
| 50.0 |
| 5.760 | % | 1/2/2001 |
| 1/2/2003 |
| — |
| (12 | ) |
| 50.0 |
| 1.520 | % | 1/7/2003 |
| 1/2/2004 |
| — |
| — |
| ||||||||
Total |
|
|
|
|
|
|
|
|
| $ | (726 | ) | $ | (494 | ) |
|
|
|
|
|
|
|
|
| $ | (429 | ) | $ | (467 | ) |
14
We have designated each of these derivatives as cash flow hedges. These derivatives hedge the risk of changes in interest rates on certain of our one-month LIBOR-based variable rate borrowings. At September 30, 2003,March 31, 2004, our outstanding interest rate swaps wereswap was considered a highly effective cash flow hedgeshedge under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
16
The table below sets forth our accounting application of changes in derivative fair values:
|
| For the nine months ended |
| ||||
|
| 2003 |
| 2002 |
| ||
(Decrease) increase in fair value applied to AOCL (1) and minority interests |
| $ | (232 | ) | $ | 2,738 |
|
Decrease in fair value recognized as loss (2) |
| — |
| (1 | ) | ||
|
| For the three months ended |
| ||||
|
| 2004 |
| 2003 |
| ||
(Decrease) in fair value applied to AOCL (1) and minority interests |
| $ | (39 | ) | $ | (299 | ) |
Increase in fair value recognized as gain (2) |
| $ | 77 |
| $ | — |
|
(1) AOCL is defined below.
(2) Represents hedge ineffectiveness and is included in tenant recoveries and other revenueinterest expense on our Consolidated Statements of Operations.
Over time, the unrealized losses associated with interest rate swaps that are held in the accumulated other comprehensive loss component of shareholders’ equity (“AOCL”) and minority interests will be reclassified to earnings as interest payments occur on our LIBOR-based borrowings.
Preferred Shares
On AugustFebruary 11, 2003, we completed2004, the saleholder of 2,200,000the Series GD Preferred Shares of beneficial interest (the “Series Gconverted the shares into common shares on the basis of 2.2 common shares for each Series D Preferred Shares”) at a priceShare, resulting in the issuance of $25.00 per share for net proceeds of $53,240. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after August 11, 2008. Holders of these shares are entitled to cumulative dividends, payable quarterly (as and if declared by the Board of Trustees). Dividends accrue from the date of issue at the annual rate of $2.00 per share, which is equal to 8% of the $25.00 per share redemption price. We contributed the net proceeds to our Operating Partnership in exchange for 2,200,000 Series G Preferred Units. The Series G Preferred Units carry terms that are substantially the same as the Series G Preferred Shares.1,196,800 common shares.
Common Shares
On May 27, 2003, we sold 5,290,000During the three months ended March 31, 2004, 43,950 common sharesunits in an underwritten public offering at a net price of $15.03 per share. We contributed the net proceeds from the sale to our Operating Partnership in exchangewere converted into common shares on the basis of one common share for 5,290,000each common units.unit.
During the ninethree months ended September 30, 2003,March 31, 2004, we issued 119,32499,935 common shares to certain employees. All of these shares are subject to forfeiture restrictions that lapse annually throughout their respective terms provided that the employees remain employed by us.
During the nine months ended September 30, 2003,same period, forfeiture restrictions lapsed on 49,073100,595 common shares previously issued to officers.employees. We also issued 4,000 unrestricted common shares to employees during this period.
We issued 225,847234,227 common shares upon the exercise of share options during the ninethree months ended September 30, 2003.
During the nine months ended September 30, 2003, 119,533 common units in our Operating Partnership were converted into common shares, in accordance with our Operating Partnership’s Second Amended and Restated Limited Partnership Agreement, on the basis of one common share for each common unit.March 31, 2004.
A summary of the activity in the AOCL component of shareholders’ equity for the ninethree months ended September 30, 2003March 31, 2004 follows:
|
|
| ||
|
| |||
|
|
|
Beginning balance |
| $ | (294 | ) |
Unrealized loss on interest rate swaps, net of minority interests |
| (34 | ) | |
Ending balance |
| $ | (328 | ) |
1715
The following table summarizes our dividends and distributions when either the payable dates or record dates occurred during the ninethree months ended September 30, 2003:March 31, 2004:
|
| Record Date |
| Payable Date |
| Dividend/ |
| Total |
| ||
Series B Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.6250 |
| $ | 781 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.6250 |
| $ | 781 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.6250 |
| $ | 781 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.6250 |
| $ | 781 |
|
|
|
|
|
|
|
|
|
|
| ||
Series D Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.2500 |
| $ | 136 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.2500 |
| $ | 136 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.2500 |
| $ | 136 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.2500 |
| $ | 136 |
|
|
|
|
|
|
|
|
|
|
| ||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.6406 |
| $ | 737 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.6406 |
| $ | 737 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.6406 |
| $ | 737 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.6406 |
| $ | 737 |
|
|
|
|
|
|
|
|
|
|
| ||
Series F Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.6172 |
| $ | 880 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.6172 |
| $ | 880 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.6172 |
| $ | 880 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.6172 |
| $ | 880 |
|
|
|
|
|
|
|
|
|
|
| ||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.3610 |
| $ | 794 |
|
|
|
|
|
|
|
|
|
|
| ||
Common Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.2200 |
| $ | 5,114 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.2200 |
| $ | 5,139 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.2200 |
| $ | 6,322 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.2350 |
| $ | 6,798 |
|
|
|
|
|
|
|
|
|
|
| ||
Series C Preferred Units: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 6, 2002 |
| January 15, 2003 |
| $ | 0.5625 |
| $ | 572 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.5625 |
| $ | 572 |
|
Second Quarter 2003 |
| (1) |
| (1) |
| $ | 0.4698 |
| $ | 477 |
|
|
|
|
|
|
|
|
|
|
| ||
Common Units: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2002 |
| December 31, 2002 |
| January 15, 2003 |
| $ | 0.2200 |
| $ | 1,978 |
|
First Quarter 2003 |
| March 31, 2003 |
| April 15, 2003 |
| $ | 0.2200 |
| $ | 1,978 |
|
Second Quarter 2003 |
| June 30, 2003 |
| July 15, 2003 |
| $ | 0.2200 |
| $ | 1,968 |
|
Third Quarter 2003 |
| September 30, 2003 |
| October 15, 2003 |
| $ | 0.2350 |
| $ | 2,085 |
|
(1) Repurchase of units took place prior to distribution payment date. Accrued and unpaid return on units totaled $477 on the June 16, 2003 repurchase date. We paid this amount to the holder of the units at the time of purchase.
|
| Record Date |
| Payable Date |
| Dividend/ |
| Total |
| ||
Series B Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.6250 |
| $ | 781 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.6250 |
| $ | 781 |
|
|
|
|
|
|
|
|
|
|
| ||
Series D Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.2500 |
| $ | 136 |
|
|
|
|
|
|
|
|
|
|
| ||
Series E Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.6406 |
| $ | 737 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.6406 |
| $ | 737 |
|
|
|
|
|
|
|
|
|
|
| ||
Series F Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.6172 |
| $ | 880 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.6172 |
| $ | 880 |
|
|
|
|
|
|
|
|
|
|
| ||
Series G Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.5000 |
| $ | 1,100 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.5000 |
| $ | 1,100 |
|
|
|
|
|
|
|
|
|
|
| ||
Series H Preferred Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.1458 |
| $ | 292 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.4688 |
| $ | 938 |
|
|
|
|
|
|
|
|
|
|
| ||
Common Shares: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.2350 |
| $ | 6,806 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.2350 |
| $ | 7,178 |
|
|
|
|
|
|
|
|
|
|
| ||
Common Units: |
|
|
|
|
|
|
|
|
| ||
Fourth Quarter 2003 |
| December 31, 2003 |
| January 15, 2004 |
| $ | 0.2350 |
| $ | 2,085 |
|
First Quarter 2004 |
| March 31, 2004 |
| April 15, 2004 |
| $ | 0.2350 |
| $ | 2,074 |
|
1816
|
| For the nine months |
|
| For the three months |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
| |||||||||
Consolidation of real estate joint ventures in connection with adoption of FIN 46R: |
|
|
|
|
| |||||||||
Operating properties |
| $ | 2,176 |
| $ | — |
| |||||||
Projects under construction or development |
| 17,959 |
| — |
| |||||||||
Investments in and advances to unconsolidated real estate joint ventures |
| (3,957 | ) | — |
| |||||||||
Restricted cash |
| 10 |
| — |
| |||||||||
Accounts receivable, net |
| 145 |
| — |
| |||||||||
Deferred rent receivable |
| 7 |
| — |
| |||||||||
Deferred charges, net |
| 1,026 |
| — |
| |||||||||
Prepaid and other assets |
| (3,263 | ) | — |
| |||||||||
Mortgage and other loans payable |
| (10,171 | ) | — |
| |||||||||
Accounts payable and accrued expenses |
| (2,737 | ) | — |
| |||||||||
Rents received in advance and security deposits |
| (347 | ) | — |
| |||||||||
Other liabilities |
| 4,650 |
| — |
| |||||||||
Minority interests-other consolidated real estate entities |
| (5,498 | ) | — |
| |||||||||
Net adjustment |
| $ | — |
| $ | — |
| |||||||
Adjustment to purchase of commercial real estate properties by acquiring joint venture interests: |
|
|
|
|
| |||||||||
Operating properties |
| $ | (83 | ) | $ | — |
| |||||||
Investments in and advances to unconsolidated real estate joint ventures |
| 83 |
| — |
| |||||||||
Net adjustment |
| $ | — |
| $ | — |
| |||||||
Debt assumed in connection with acquisitions |
| $ | 16,917 |
| $ | 36,040 |
|
| $ | 21,218 |
| $ | 16,917 |
|
Notes receivable assumed upon sales of real estate |
| $ | 3,300 |
| $ | 2,326 |
|
| $ | — |
| $ | 3,300 |
|
Investment in real estate joint venture obtained with disposition of property |
| $ | 2,300 |
| $ | — |
|
| $ | — |
| $ | 2,300 |
|
Decrease in accrued capital improvements |
| $ | 856 |
| $ | 2,536 |
| |||||||
Amortization of discount on mortgage loan to commercial real estate properties |
| $ | 323 |
| $ | — |
| |||||||
Increase (decrease) in accrued capital improvements and leasing costs |
| $ | 10,087 |
| $ | (1,183 | ) | |||||||
Amortization of discounts and premiums on mortgage loans to commercial real estate properties |
| $ | 92 |
| $ | 85 |
| |||||||
Accretion of other liability to commercial real estate properties |
| $ | 358 |
| $ | — |
|
| $ | 147 |
| $ | 84 |
|
(Decrease) increase in fair value of derivatives applied to AOCL and minority interests |
| $ | (232 | ) | $ | 2,738 |
| |||||||
Decrease in fair value of derivatives applied to AOCL and minority interests |
| $ | (39 | ) | $ | (299 | ) | |||||||
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT |
| $ | 6,688 |
| $ | 5,694 |
|
| $ | 1,129 |
| $ | — |
|
Dividends/distribution payable |
| $ | 12,991 |
| $ | 9,819 |
| |||||||
Decrease in minority interests and increase in shareholders’ equity in connection with the conversion of common units into common shares |
| $ | 2,066 |
| $ | 8,623 |
|
| $ | 1,003 |
| $ | — |
|
Dividends/distribution payable |
| $ | 11,637 |
| $ | 9,789 |
| |||||||
Conversion of preferred shares adjusted to common shares and paid in capital |
| $ | 12 |
| $ | — |
| |||||||
Issuance of restricted shares |
| $ | 2,271 |
| $ | 1,223 |
|
1917
We have sixseven primary office property segments: Baltimore/Washington Corridor, Northern Virginia, Greater Philadelphia, Northern/Central New Jersey, Greater Harrisburg, Suburban Maryland and SuburbanSouthern Maryland.
The table below reports segment financial information. Our segment entitled “Other” includes assets and operations not specifically associated with the other defined segments. We measure the performance of our segments based on total revenues less property operating expenses, a measure we define as net operating income (“NOI”). We believe that NOI 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, 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/ |
| Northern |
| Greater |
| Northern/ |
| Greater |
| Suburban |
| Other |
| Total |
|
| Baltimore/ |
| Northern |
| Greater |
| Northern/ |
| Greater |
| Suburban |
| Southern |
| Other |
| Total |
| |||||||||||||||||
Three months ended September 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Revenues |
| $ | 24,670 |
| $ | 9,010 |
| $ | 2,507 |
| $ | 3,685 |
| $ | 2,372 |
| $ | 1,481 |
| $ | 1,725 |
| $ | 45,450 |
|
| $ | 25,278 |
| $ | 10,886 |
| $ | 2,506 |
| $ | 4,679 |
| $ | 2,243 |
| $ | 1,555 |
| $ | 124 |
| $ | 1,700 |
| $ | 48,971 |
|
Property operating expenses |
| 7,242 |
| 2,657 |
| 36 |
| 1,300 |
| 663 |
| 536 |
| 628 |
| 13,062 |
|
| 8,125 |
| 3,312 |
| 40 |
| 1,486 |
| 742 |
| 598 |
| 33 |
| 703 |
| $ | 15,039 |
| ||||||||||||||||
NOI |
| $ | 17,428 |
| $ | 6,353 |
| $ | 2,471 |
| $ | 2,385 |
| $ | 1,709 |
| $ | 945 |
| $ | 1,097 |
| $ | 32,388 |
|
| $ | 17,153 |
| $ | 7,574 |
| $ | 2,466 |
| $ | 3,193 |
| $ | 1,501 |
| $ | 957 |
| $ | 91 |
| $ | 997 |
| $ | 33,932 |
|
Commercial real estate property expenditures |
| $ | 3,807 |
| $ | 64,536 |
| $ | 201 |
| $ | 122 |
| $ | 74 |
| $ | 101 |
| $ | 314 |
| $ | 69,155 |
|
| $ | 29,761 |
| $ | 3,064 |
| $ | 179 |
| $ | 233 |
| $ | 195 |
| $ | 26,489 |
| $ | 48,531 |
| $ | 359 |
| $ | 108,811 |
|
Segment assets at March 31, 2004 |
| $ | 700,417 |
| $ | 265,400 |
| $ | 101,835 |
| $ | 83,757 |
| $ | 68,922 |
| $ | 70,388 |
| $ | 52,092 |
| $ | 89,199 |
| $ | 1,432,010 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Three months ended September 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Revenues |
| $ | 21,151 |
| $ | 3,777 |
| $ | 2,507 |
| $ | 5,176 |
| $ | 2,407 |
| $ | 2,339 |
| $ | 1,678 |
| $ | 39,035 |
|
| $ | 22,848 |
| $ | 5,860 |
| $ | 2,506 |
| $ | 4,522 |
| $ | 2,493 |
| $ | 2,482 |
| $ | — |
| $ | 1,709 |
| $ | 42,420 |
|
Property operating expenses |
| 6,771 |
| 1,472 |
| 38 |
| 2,030 |
| 604 |
| 914 |
| 532 |
| 12,361 |
|
| 8,027 |
| 1,883 |
| 34 |
| 1,628 |
| 747 |
| 1,024 |
| — |
| 659 |
| 14,002 |
| |||||||||||||||||
NOI |
| $ | 14,380 |
| $ | 2,305 |
| $ | 2,469 |
| $ | 3,146 |
| $ | 1,803 |
| $ | 1,425 |
| $ | 1,146 |
| $ | 26,674 |
|
| $ | 14,821 |
| $ | 3,977 |
| $ | 2,472 |
| $ | 2,894 |
| $ | 1,746 |
| $ | 1,458 |
| $ | — |
| $ | 1,050 |
| $ | 28,418 |
|
Commercial real estate property expenditures |
| $ | 2,407 |
| $ | 51,010 |
| $ | 143 |
| $ | 382 |
| $ | 34 |
| $ | 27,471 |
| $ | 96 |
| $ | 81,543 |
|
| $ | 38,769 |
| $ | 264 |
| $ | 143 |
| $ | 201 |
| $ | 127 |
| $ | 188 |
| $ | — |
| $ | 134 |
| $ | 39,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Nine months ended September 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Revenues |
| $ | 71,261 |
| $ | 20,116 |
| $ | 7,519 |
| $ | 11,864 |
| $ | 7,523 |
| $ | 5,259 |
| $ | 5,212 |
| $ | 128,754 |
| ||||||||||||||||||||||||||||
Property operating expenses |
| 21,599 |
| 6,191 |
| 106 |
| 4,193 |
| 2,093 |
| 2,150 |
| 1,857 |
| 38,189 |
| ||||||||||||||||||||||||||||||||||||
NOI |
| $ | 49,662 |
| $ | 13,925 |
| $ | 7,413 |
| $ | 7,671 |
| $ | 5,430 |
| $ | 3,109 |
| $ | 3,355 |
| $ | 90,565 |
| ||||||||||||||||||||||||||||
Commercial real estate property expenditures |
| $ | 47,431 |
| $ | 130,441 |
| $ | 510 |
| $ | 351 |
| $ | 241 |
| $ | 506 |
| $ | 1,064 |
| $ | 180,544 |
| ||||||||||||||||||||||||||||
Segment assets at September 30, 2003 |
| $ | 641,310 |
| $ | 263,428 |
| $ | 102,631 |
| $ | 84,844 |
| $ | 69,724 |
| $ | 41,767 |
| $ | 96,274 |
| $ | 1,299,978 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Nine months ended September 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Revenues |
| $ | 62,856 |
| $ | 9,286 |
| $ | 7,519 |
| $ | 14,701 |
| $ | 7,204 |
| $ | 5,408 |
| $ | 4,949 |
| $ | 111,923 |
| ||||||||||||||||||||||||||||
Property operating expenses |
| 17,965 |
| 3,674 |
| 112 |
| 5,413 |
| 1,853 |
| 2,228 |
| 1,662 |
| 32,907 |
| ||||||||||||||||||||||||||||||||||||
NOI |
| $ | 44,891 |
| $ | 5,612 |
| $ | 7,407 |
| $ | 9,288 |
| $ | 5,351 |
| $ | 3,180 |
| $ | 3,287 |
| $ | 79,016 |
| ||||||||||||||||||||||||||||
Commercial real estate property expenditures |
| $ | 82,127 |
| $ | 51,336 |
| $ | 423 |
| $ | 712 |
| $ | 833 |
| $ | 27,655 |
| $ | 742 |
| $ | 163,828 |
| ||||||||||||||||||||||||||||
Segment assets at September 30, 2002 |
| $ | 598,855 |
| $ | 116,562 |
| $ | 104,060 |
| $ | 107,673 |
| $ | 70,917 |
| $ | 59,802 |
| $ | 83,839 |
| $ | 1,141,708 |
| ||||||||||||||||||||||||||||
Segment assets at March 31, 2003 |
| $ | 640,141 |
| $ | 114,813 |
| $ | 103,340 |
| $ | 86,211 |
| $ | 70,227 |
| $ | 42,176 |
| $ | — |
| $ | 91,432 |
| $ | 1,148,340 |
|
2018
The following table reconciles our NOI for reportable segments to income before income taxes and discontinued operations as reported on our Consolidated Statements of Operations:
|
| For the three months ended |
| For the nine months ended |
|
| For the three months |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||||
NOI for reportable segments |
| $ | 32,388 |
| $ | 26,674 |
| $ | 90,565 |
| $ | 79,016 |
|
| $ | 33,932 |
| $ | 28,418 |
|
Equity in income (loss) of unconsolidated real estate joint ventures |
| 95 |
| 138 |
| (91 | ) | 134 |
| |||||||||||
Equity in loss of unconsolidated real estate joint ventures |
| (88 | ) | (153 | ) | |||||||||||||||
Income (loss) from service operations |
| 742 |
| 15 |
| 580 |
| (179 | ) |
| 742 |
| (81 | ) | ||||||
Add: Gain on sales of real estate |
| 23 |
| 796 |
| 448 |
| 1,742 |
| |||||||||||
(Loss) gain on sales of real estate |
| (222 | ) | 404 |
| |||||||||||||||
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest |
| (10,436 | ) | (10,489 | ) | (30,608 | ) | (28,072 | ) |
| (10,262 | ) | (10,135 | ) | ||||||
Depreciation and other amortization |
| (9,462 | ) | (7,357 | ) | (26,735 | ) | (21,941 | ) |
| (10,359 | ) | (8,044 | ) | ||||||
General and administrative |
| (1,937 | ) | (815 | ) | (5,651 | ) | (4,925 | ) |
| (2,286 | ) | (1,948 | ) | ||||||
Amortization of deferred financing costs |
| (773 | ) | (559 | ) | (1,957 | ) | (1,793 | ) |
| (859 | ) | (589 | ) | ||||||
Minority interests |
| (1,833 | ) | (1,897 | ) | (5,435 | ) | (5,603 | ) |
| (1,452 | ) | (1,787 | ) | ||||||
NOI from discontinued operations |
| (15 | ) | (603 | ) | (551 | ) | (1,950 | ) |
| — |
| (554 | ) | ||||||
Income before income taxes and discontinued operations |
| $ | 8,792 |
| $ | 5,903 |
| $ | 20,565 |
| $ | 16,429 |
|
| $ | 9,146 |
| $ | 5,531 |
|
We did not allocate (loss) gain on sales of real estate, interest expense, amortization of deferred financing costs and depreciation and other amortization to segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate equity in income (loss)loss of unconsolidated real estate joint ventures, income (loss) from service operations, general and administrative expense and minority interests because these items represent general corporate items not attributable to segments.
COMI’s provision for income tax consists of the following:
|
| For the nine months |
|
| For the three months |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
Current |
|
|
|
|
|
|
|
|
|
| ||||
Federal |
| $ | (173 | ) | $ | 53 |
|
| $ | — |
| $ | — |
|
State |
| (37 | ) | 12 |
|
| — |
| — |
| ||||
|
| (210 | ) | 65 |
|
| — |
| — |
| ||||
Deferred |
|
|
|
|
|
|
|
|
|
| ||||
Federal |
| (23 | ) | — |
|
| (165 | ) | 24 |
| ||||
State |
| (5 | ) | — |
|
| (35 | ) | 5 |
| ||||
|
| (28 | ) | — |
|
| (200 | ) | 29 |
| ||||
Total |
| (238 | ) | 65 |
|
| (200 | ) | 29 |
| ||||
Less: minority interests |
| 57 |
| (22 | ) | |||||||||
Minority interests |
| 47 |
| (8 | ) | |||||||||
Income tax (expense) benefit, net of minority interests |
| $ | (181 | ) | $ | 43 |
|
| $ | (153 | ) | $ | 21 |
|
Items contributing to temporary differences that lead to deferred taxes include depreciation and amortization, certain accrued compensation, compensation made in the form of contributions to a deferred nonqualified compensation plan and expenses associated with stock-based compensation.
COMI’s combined Federal and state effective tax rate for the ninethree months ended September 30,March 31, 2004 and 2003 and 2002 was approximately 40%.
2119
Income from discontinued operations includes revenues and expenses associated with an operating property located in Oxon Hill, Maryland that was sold on March 31, 2003. The table below sets forth the components of income from discontinued operations:
|
| For the three months |
| For the nine months |
| ||||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
|
| For the three |
| |||||
Revenue from real estate operations |
| $ | 2 |
| $ | 970 |
| $ | 910 |
| $ | 2,961 |
|
| $ | 902 |
|
Expenses from real estate operations: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property operating expenses |
| (13 | ) | 367 |
| 359 |
| 1,011 |
|
| 348 |
| |||||
Depreciation and amortization |
| — |
| 147 |
| 19 |
| 462 |
|
| 19 |
| |||||
Interest expense |
| — |
| 74 |
| 100 |
| 221 |
|
| 100 |
| |||||
Expenses from real estate operations |
| (13 | ) | 588 |
| 478 |
| 1,694 |
|
| 467 |
| |||||
Earnings from real estate operations before gain on sale of real estate and minority interests |
| 15 |
| 382 |
| 432 |
| 1,267 |
|
| 435 |
| |||||
Gain on sale of real estate |
| — |
| — |
| 2,995 |
| — |
|
| 3,011 |
| |||||
Income from discontinued operations before minority interests |
| 15 |
| 382 |
| 3,427 |
| 1,267 |
|
| 3,446 |
| |||||
Minority interests in discontinued operations |
| (4 | ) | (114 | ) | (1,004 | ) | (398 | ) |
| (1,011 | ) | |||||
Income from discontinued operations, net of minority interests |
| $ | 11 |
| $ | 268 |
| $ | 2,423 |
| $ | 869 |
|
| $ | 2,435 |
|
In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. Management does not anticipate that any liabilities that may result will have a materially adverse effect on our financial position, operations or liquidity. 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.
At September 30, 2003,Acquisition
As of March 31, 2004, we were under contract to acquire from Constellation the second phasetwo office properties in St. Mary’s County, Maryland for $13,650. One of a 108-acre land purchase for a minimum purchase price of $9,013. Wethese buildings was acquired on May 5, 2004 and we expect to acquire this parcel in November 2003.the other by July 2004.
Joint Ventures
In the event that the costs to complete construction of buildingsa building owned by two of our joint venturesNBP 220, LLC exceed amounts funded by existing credit facilities and member investments previously made, we will be responsible for making additional investments in thesethis joint venturesventure of up to $8,500 in the aggregate.$4,500. We do not expect that such contributions will be necessary.
We may be required to make additional unilateral capital contributions to Route 46 Partners, LLC of up to $320 to fund our partners’ preferred return; we do not expect that such contributions will be necessary. We may also be required to fund leasing commissions associated with leasing space in this joint venture’s building to the extent such commissions exceed a defined amount; we do not expect that any such funding, if required, will be material to us.
20
We may need to make our 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 need to make even larger investments in these joint ventures.
As of September 30, 2003, we served as guarantor for the repayment of mortgage loans totaling $15,711 for certainIn three of our unconsolidated real estate joint ventures in the event that the joint ventures
22
default on the payment of such loans. The maturity dates of these loans range from January to November 2004.
In four of our unconsolidated real estate joint ventures owned as of September 30, 2003,March 31, 2004, we would be obligated to acquire the other members’ interest in each of the joint ventures (20% in the case of threeone and 50% each in the case of one) in the event that all of the followingtwo) if defined events were to occur:
(1)an 18-month period passes from the date of completion of the shell of the final building to be constructed by the joint venture;
(2)at the end of the 18-month period, the aggregate leasable square footage of the joint venture’s buildings is 90% leased and occupied by tenants who are not in default under their leases; and
(3)six months pass from the end of the 18-month period and either the buildings have not been sold or we have not acquired the other members’ interest.
occur. The amount we would need to pay for those membership interests is computed based on the amount that the owners of those interests would receive under the joint venture agreements in the event that office properties owned by the buildingsrespective joint ventures were sold for a capitalized fair value (as defined in the agreements) on a defined date. As of September 30, 2003, none of the four real estate joint ventures had completed the shell construction on their final building. We estimate the aggregate amount we would need to pay for our partners’ membership interests in these joint ventures to be $2.1 million;$1,300; however, since the determination of this amount is dependent on the operations of the office properties and none of thesethe properties are both completed and occupied, this estimate is preliminary and could be materially different from the actual obligation.
We would be required to acquire the other members’ interestsmember’s interest in NBP 140, LLC and NBP 220, LLC in the event that the joint ventures defaultventure defaults on theirits obligations as landlordslandlord or dodoes not meet established construction completion timeframes. The minimum amount we would need to acquire thesethis membership interestsinterest is $10,262$4,911 at September 30, 2003.March 31, 2004.
Operating Leases
We are obligated as lessee under five operating leases for office space. Future minimum aggregate rental payments due under the terms of these leases as of September 30, 2003March 31, 2004 were as follows:
2003 |
| $ | 153 |
| ||||
2004 |
| 601 |
|
| $ | 447 |
| |
2005 |
| 585 |
|
| 585 |
| ||
2006 |
| 324 |
|
| 324 |
| ||
2007 |
| 39 |
|
| 39 |
| ||
Thereafter |
| 29 |
| |||||
2008 |
| 29 |
| |||||
|
| $ | 1,731 |
|
| $ | 1,424 |
|
Land Leases
We areAt March 31, 2004, we were obligated as lessee under leases for two parcels of land; we have a building located on one of these parcels and the other parcel is being developed. These leases provide for monthly rent on one parcel through March 2098 and the other through September 2099. Future minimum aggregateannual rental payments due under the terms of these leases as of September 30, 2003March 31, 2004 were as follows:
2003 |
| $ | 89 |
|
2004 |
| 353 |
| |
2005 |
| 353 |
| |
2006 |
| 353 |
| |
2007 |
| 353 |
| |
Thereafter |
| 32,064 |
| |
|
| $ | 33,565 |
|
23
2004 |
| $ | 265 |
|
2005 |
| 353 |
| |
2006 |
| 353 |
| |
2007 |
| 353 |
| |
2008 |
| 353 |
| |
Thereafter |
| 31,711 |
| |
|
| $ | 33,388 |
|
We have the optionacquired title to acquire these two parcels of land over a three-year period beginning in January 2004 for an aggregate maximum purchase price of $4,000; we expect to exercise this purchase option in 2004.$4,000 on April 14, 2004, at which time the leases were terminated.
VehicleOther Operating Leases
We are obligated under various leases for vehicles.vehicles and office equipment. Future minimum aggregateannual rental payments due under the terms of these leases as of September 30, 2003March 31, 2004 were as follows:
2003 |
| $ | 81 |
|
2004 |
| 261 |
| |
2005 |
| 176 |
| |
2006 |
| 94 |
| |
2007 |
| 11 |
| |
|
| $ | 623 |
|
21
2004 |
| $ | 203 |
|
2005 |
| 183 |
| |
2006 |
| 105 |
| |
2007 |
| 17 |
| |
|
| $ | 508 |
|
17.Pro Forma Financial Information
We accounted for our 20022003 and 20032004 acquisitions of consolidated entities using the purchase method of accounting. We included the results of operations for the acquisitions in our Consolidated Statements of Operations from their respective purchase dates through September 30, 2003.March 31, 2004.
We prepared our pro forma condensed consolidated financial information presented below as if all of our 20022003 and 20032004 acquisitions and dispositions involvingof operating properties had occurred on January 1, 2002.2003. The pro forma financial information is unaudited and is not necessarily indicative of the results that actually would have occurred if these acquisitions and dispositions had occurred on January 1, 2002,2003, nor isdoes it intendedintend to indicate our results of operations for future periods.
|
| For the nine months ended |
|
| For the three months |
| ||||||||
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Pro forma total revenues |
| $ | 138,812 |
| $ | 125,528 |
|
| $ | 58,663 |
| $ | 51,554 |
|
Pro forma net income available to common shareholders |
| $ | 2,765 |
| $ | 12,113 |
|
| $ | 4,801 |
| $ | 4,138 |
|
Pro forma earnings per common share on net income available to common shareholders |
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.10 |
| $ | 0.44 |
|
| $ | 0.16 |
| $ | 0.14 |
|
Diluted |
| $ | 0.09 |
| $ | 0.42 |
|
| $ | 0.15 |
| $ | 0.14 |
|
2418.Subsequent Events
On April 15, 2004, we acquired a 178,764 square foot office property located in Northern Baltimore County, Maryland for a purchase price of approximately $16,500 primarily using borrowings under our Revolving Credit Facility.
On April 23, 2004, we sold 2,750,000 common shares in an underwritten public offering at a net price of $21.243 per share. We contributed the net proceeds totaling approximately $58,400 to our Operating Partnership in exchange for 2,750,000 common units.
On April 26, 2004, we sold for approximately $9,600 a land parcel in Columbia, Maryland and a land parcel in Linthicum, Maryland. We issued to the buyer a $5,600 mortgage loan bearing interest at 5.5% and a maturity date of July 2005; the balance of the acquisition was in the form of cash from the buyer. Upon completion of the sale, we entered into an agreement with the buyer to lease the land parcels for an aggregate monthly payment of $10 beginning July 1, 2004 until April 30, 2005, at which time the rent reduces to $1 per month until 2079. The buyer in this transaction has an option to contribute the two land parcels into our Operating Partnership between January 1, 2005 and February 28, 2005 in exchange for extinguishment of the $5,600 mortgage loan with us and $4,000 in common units in our Operating Partnership; a unit price ranging from $24.45 to $25.90 will be used to determine the number of units in the Operating Partnership that the buyer would receive if the option were exercised. If the buyer in this transaction does not exercise its option to contribute the two land parcels into our Operating Partnership, we have the option to re-acquire the properties anytime after March 15, 2005 for the same consideration described in the previous sentence.
22
23
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a real estate investment trust, or REIT, that focuses on the ownership, management, leasing, acquisition and development of suburban office properties located in select submarkets in the Mid-Atlantic region of the United States. We conduct our real estate ownership activity through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), for which we are the sole general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies. The Operating Partnership also owns an entity through which we provide real estate-related services that include (1) property management, (2) construction and development management and (3) heating and air conditioning services and controls. The number of operating properties in our portfolio totaled 129 as of March 31, 2004 and 119 as of December 31, 2003. Our growth in number of operating properties over that timeframe was achieved primarily through our acquisition and development of properties.
Most of our revenues come from rents and property operating expense reimbursements earned from tenants leasing space in our properties. Most of our expenses take the form of (1) property operating costs, such as real estate taxes, utilities and repairs and maintenance, (2) financing costs, such as interest and loan costs and (3) depreciation and amortization of our operating properties and tenant lease costs.
Cash provided from operations is our primary source of cash for funding dividends and distributions, debt service on our loans and other working capital requirements. A good place to start in evaluating our cash flow provided by operations is the line entitled “net cash provided by operating activities” on our Statements of Cash Flows. We also believe that the amount that we incur on our operating properties for tenant and capital improvements and leasing costs are particularly useful in evaluating our cash flow from operations since these costs are required to operate our properties; we provide this information in the section entitled “Funds from Operations.” Since we are a REIT and therefore distribute 100% of our REIT taxable income in order to avoid paying income taxes, our dividends and distributions paid are also useful in determining how much cash we have available for other uses; however, it is noteworthy that we have historically paid dividends in excess of our REIT taxable income.
We historically have financed our long-term capital needs, including property acquisition and development activities, through a combination of the following:
•borrowings under our primary revolving credit facility (the “Revolving Credit Facility”);
•borrowings from new loans;
•issuances of common shares of beneficial interest (“common shares”), preferred shares of beneficial interest (“preferred shares”) and common units and/or preferred units in our Operating Partnership;
•contributions from outside investors into real estate joint ventures;
•proceeds from sales of real estate; and
•any available residual cash flow from operations after application to the items described in the previous paragraph.
During the three months ended March 31, 2004, we:
•experienced increased revenues, operating expenses and earnings from real estate operations due primarily to the addition of properties through acquisition and construction activities;
•experienced increased revenue from Same-Office Properties of $493,000 or 1% and increased operating expenses from those properties of $56,000 or 6%;
•finished the period with occupancy for our portfolio of properties at 91.9%;
•renewed 84.2% of the square footage under leases expiring during the period;
•acquired nine office properties and two land parcels for $75.2 million; eight of these properties represented our initial entry into the Southern Maryland region; and
24
•obtained a new $300.0 million revolving credit facility which replaces our previous facility.
In this section, we discuss our financial condition and results of operations as of and for the three and nine months ended September 30, 2003.March 31, 2004. 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, 2003March 31, 2004 compared to the same periodsperiod in 2002;
•what our primary sources and uses of cash were in the nine months ended September 30, 2003;
• how we raised cash for acquisitions and other capital expenditures during the ninethree months ended September 30, 2003;March 31, 2004;
• significant changes since December 31, 2002 in our cash flows;
•how we expect to generate cash for short and long-term capital needs;
•our off-balance sheet arrangements in place that are reasonably likely to affect our financial condition, results of operations and liquidity;
• how we intend to generate cash for short-our commitments and long-term capital needs;contingencies; and
• the computation of our fundsFunds from operations.Operations for the three months ended March 31, 2004 and 2003.
You should refer to our Consolidated Financial Statements and “OperatingSelected Financial Data Variance Analysis” table set forth below 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,” “expect,” “estimate” 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:
• our ability to borrow on favorable terms;
• 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;
• risks of real estate acquisition and development 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 or operating costs may be greater than anticipated;activities;
• 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;
• governmental actions and initiatives; and
• environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
25
Corporate Office Properties Trust and Subsidiaries
Operating Data Variance Analysis
(Dollars for this table are in thousands, except per share data)
|
| For the three months ended September 30, |
| For the nine months ended September 30, |
|
| For the three months ended March 31, |
| |||||||||||||||||||||||||||
|
| 2003 |
| 2002 |
| Variance |
| % Change |
| 2003 |
| 2002 |
| Variance |
| % Change |
|
| 2004 |
| 2003 |
| Variance |
| % Change |
| |||||||||
Real Estate Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Rental revenue |
| $ | 40,210 |
| $ | 33,769 |
| $ | 6,441 |
| 19 | % | $ | 112,921 |
| $ | 97,328 |
| $ | 15,593 |
| 16 | % |
| $ | 43,194 |
| $ | 35,989 |
| $ | 7,205 |
| 20 | % |
Tenant recoveries and other revenue |
| 5,238 |
| 4,296 |
| 942 |
| 22 | % | 14,923 |
| 11,634 |
| 3,289 |
| 28 | % |
| 5,777 |
| 5,529 |
| 248 |
| 4 | % | |||||||||
Revenues from real estate operations |
| 45,448 |
| 38,065 |
| 7,383 |
| 19 | % | 127,844 |
| 108,962 |
| 18,882 |
| 17 | % |
| 48,971 |
| 41,518 |
| 7,453 |
| 18 | % | |||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Property operating |
| 13,075 |
| 11,994 |
| 1,081 |
| 9 | % | 37,830 |
| 31,896 |
| 5,934 |
| 19 | % |
| 15,039 |
| 13,654 |
| 1,385 |
| 10 | % | |||||||||
Interest |
| 10,436 |
| 10,489 |
| (53 | ) | (1 | )% | 30,608 |
| 28,072 |
| 2,536 |
| 9 | % |
| 10,262 |
| 10,135 |
| 127 |
| 1 | % | |||||||||
Amortization of deferred financing costs |
| 773 |
| 559 |
| 214 |
| 38 | % | 1,957 |
| 1,793 |
| 164 |
| 9 | % |
| 859 |
| 589 |
| 270 |
| 46 | % | |||||||||
Depreciation and other amortization |
| 9,462 |
| 7,357 |
| 2,105 |
| 29 | % | 26,735 |
| 21,941 |
| 4,794 |
| 22 | % |
| 10,359 |
| 8,044 |
| 2,315 |
| 29 | % | |||||||||
Expenses from real estate operations |
| 33,746 |
| 30,399 |
| 3,347 |
| 11 | % | 97,130 |
| 83,702 |
| 13,428 |
| 16 | % |
| 36,519 |
| 32,422 |
| 4,097 |
| 13 | % | |||||||||
Earnings from real estate operations before equity in income (loss) of unconsolidated real estate joint ventures |
| 11,702 |
| 7,666 |
| 4,036 |
| 53 | % | 30,714 |
| 25,260 |
| 5,454 |
| 22 | % | ||||||||||||||||||
Equity in income (loss) of unconsolidated real estate joint ventures |
| 95 |
| 138 |
| (43 | ) | (31 | )% | (91 | ) | 134 |
| (225 | ) | (168 | )% | ||||||||||||||||||
Earnings from real estate operations before equity in loss of unconsolidated real estate joint ventures |
| 12,452 |
| 9,096 |
| 3,356 |
| 37 | % | ||||||||||||||||||||||||||
Equity in loss of unconsolidated real estate joint ventures |
| (88 | ) | (153 | ) | 65 |
| (42 | )% | ||||||||||||||||||||||||||
Earnings from real estate operations |
| 11,797 |
| 7,804 |
| 3,993 |
| 51 | % | 30,623 |
| 25,394 |
| 5,229 |
| 21 | % |
| 12,364 |
| 8,943 |
| 3,421 |
| 38 | % | |||||||||
Income (losses) from service operations |
| 742 |
| 15 |
| 727 |
| 4847 | % | 580 |
| (179 | ) | 759 |
| N/A |
| ||||||||||||||||||
Income (loss) from service operations |
| 742 |
| (81 | ) | 823 |
| N/A |
| ||||||||||||||||||||||||||
General and administrative expense |
| (1,937 | ) | (815 | ) | (1,122 | ) | 138 | % | (5,651 | ) | (4,925 | ) | (726 | ) | 15 | % |
| (2,286 | ) | (1,948 | ) | (338 | ) | 17 | % | |||||||||
Gain on sales of real estate |
| 23 |
| 796 |
| (773 | ) | (97 | )% | 448 |
| 1,742 |
| (1,294 | ) | (74 | )% | ||||||||||||||||||
(Loss) gain on sales of real estate |
| (222 | ) | 404 |
| (626 | ) | N/A |
| ||||||||||||||||||||||||||
Income before minority interests, income taxes and discontinued operations |
| 10,625 |
| 7,800 |
| 2,825 |
| 36 | % | 26,000 |
| 22,032 |
| 3,968 |
| 18 | % |
| 10,598 |
| 7,318 |
| 3,280 |
| 45 | % | |||||||||
Minority interests |
| (1,833 | ) | (1,897 | ) | 64 |
| (3 | )% | (5,435 | ) | (5,603 | ) | 168 |
| (3 | )% |
| (1,452 | ) | (1,787 | ) | 335 |
| (19 | )% | |||||||||
Income tax (expense) benefit, net |
| (221 | ) | (9 | ) | (212 | ) | 2356 | % | (181 | ) | 43 |
| (224 | ) | (521 | )% |
| (153 | ) | 21 |
| (174 | ) | N/A |
| |||||||||
Income from discontinued operations, net |
| 11 |
| 268 |
| (257 | ) | (96 | )% | 2,423 |
| 869 |
| 1,554 |
| 179 | % |
| — |
| 2,435 |
| (2,435 | ) | (100 | )% | |||||||||
Net income |
| 8,582 |
| 6,162 |
| 2,420 |
| 39 | % | 22,807 |
| 17,341 |
| 5,466 |
| 32 | % |
| 8,993 |
| 7,987 |
| 1,006 |
| 13 | % | |||||||||
Preferred share dividends |
| (3,157 | ) | (2,533 | ) | (624 | ) | 25 | % | (8,224 | ) | (7,600 | ) | (624 | ) | 8 | % |
| (4,456 | ) | (2,533 | ) | (1,923 | ) | 76 | % | |||||||||
Repurchase of preferred units in excess of recorded book value |
| — |
| — |
| — |
| N/A |
| (11,224 | ) | — |
| (11,224 | ) | N/A |
| ||||||||||||||||||
Net income available to common shareholders |
| $ | 5,425 |
| $ | 3,629 |
| $ | 1,796 |
| 49 | % | $ | 3,359 |
| $ | 9,741 |
| $ | (6,382 | ) | (66 | )% |
| $ | 4,537 |
| $ | 5,454 |
| $ | (917 | ) | (17 | )% |
Basic earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Income before discontinued operations |
| $ | 0.19 |
| $ | 0.15 |
| $ | 0.04 |
| 27 | % | $ | 0.04 |
| $ | 0.40 |
| $ | (0.36 | ) | (90 | )% |
| $ | 0.15 |
| $ | 0.13 |
| $ | 0.02 |
| 15 | % |
Net income |
| $ | 0.19 |
| $ | 0.16 |
| $ | 0.03 |
| 19 | % | $ | 0.13 |
| $ | 0.44 |
| $ | (0.31 | ) | (70 | )% | ||||||||||||
Net income available to common shareholders |
| $ | 0.15 |
| $ | 0.23 |
| $ | (0.08 | ) | (35 | )% | |||||||||||||||||||||||
Diluted earnings per common share |
|
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|
|
|
|
|
|
|
|
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|
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|
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| |||||||||
Income before discontinued operations |
| $ | 0.18 |
| $ | 0.14 |
| $ | 0.04 |
| 29 | % | $ | 0.03 |
| $ | 0.38 |
| $ | (0.35 | ) | (92 | )% |
| $ | 0.14 |
| $ | 0.12 |
| $ | 0.02 |
| 17 | % |
Net income |
| $ | 0.18 |
| $ | 0.15 |
| $ | 0.03 |
| 20 | % | $ | 0.12 |
| $ | 0.42 |
| $ | (0.30 | ) | (71 | )% | ||||||||||||
Net income available to common shareholders |
| $ | 0.14 |
| $ | 0.22 |
| $ | (0.08 | ) | (36 | )% |
26
Results of Operations
While reviewing this section, you should refer to the “Operating Data Variance Analysis” table set forth on the preceding page, as it reflects the computation of the variances described in this section.
Occupancy and leasing
Over the last three years, the United States economy suffered from an economic slowdown that we believe had an adverse effect on the office real estate leasing market. Occupancy rates declined in most parts of the country, placing downward pressure on rental rates and increasing the competitive environment for attracting tenants. We believe that the economic slowdownnational trend was felt in the United States affected our property operations by decreasing occupancy in certaineach of our properties, which in turn led togeographic regions, contributing towards decreased revenues from those properties in the nine months ended September 30, 2003 relative to the comparable 2002 period. Average quarter end occupancy in our portfolio decreased from 94.0% in the nine months ended September 30, 2002 to 91.4% in the nine months ended September 30, 2003. Lower occupancyof properties. We also experienced downward pressure on rental rates and the resulting increased competition for tenants in our properties. During the latter portion of 2003 and in the first quarter of 2004, we believe that there was an increase in leasing activity in our regions. We expect the increased leasing activity trend in our regions to continue in 2004, which we expect would improve occupancy levels in those regions and in our properties.
The table below sets forth certain occupancy and leasing information:
|
| March 31, |
| December 31, |
| ||
Occupancy for portfolio of properties |
| 91.9 | % | 91.2 | % | ||
Average contractual rental rate (1) |
| $ | 19.81 |
| $ | 20.06 |
|
Weighted average lease term (in years) |
| 4.7 |
| 4.9 |
| ||
(1) Includes estimated expense reimbursements.
We were able to renew 84.2% of the square footage under leases expiring in the three months ended March 31, 2004; these renewals took place at an average contractual rental rate per square foot of $19.35. The occupancy and leasing information reflected in the table above includes the effects of properties acquired during the three months ended March 31, 2004; these properties were 94.0% occupied, had an average contractual rental rate per square foot of $16.84 and a weighted average lease term of 4.6 years as of March 31, 2004.
As we discussed above, we are beginning to see signs of improvement in leasing trends in many of our submarkets. However, since rental conditions in many of our regions continue to be affected by the economic downturn, we expect that the operating regions placed downward pressure on rental rates in mostperformance of these regions, a trend that we anticipate will affect us furtherour properties may be adversely affected as we attempt to lease vacant space and renew leases that are scheduled to expire on occupied space.expire. Our exposure to continued downward pressure on occupancyover the remainder of 2004 and rental rates in the short term2005 is reduced somewhat by the fact that only 16.8% of our annualized rental revenues from leases in place as of September 30, 2003,March 31, 2004 were from leases on only 10.4% of our occupied square feet were scheduled to expire by the end of 2004.
We believe that the economic slowdown adversely affected a number of our tenants during the year and contributed to an increase in bad debt expense. We also had several tenants who were current in fulfilling their lease obligations as of September 30, 2003 that we believe could encounter financial difficulties in the foreseeable future. However, we do not believe that the economic slowdown has had a materially adverse effect on the timing of our accounts receivable collections; while our accounts receivable balance increased from $3.5 million at December 31, 2002 to $7.0 million at September 30, 2003, most of this increase is attributable to large construction and termination fee billings to tenants that took place near the end of the period.
Magellan Health Services, Inc. (“Magellan”), a tenant in a total of 150,622 square feet in two of our buildings, filed for Chapter 11 bankruptcy in February 2003. Magellan was current in making payments under its leases on the space through September 30, 2003. Since we currently expect that Magellan will successfully reorganize through the bankruptcy process, we agreed in July 2003 to extend the lease term on 107,778 square feet through April 2005; this action was affirmed by the bankruptcy court.
We expect that the cost of utility services for our properties may increase within the next year as a result of energy de-regulation expected to take place in 2004. In addition, we expect that real estate taxes assessed by state and local municipalities on our properties may increase in the future in response to budgetary shortfalls in those municipalities. Should these increases in expenses occur, we expect that we will be able to recover a significant portion of the expense increases through increased tenant recovery revenue in the short-term and increased rental revenue in the long-term.
27
We experienced changes in our tenant base during the nine months ended September 30, 2003 due primarily to acquisitions and leasing activity. The following schedule lists our twenty largest tenants based on annualized rental revenue (defined below) as of September 30, 2003:
Rank |
| Tenant |
| Total |
| Percentage of |
| |
|
|
|
| (in thousands) |
|
|
| |
1 |
| United States of America |
| $ | 22,121 |
| 12.7 | % |
2 |
| Computer Sciences Corporation (1) |
| 11,133 |
| 6.4 | % | |
3 |
| AT&T Local Services (1) |
| 9,228 |
| 5.3 | % | |
4 |
| VeriSign, Inc. |
| 8,985 |
| 5.2 | % | |
5 |
| Unisys (2) |
| 7,746 |
| 4.4 | % | |
6 |
| General Dynamics Government Corporation |
| 5,917 |
| 3.4 | % | |
7 |
| Booz Allen Hamilton |
| 4,607 |
| 2.6 | % | |
8 |
| Northrop Grumman Corporation |
| 4,398 |
| 2.5 | % | |
9 |
| Ciena Corporation |
| 3,905 |
| 2.2 | % | |
10 |
| The Boeing Company (1) |
| 3,665 |
| 2.1 | % | |
11 |
| The Aerospace Corporation |
| 3,361 |
| 1.9 | % | |
12 |
| Magellan Health Services, Inc. |
| 3,302 |
| 1.9 | % | |
13 |
| Commonwealth of Pennsylvania (1) |
| 2,656 |
| 1.5 | % | |
14 |
| Merck & Co., Inc. (2) |
| 2,326 |
| 1.3 | % | |
15 |
| Johns Hopkins University (1) |
| 2,282 |
| 1.3 | % | |
16 |
| Carefirst, Inc. and Subsidiaries (1) |
| 2,166 |
| 1.2 | % | |
17 |
| USinternetworking, Inc. |
| 1,935 |
| 1.1 | % | |
18 |
| BAAN U.S.A., Inc. |
| 1,737 |
| 1.0 | % | |
19 |
| Omniplex World Services |
| 1,633 |
| 0.9 | % | |
20 |
| Comcast Corporation |
| 1,577 |
| 0.9 | % | |
|
|
|
|
|
|
|
| |
|
| Subtotal of 20 largest tenants |
| 104,680 |
| 60.1 | % | |
|
| All remaining tenants |
| 69,453 |
| 39.9 | % | |
|
| Total |
| $ | 174,133 |
| 100.0 | % |
(1) Includes affiliated organizations and agencies.
(2) Unisys subleases space to Merck and Co., Inc; revenue from this subleased space is classified as Merck & Co., Inc. revenue.2005.
Annualized rental revenue is a measure that we use to evaluate the source of our rental revenue as of a point in time. It is computed by multiplying by 12 the sum of monthly contractual base rentrents and estimated monthly expense reimbursements under active leases in our portfolio of properties as of a point in time. Portfolio annualized rental revenue is annualized rental revenue for our entire portfolio of properties as of a point in time, including both consolidated properties and properties owned through unconsolidated real estate joint ventures. We consider annualized rental revenue to be a useful measure for analyzing revenue sources because, since it is point-in-time based, it woulddoes not contain increases and decreases in revenue associated with periods in which lease terms were not in effect; historical GAAP revenue wouldunder generally accepted accounting principles (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis.
Most of the leases with our largest tenant, the United States Government, provide for consecutive one-year terms or provide for early termination rights; all of the leasing statistics set forth above assume that the United States Government will remain in the space that they lease through the end of the respective
27
arrangements, without ending consecutive one-year leases prematurely or exercising early termination rights. We reported the statistics in this manner since we manage our leasing activities using these same assumptions and believe these assumptions to be probable.
Geographic concentration of property operations
During the three months ended March 31, 2004, we acquired eight properties in St. Mary’s County, Maryland, which is located in Southern Maryland; this acquisition marked our entry into that submarket of the Greater Washington, D.C. area. We also acquired one property in Suburban Maryland. The table below sets forth the regional allocation of our portfolio annualized rental revenue:
|
| % of Portfolio Annualized |
| ||
Region |
| March 31, |
| December 31, |
|
Baltimore/Washington Corridor |
| 51.8 | % | 53.6 | % |
Northern Virginia |
| 18.3 | % | 19.8 | % |
Northern/Central New Jersey |
| 9.1 | % | 9.5 | % |
Greater Philadelphia |
| 5.4 | % | 5.7 | % |
Harrisburg, Pennsylvania |
| 4.6 | % | 5.1 | % |
Suburban Maryland |
| 4.3 | % | 2.9 | % |
Southern Maryland |
| 3.1 | % | N/A |
|
Other |
| 3.4 | % | 3.4 | % |
|
| 100.0 | % | 100.0 | % |
The changes in the percentages between the two points in time are attributable primarily to the property acquisitions. We expect that we will focus most of our acquisition and development activities in the Northern Virginia, Baltimore/Washington Corridor and Suburban Maryland regions in 2004. In addition, we are contractually obligated to acquire two additional office properties in the Southern Maryland region.
Concentration of leases with certain tenants
The following schedule lists our 20 largest tenants based on percentage of portfolio annualized rental revenue:
28
|
| Percentage of Portfolio |
| ||
Tenant |
| March 31, |
| December 31, |
|
|
|
|
|
|
|
United States of America |
| 14.2 | % | 14.8 | % |
Computer Sciences Corporation (1) |
| 6.3 | % | 6.3 | % |
AT&T Corporation (1) |
| 5.1 | % | 5.2 | % |
VeriSign, Inc. |
| 4.7 | % | 5.1 | % |
General Dynamics Corporation |
| 4.2 | % | 3.3 | % |
Unisys (2) |
| 4.1 | % | 4.4 | % |
Booz Allen Hamilton, Inc. |
| 2.6 | % | 2.6 | % |
Northrop Grumman Corporation |
| 2.4 | % | 2.5 | % |
Ciena Corporation |
| 2.1 | % | 2.2 | % |
The Boeing Company (1) |
| 2.0 | % | 2.1 | % |
The Aerospace Corporation |
| 1.8 | % | 1.9 | % |
Magellan Health Services, Inc. |
| 1.6 | % | 1.8 | % |
Commonwealth of Pennsylvania (1) |
| 1.5 | % | 1.5 | % |
Johns Hopkins University (1) |
| 1.3 | % | 1.3 | % |
Titan Corporation (1) |
| 1.3 | % | 1.3 | % |
Merck & Co., Inc. (2) |
| 1.2 | % | 1.3 | % |
Carefirst, Inc. and Subsidiaries (1) |
| 1.2 | % | 1.2 | % |
USinternetworking, Inc. |
| 1.0 | % | 1.1 | % |
Comcast Corporation |
| 0.9 | % | 1.0 | % |
Omniplex World Services |
| 0.9 | % | 0.9 | % |
Subtotal of 20 largest tenants |
| 60.4 | % | 61.8 | % |
All remaining tenants |
| 39.6 | % | 38.2 | % |
Total |
| 100.0 | % | 100.0 | % |
(1) Includes affiliated organizations and agencies.
(2) Unisys subleases space to Merck and Co., Inc.; revenue from this subleased space is classified as Merck & Co., Inc. revenue.
As noted above, most of the leases with the United States Government provide for a series of one-year terms or provide for early termination rights. The government may terminate its leases if, among other reasons, the United States Congress fails to provide funding.
Industry concentration of tenants
The percentage of our portfolio annualized rental revenue derived from the United States defense industry increased during the three months ended March 31, 2004 due primarily to our property acquisitions. The table below sets forth the percentage of our annualized rental revenue derived from that industry:
|
| % of Annualized |
| ||
|
| March 31, |
| December 31, |
|
Total Portfolio |
| 41.7 | % | 39.9 | % |
Baltimore/Washington Corridor |
| 57.3 | % | 57.4 | % |
Northern Virginia |
| 49.1 | % | 45.5 | % |
Southern Maryland |
| 92.9 | % | N/A |
|
29
We expect the percentage of our portfolio annualized rental revenue derived from the United States defense industry will continue to increase during the remainder of 2004.
Revenues from real estate operations and property operating expenses
We typically view our changes in revenues from real estate operations and property operating expenses as being comprised ofcomprising three main components:
• Changes attributable to the operations of properties owned and 100% operational throughout the two periods being compared. We define these as changes from “Same-Office Properties.” For example, when comparing the thirdfirst quarters of 20022003 and 2003,2004, Same-Office Properties would be properties owned and 100% operational from JulyJanuary 1, 20022003 through September 30, 2003.March 31, 2004.
28
• Changes attributable to operating properties acquired during or in between the two periods being compared and newly-constructed properties that were placed into service and not 100% operational throughout the two periods being compared. We define these as changes from “Property Additions.”
• Changes attributable to properties sold during or in between the two periods being compared.compared that are not reported as discontinued operations. We define these as changes from “Sold Properties.”
Comparison of the three months ended September 30, 2003 and 2002
The table below sets forth the components of our changes in revenues from real estate operations and property operating expenses (dollars in thousands):
|
| Property |
|
|
| Sold |
| Other |
| Total |
| |||||||||||||||||||||||||
|
| Property |
| Same-Office Properties |
| Sold |
| Other |
| Total |
|
|
| Dollar |
| Percentage |
|
|
| |||||||||||||||||
|
| Dollar |
| Dollar |
| Percentage |
| Dollar |
| Dollar |
| Dollar |
|
|
|
|
|
| Other | Total | ||||||||||||||||
Revenues from real estate operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Rental revenue |
| $ | 5,681 |
| $ | 1,592 |
| 5 | % | $ | (832 | ) | $ | — |
| $ | 6,441 |
|
| $ | 7,039 |
| $ | 789 |
| 2 | % | $ | (623 | ) | $ | — | $ | 7,205 | ||
Tenant recoveries and other revenue |
| 815 |
| 180 |
| 5 | % | (42 | ) | (11 | ) | 942 |
|
| 669 |
| (296 | ) | (6 | )% | (71 | ) | (54 | ) | 248 |
| ||||||||||
Total |
| $ | 6,496 |
| $ | 1,772 |
| 5 | % | $ | (874 | ) | $ | (11 | ) | $ | 7,383 |
|
| $ | 7,708 |
| $ | 493 |
| 1 | % | $ | (694 | ) | $ | (54 | ) | $ | 7,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Property operating expenses |
| $ | 1,593 |
| $ | (54 | ) | (1 | )% | $ | (411 | ) | $ | (47 | ) | $ | 1,081 |
|
| $ | 1,686 |
| $ | 56 |
| 0 | % | $ | (297 | ) | $ | (60 | ) | $ | 1,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Number of operating properties |
| 13 |
| 102 |
| N/A |
| 2 |
| N/A |
| 117 |
| |||||||||||||||||||||||
Straight-line rental revenue adjustments included in rental revenue |
| $ | 486 |
| $ | (852 | ) | N/A |
| $ | (12 | ) | $ | — |
| $ | (378 | ) | ||||||||||||||||||
Amortization of origination value of leases on acquired properties included in rental revenue |
| $ | (379 | ) | $ | 139 |
| N/A |
| $ | — |
| $ | — |
| $ | (240 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Number of operating properties included in component category |
| 19 |
| 109 |
| N/A |
| 1 |
| N/A |
| 129 |
|
(1) Includes 1116 acquired properties and twothree newly-constructed properties.
As the table above indicates, our total increase in revenues from real estate operations and property(2) Includes sold operating expenses was attributable primarily to the Property Additions.
The increase in rental revenue from the Same-Office Properties includes the following:
•increase of $878,000 in net revenue from the early termination of leases; this increase includes $1.4 million attributable to a lease terminated in September 2003. To explain further, when tenants terminate their lease obligations prior to the end of the agreed lease term, they typically pay a fee to break these obligations. We recognize such fees as revenue at the time of the lease terminations and write off any (1) deferred rents receivable and (2) deferred revenue and deferred assetsproperties that are amortizable into rental revenue associated with the leases against the lease termination fee revenue; the resulting net amount is the net revenue from the early termination of the leases;
•increase of $355,000 relating to a building that was 100% occupied in the three months ended September 30, 2003 but vacant most of the three months ended September 30, 2002; and
•increase of $314,000 relating to revenue recognized according to SFAS 141 (excluding amounts recorded in connection with the early termination of leases).not reported as discontinued operations.
Our interest expense decreased 1% due primarily to a decrease in our weighted average interest rates from 6.5% to 5.7%, offset by the effect of a 12.8% increase in our average outstanding debt balance resulting from our 2002 and 2003 acquisition and construction activities. Of the $2.1 million increase in our depreciation and other amortization expense, $1.5 million was attributable to the Property Additions.
Income from service operations increased $727,000 due mostly to additional profit recognized on two construction management contracts. We expect that we will continue to recognize higher profit from construction management contracts than we have historically, although we do not expect such profits to be as high in future three month periods as they were in the three months ended September 30, 2003.
General and administrative expenses increased $1.1 million or 138% due primarily to the following:
29
•$652,000 associated with common share awards due mostly to a lengthening of the awards’ vesting schedule completed during the three months ended September 30, 2002. The lengthening of the vesting schedule decreased the number of shares vesting in 2002, which in turn decreased our common share awards expense in that period; and
•$174,000 due to additional employee bonus expense.
Gain on sales of real estate decreased $773,000 due primarily to the sale of two land parcels that took place during the three months ended September 30, 2002.
Net income available to common shareholders and basic and diluted earnings per common share increased due primarily to the net effect of the changes discussed above, offset somewhat by a $624,000 increase in preferred share dividends resulting from the Series G Preferred Shares issued in August 2003.
Comparison of the nine months ended September 30, 2003 and 2002
Our properties are concentrated in the Mid-Atlantic region of the United States, a region that encountered snowfall of record proportions during the nine months ended September 30, 2003. The large snowfall required us to incur higher than normal snow removal expenses, which increased our overall property operating expenses. While the increased property expenses resulted in higher tenant recovery revenue, the structures of many of our leases do not enable us to recover the total increase in property operating expenses from tenants, and we do not recover expenses to the extent that buildings are vacant.
The table below sets forth the components of our changes in revenues from real estate operations and property operating expenses (dollars in thousands):
|
| Property |
| Same-Office Properties |
| Sold |
| Other |
| Total |
| |||||||
|
| Dollar |
| Dollar |
| Percentage |
| Dollar |
| Dollar |
| Dollar |
| |||||
Revenues from real estate operations |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Rental revenue |
| $ | 16,770 |
| $ | 1,166 |
| 1 | % | $ | (2,343 | ) | $ | — |
| $ | 15,593 |
|
Tenant recoveries and other revenue |
| 2,358 |
| 986 |
| 9 | % | (107 | ) | 52 |
| 3,289 |
| |||||
Total |
| $ | 19,128 |
| $ | 2,152 |
| 2 | % | $ | (2,450 | ) | $ | 52 |
| $ | 18,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property operating expenses |
| $ | 5,287 |
| $ | 1,701 |
| 6 | % | $ | (991 | ) | $ | (63 | ) | $ | 5,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Number of operating properties |
| 22 |
| 93 |
| N/A |
| 2 |
| N/A |
| 117 |
|
(1) Includes 17 acquired properties and five newly-constructed properties.
As the table above indicates, our total increase in revenues from real estate operations and property operating expenses was attributable primarily to the Property Additions. However,Included in the total revenuesincrease in rental revenue of the Property Additions is $1.5 million in net revenue from these properties were adversely affected by property vacancies and the slow lease-upearly termination of newly-constructed buildings, conditions that we believe were attributableleases. To explain further, when tenants terminate their lease obligations prior to the economic slowdown.end of the agreed lease terms, they typically pay fees to break these obligations. We recognize such fees as revenue and write off against such revenue any (1) deferred rents receivable and (2) deferred revenue and deferred assets that are amortizable into rental revenue associated with the leases; the resulting net amount is the net revenue from the early termination of the leases.
30
The increase in rental revenue from the Same-Office Properties includes the following:
• net increase of $832,000$1.2 million in connection with three buildingsfour properties that experienced significant changesincreases in occupancy between the two periods; and
• increasedecrease of $467,000 relating to$286,000 in net revenue recognized according to SFAS 141 (excluding amounts recorded in connection withfrom the early termination of leases).leases.
Tenant recoveries and other revenue from the Same-Office Properties increased primarily due to the increase in property operating expenses described below.
30
The increase in the Same-Office Properties’ property operating expenses wasincluded the following:
•increase of $462,000, or 43%, in property labor costs due mostly to (1) higher than normal hours billed to properties due in part to projects underway during the current period and (2) an increase in billable rates of repairs and maintenance employees. We expect that this increasing trend in property labor costs may diminish later in 2004 due to a normalization of billable hours and a potential downward adjustment in the billable rates of repairs and maintenance salaries;
•increase of $231,000, or 9.9%, in real estate taxes due primarily to an increase in the assessed value of $1.5 million,many of our properties. This increasing trend was present across all of our regions. While we continue to monitor the reasonableness of the increase in the assessed value of our properties in determining whether appeals are necessary, we expect that this increasing trend will continue. We also expect that the rates used by state and local municipalities to assess real estate taxes on our properties may increase in the future in response to budgetary shortfalls in those municipalities;
•increase of $228,000, or 852%15.5%, in cleaning expenses; much of this increase is due to cleaning costs required in the current period at properties that were not occupied during the prior period;
•decrease of $730,000, or 38.5%, in snow removal due to higher snowfall in 2003.the prior period; and
•decrease of $460,000, or 100%, in expense associated with doubtful or uncollectible receivables. Most of this decrease was attributable to a large expense associated with a particular tenant in the prior period coupled with virtually no expense in the current period.
We expect that the cost of utility services for our properties may increase within the next year as a result of energy de-regulation expected to take place in Maryland during mid-2004. Should these increases in expenses occur, we expect that we will be able to recover a significant portion of the expense increases through increased tenant recovery revenue in the short term and increased rental revenue in the long term.
Interest expense and amortization of deferred financing costs
Our interest expense and amortization of deferred financing costs increased 9% due primarily to$397,000, or 3.7%, which included a 17.3%$270,000 increase in ouramortization of deferred financing costs attributable in part to the early extinguishment of debt in connection with the initial borrowing under a new Revolving Credit Facility (see section entitled “Investing and financing activities during the three months ended March 31, 2004”). Our average outstanding debt balance increased by 6% resulting from our 20022003 and 20032004 acquisition and constructiondevelopment activities, offset by a decrease in ourrepayments of debt using proceeds from offerings that took place during 2003. Our weighted average interest rates decreased from 6.5%6.0% to 5.9%5.8%. The $4.8For additional information regarding our mortgage and other loans payable, please refer to the sections entitled “Analysis of indebtedness” and “Quantitative and Qualitative Disclosures About Market Risk.”
Depreciation and amortization
Of the $2.3 million increase in our depreciation and other amortization expense, $1.8 million was attributable primarily to the Property Additions.
Income (loss) from service operations
After incurring a loss of $81,000 in the three months ended March 31, 2003, our service operations generated income of $742,000 in the three months ended March 31, 2004. This improvement can be attributed primarily to (1) a $404,000 increase in income from the heating and air conditioning services and controls division and (2) a $305,000 increase in income from the property management division. The improvement in income from the heating and air conditioning services and controls division is attributable
31
primarily to increased $759,000 duetime and materials billing activity from its service contract and controls product lines. Much of this activity is attributable to several large contracts; once these contracts are complete, additional contracts will need to be obtained to continue to maintain the activity level. As a result, there is a high level of uncertainty over whether the improvement in income from the division is a trend that will continue.
The increase in income from the property management division is attributable mostly to additional profit recognized on construction management contracts.(1) higher than normal hours billed per employee and (2) an increase in billable rates of repairs and maintenance employees. We expect that we will continuethis trend may diminish later in 2004 due to recognize higher profit from construction management contracts than we have historically.a normalization of billable hours per employee and a potential downward adjustment in the billable rates of repairs and maintenance employees.
General and administrative expenses
General and administrative expenses increased $726,000,$338,000, or 15%, which17%. This increase includes an increaseincreases of $507,000(1) $104,000 in expenses associated with common share awardsemployee restricted shares and (2) $82,000 in professional fees due mostlyprimarily to legal and other consulting services.
(Loss) gain on sales of real estate, excluding sales classified as discontinued operations
During the three months ended March 31, 2004, we recognized a $245,000 decrease to a lengtheninggain recognized on a prior year disposition of an investment in a real estate joint venture as a result of a change in the awards’ vesting schedule completed in 2002. The lengtheningsettlement negotiated between our joint venture partner and us. During the three months ended March 31, 2003, we recognized a $376,000 gain on the sale of the vesting schedule decreased the number of shares vesting in 2002, which in turn decreased our common share awards expense in that period.
two land parcels. Gain on sales of real estate for both periods also includes amortized gain from a building sale that occurred in 2002. Since our real estate sales activity is driven by transactions unrelated to our core operations, our gain on sales of real estate is subject to material fluctuation from period to period.
Minority interests
Interests in our Operating Partnership are in the form of preferred and common units. The line entitled “minority interests” on our Consolidated Statements of Operations includes primarily income before minority interests, income taxes, discontinued operations and cumulative effect of accounting change allocated to preferred and common units not owned by us; for the amount of this line attributable to preferred units versus common units, you should refer to our Consolidated Statements of Operations. Income is allocated to minority interest preferred unitholders equal to the priority return from the Operating Partnership to which they are entitled. Income is allocated to minority interest common unitholders based on the income earned by the Operating Partnership after allocation to preferred unitholders multiplied by the percentage of the common units in the Operating Partnership owned by those common unitholders.
As of March 31, 2004, we owned 100% of the outstanding preferred units and approximately 77% of the outstanding common units. The percentage of the Operating Partnership owned by minority interests decreased $1.3 millionfrom the three months ended March 31, 2003 to the three months ended March 31, 2004 due primarily to the gain on three land parcel salesfollowing:
•since we receive preferred units and common units in the prior period exceedingOperating Partnership each time we issue preferred shares and common shares, additional units were issued to us as we issued new shares during the gain on similar sales activitylast nine months of 2003 and the first three months of 2004;
•certain minority interest holders of common units exchanged their common units for our common shares; and
•we owned all of the preferred units in the current period.Operating Partnership during the last three years except for the Series C Preferred Units, which were owned by third parties until the Operating Partnership repurchased the units in June 2003.
32
Our income allocated to minority interest holders of preferred units decreased due to our repurchase of the Series C Preferred Units. Our changes in income allocated to minority interest holders of common units included the following:
•decrease attributable to our increasing ownership of common units and preferred units; and
•increase due to an increase in the Operating Partnership’s income before minority interests, income taxes and discontinued operations.
Income from discontinued operations
Income from discontinued operations increased due primarily to a gain recognized on the saleis composed entirely of aone operating office property that is includedwe sold in discontinued operations.March 2003. See Note 15 to the Consolidated Financial Statements for a summary of income from discontinued operations.
DuringAdjustments to net income to arrive at net income available to common shareholders
We completed the ninesale of two series of preferred shares in 2003. On February 11, 2004, the holder of our Series D Preferred Shares of beneficial interest converted the shares into 1,196,800 common shares. Preferred share dividends increased due to the dividend requirements of the two new series of preferred shares issued in 2003. This increase was offset somewhat by the decrease caused by the absence of the dividend requirements of the Series D Preferred Shares for most of the three months ended September 30, 2003,March 31, 2004.
We expect to redeem our Series B Preferred Shares of beneficial interest as early as July 15, 2004. When these shares are redeemed, we recognized an $11.2will recognize a $1.8 million decrease to net income available to common shareholders representing the excess of the repurchase price of the Series C Preferred Units over the sum of the recorded book value of the units and the accrued and unpaid returnpertaining to the unitholder. The repurchase oforiginal issuance costs we incurred on the Series C Preferred Units is discussed in the “Liquidity and Capital Resources” section below.shares.
NetDiluted earnings per common share
Diluted earnings per common share on net income available to common shareholders and basic and diluteddecreased due primarily to income derived from discontinued operations in the prior period, which is discussed above. Diluted earnings per common share decreasedon income before discontinued operations increased due primarily to the repurchase of the Series C Preferred Units, offset by the net effect of our growth in income before discontinued operations exceeding the items discussed above.effect of our growth in additional common shares and common share equivalents outstanding.
Liquidity and Capital Resources
Cash providedand cash equivalents
Our cash and cash equivalents balance totaled $9.5 million as of March 31, 2004 and December 31, 2003. While the balance of our cash and cash equivalents did not change significantly, the balances that we carry as of a point in time can vary significantly; this is due in part to the inherent variability of the cash needs of our development activities. 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.
Operating activities
We generated most of our cash from the operations of our properties. Most of the amount by which our revenues from real estate operations exceeded property operating expenses was cash flow; we applied most of this cash flow towards interest expense, scheduled principal amortization on mortgage loans, dividends to our shareholders, distributions to minority interest holders of preferred and common units in the Operating Partnership, capital improvements and leasing costs for our operating properties and general and administrative expenses.
33
Our cash flow from operations determined in accordance with GAAP increased $2.3 million or 15.1% when comparing the three months ended March 31, 2004 and 2003; this increase is attributable primarily to the additional cash flow from operations generated by our primary sourcenewly-acquired and newly-constructed properties. The change in our cash flow from operations included a $3.5 million decrease in accounts receivable from December 31, 2003 to March 31, 2004 due primarily to significant billings to tenants in December 2003 for leasehold improvements that were repaid in the current period; we consider this increase to be associated primarily with the significance of liquiditythe improvements for which we billed and the timing of such billings and collections and not a change in trend for the amount of receivables we expect to fund dividendscarry in the future. Our cash flow from operations for the three months ended March 31, 2004 included a $6.7 million decrease in accounts payable and distributions, pay debt serviceaccrued expenses from December 31, 2003 to March 31, 2004 which included the following: (1) decreased payables associated with construction services performed for third parties brought about by an increase in construction services activity and fund working capital requirements.the timing of our payments; and (2) decreased accrual associated with common shares issued to employees that vest in January 2004 due to the vesting of such shares. We expect to continue to use cash flow provided by operations to meet our short-term capital needs, including all property operating expenses, general and administrative expenses, debt service, dividend and distribution requirementsdistributions and recurring capital improvements and leasing commissions.costs. We do not anticipate borrowing to meet these requirements. Factors that could negatively affect our ability to generate cash from operations in
Investing and financing activities during the future are discussed in our 2002 Annual Report on Form 10-K.three months ended March 31, 2004
We historically haveacquired nine office properties totaling 559,899 square feet and two parcels of land for $75.2 million. These acquisitions were financed our long-term capital needs, including property acquisition and construction activities, through a combination ofusing the following:
• cash$53.0 million in borrowings from operations;our Revolving Credit Facility;
• $21.2 million from borrowings from our secured revolving credit facility with Bankers Trust Company (the “Revolving Credit Facility”);
•borrowings from newof assumed mortgage loans;
•equity issuances of common shares, preferred shares, common units and/or preferred units;
•contributions from outside investors into real estate joint ventures; and
• cash reserves for the balance.
We had construction activities underway on four office properties totaling 426,538 square feet that were 64% pre-leased; one of these properties was owned by a real estate joint venture that was unconsolidated until March 31, 2004 (see Note 5 to the Consolidated Financial Statements) and was 48% operational as of the end of the period. Costs incurred on these properties through March 31, 2004 totaled approximately $34.0 million, of which $8.1 million was incurred in 2004 (excluding costs incurred by the one real estate joint venture prior to becoming a consolidated real estate joint venture). We have a construction loan facility in place totaling $24.7 million to finance the construction of two of these properties; borrowings under these facilities totaled $10.2 million at March 31, 2004. The remaining costs were funded using approximately $4.4 million in contributions from real estate joint venture partners and the balance using primarily borrowings from our Revolving Credit Facility and cash reserves.
34
The table below sets forth the major components of our real estate property additions, excluding additions related to the consolidation of real estate joint ventures in connection with our adoption of FIN 46R, which is described below (in thousands):
|
| For the three months ended |
| |
Acquisitions |
| $ | 71,202 |
|
Construction and development |
| 14,395 |
| |
Tenant improvements on operating properties |
| 2,268 | (1) | |
Capital improvements on operating properties |
| 836 |
| |
|
| $ | 88,701 |
|
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction and development.
Our investments in unconsolidated real estate joint ventures decreased $4.2 million due to our consolidation as of March 31, 2004 of Gateway 70 LLC, MOR Forbes 2 LLC and MOR Montpelier 3 LLC in conjunction with our adoption of FIN 46R for those joint venture investments. For additional information regarding our investments in unconsolidated real estate joint ventures, you may refer to the section below entitled “Off-Balance Sheet Arrangements” and Note 5 to our Consolidated Financial Statements.
On March 10, 2004, we obtained a new Revolving Credit Facility with a number of lenders led by Wachovia Bank, National Association. The terms of the new Revolving Credit Facility are discussed in the section below entitled “Analysis of indebtedness.” We used proceeds from our initial borrowing under this facility to (1) repay the $27.8 million balance that was outstanding under our Revolving Credit Facility with Bankers Trust Company and (2) refinance $95.2 million in other mortgage loans.
During the three months ended March 31, 2004, we borrowed $21.3 million under mortgage and other loans payable, excluding our Revolving Credit Facility; the proceeds from these borrowings were used primarily to fund acquisitions.
Analysis of cash flow associated with investing and financing activities
Our net cash flow used in investing activities increased $68.2 million when comparing the three months ended March 31, 2004 and 2003. This increase was due primarily to the following:
•$33.6 million increase in purchases of and additions to commercial real estate; this increase is due primarily to an increase in property acquisitions. Our ability to locate and complete acquisitions is dependent on numerous variables and, as a result, is inherently subject to significant fluctuation from period to period; while we expect to continue to acquire properties in the future, we are unable to predict whether the increasing acquisition volume is a trend that will continue; and
•$37.0 million decrease in proceeds from sales of properties. We generally do not acquire properties with the intent of selling them. We generally sell properties when we believe that most of the earnings growth potential in such properties has been realized or determine that a property no longer fits within our strategic plans due to its type and/or location. Since our real estate.estate sales activity is driven by transactions unrelated to our core operations, our proceeds from sales of properties is subject to material fluctuation from period to period and, therefore, we do not believe that the change described above is necessarily indicative of a trend.
Our cash flow provided by financing activities increased $65.6 million when comparing the three months ended March 31, 2004 and 2003. This increase included the following:
35
•$161.6 million increase in proceeds from mortgage and other loans payable; this increase is due primarily to borrowings under our new Revolving Credit Facility that were used to fund our (1) loan refinancings and repayment of the Revolving Credit Facility with Bankers Trust Company and (2) property acquisitions; and
•$87.9 million increase in repayments of mortgage and other loans payable; this increase is attributable primarily to the additional repayments of existing loans using borrowings under our new Revolving Credit Facility.
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 2003 Annual Report on Form 10-K. However, we did change our accounting for our real estate joint ventures, as described below.
All of our real estate joint venture investments as of March 31, 2004 can be classified into one of the following three categories:
•Externally-managed construction joint ventures (the “Externally-Managed JVs”). These joint ventures construct buildings to either be sold to third-parties or purchased by us.
•Construction joint ventures managed by us (the “Internally-Managed JVs”).
•Operating joint ventures to which we contribute an office property to partially dispose of our interest (the “Disposition JV”).
These categories are described in further detail in our 2003 Annual Report on Form 10-K. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). In December 2003, the FASB issued FIN 46R, which replaced FIN 46 and clarified ARB 51. Effective March 31, 2004, we adopted FIN 46R for our joint ventures created prior to February 1, 2003. As a result of this adoption, we began using the consolidation method of accounting for all of our Externally-Managed JVs and Internally-Managed JVs. See Note 3 and Note 5 to our Consolidated Financial Statements for additional information regarding FIN 46, FIN 46R and the effect on our accounting for these joint ventures.
36
Analysis of indebtedness
Mortgage and other loans payable at March 31, 2004 consisted of the following (dollars in thousands):
Revolving Credit Facility, LIBOR+1.25 to 1.55%, maturing March 2007 (1) |
| $ | 174,000 |
|
Teachers Insurance and Annuity Association of America, 6.89%, maturing November 2008 |
| 76,791 |
| |
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 |
| 55,846 |
| |
Transamerica Occidental Life Insurance Company, 5.36%, maturing December 2010 |
| 51,751 |
| |
Metropolitan Life Insurance Company, 6.91%, maturing June 2007 |
| 33,100 |
| |
Teachers Insurance and Annuity Association of America, 7.0%, maturing March 2009 |
| 33,034 |
| |
Allstate Life Insurance Company, 5.6%, maturing January 2013 |
| 28,749 |
| |
State Farm Life Insurance Company, 6.51%, maturing August 2012 |
| 27,012 |
| |
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 (1) |
| 25,974 |
| |
Transamerica Life Insurance and Annuity Company, 7.18%, maturing August 2009 |
| 25,478 |
| |
State Farm Life Insurance Company, 7.9%, maturing April 2008 |
| 24,910 |
| |
Transamerica Occidental Life Insurance Company, 7.3%, maturing May 2008 |
| 20,261 |
| |
Manufacturers and Traders Trust Company, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 20,198 |
| |
Allstate Life Insurance Company, 6.93%, maturing July 2008 |
| 20,082 |
| |
Allstate Life Insurance Company, 5.6%, maturing January 2013 |
| 19,166 |
| |
LaSalle Bank National Association, 6.25%, maturing December 2012 (4) |
| 17,489 |
| |
Transamerica Life Insurance and Annuity Company, 8.3%, maturing October 2005 |
| 16,816 |
| |
Northwestern Mutual Life Insurance Company, 7.0%, maturing February 2010 |
| 15,417 |
| |
Allstate Life Insurance Company, 7.14%, maturing September 2007 |
| 15,368 |
| |
Manufacturers and Traders Trust Company, LIBOR + 1.75%, maturing January 2005 (2) |
| 14,660 |
| |
Jolly Knolls, LLC, 3%, maturing December 2007 (5) |
| 13,774 |
| |
IDS Life Insurance Company, 7.9%, maturing March 2008 |
| 13,030 |
| |
Citizens Bank, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 11,881 |
| |
Manufacturers and Traders Trust Company, LIBOR +1.75%, maturing April 2005 (6) |
| 10,750 |
| |
Manufacturers and Traders Trust Company, LIBOR + 1.85%, maturing April 2005 (6)(7) |
| 8,353 |
| |
Branch Banking and Trust, LIBOR + 1.75%, maturing November 2004 (1)(8) |
| 8,197 |
| |
Provident Bank, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 7,921 |
| |
Teachers Insurance and Annuity Association of America, 8.35%, maturing October 2006 |
| 7,575 |
| |
Manufacturers and Traders Trust Company, LIBOR + 1.75%, maturing September 2005 (2)(9) |
| 6,760 |
| |
Jolly Knolls, LLC, 3%, maturing December 2007 (10) |
| 6,745 |
| |
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 |
| 5,413 |
| |
Citibank Federal Savings Bank, 6.93%, maturing July 2008 |
| 4,781 |
| |
Riggs Bank National Association, 8.625%, maturing June 2009 (11) |
| 3,722 |
| |
Branch Banking and Trust, LIBOR + 2.2%, maturing May 2004 (12) |
| 3,410 |
| |
Seller loan, 5.95%, maturing May 2007 |
| 1,341 |
| |
|
| $ | 829,755 |
|
(1) May be extended for a one-year period, subject to certain conditions.
(2) May be extended for two six-month periods, subject to certain conditions
(3) Total additional borrowings of up to $10,500 under these three loans may be available to fund tenant improvements and leasing commissions at a later date.
(4) Note with a face value of $16,757, valued using a rate of 5.67%.
(5) Note with a face value of $14,746, discounted using a rate of 6.0%. The lender is an affiliate of Constellation Real Estate, Inc.
(6) May be extended for a six-month period, subject to certain conditions.
(7) Construction loan with a commitment of $10,125.
(8) Construction loan with a commitment of $14,100.
(9) Construction loan with a commitment of $20,000.
(10) Note with a face value of $7,235, discounted using a rate of 5.92%. The lender is an affiliate of Constellation Real Estate, Inc.
(11) Note with a face value of $3,362 valued using a rate of 4.71%.
(12) Construction loan with a commitment of $4,707.
37
We have guaranteed the repayment of $303.9 million of the mortgage and other loans set forth above.
Two non-GAAP measures that we use in managing our financing policy are debt service coverage ratio (defined as various measures of results of operations divided by the sum of (1) interest expense on continuing and discontinued operations and (2) scheduled principal amortization on mortgage loans for continuing and discontinued operations) and fixed charge coverage ratio (defined as various measures of results of operations divided by the sum of (a) interest expense on continuing and discontinued operations, (b) dividends on preferred shares and (c) distributions on preferred units in our Operating Partnership not owned by us). We believe that debt service coverage ratio is a useful measure in evaluating the relationship of our earnings to the total cash flow requirements of our loans associated with operating properties. We believe that fixed charge coverage ratio is a useful measure in evaluating the relationship of our earnings to the cash flow requirements of (1) interest expense on loans associated with our operating properties and (2) dividends to our preferred equity holders. The table below reconciles the denominators for debt service coverage ratio and fixed charge coverage ratio to interest expense, the most directly comparable GAAP measure, for the three months ended March 31, 2004 (in thousands):
Interest expense from continuing operations |
| $ | 10,262 |
|
Scheduled principal amortization on mortgage and other loans |
| 6,618 |
| |
Denominator for debt service coverage ratio |
| 16,880 |
| |
Less: scheduled principal amortization on mortgage and other loans |
| (6,618 | ) | |
Preferred share dividends |
| 4,456 |
| |
Denominator for fixed charge coverage ratio |
| $ | 14,718 |
|
One non-GAAP measure of earnings that is useful in evaluating our debt service coverage and fixed charge coverage is earnings before interest, income taxes, depreciation and amortization (“EBITDA”). EBITDA is net income adjusted for the effects of interest expense, depreciation and amortization, income taxes, gain on sales of real estate (excluding sales of non-operating properties and development services provided on operating properties) and minority interests. We believe that EBITDA is an important measure of performance for a REIT because it provides a further tool to evaluate our ability to incur and service debt and to fund dividends and other cash needs. We believe that net income is the most directly comparable GAAP measure to EBITDA. The table below sets forth our computation of EBITDA for the three months ended March 31, 2004 (in thousands):
Net income |
| $ | 8,993 |
|
Interest expense from continuing operations |
| 10,262 |
| |
Amortization of deferred financing costs |
| 859 |
| |
Income tax expense, gross |
| 200 |
| |
Depreciation of furniture, fixtures and equipment |
| 98 |
| |
Real estate-related depreciation and amortization |
| 10,261 |
| |
Gain on sale of depreciated real estate properties, excluding development portion |
| (23 | ) | |
Minority interests |
| 1,405 |
| |
EBITDA |
| $ | 32,055 |
|
The timing and nature (fixed-rate versus variable-rate) of the scheduled maturities on our debt are discussed in the section entitled “Quantitative and Qualitative Disclosures about Market Risk.”
We often use our Revolving Credit Facility initially to finance much of our investing and financing activities. We then pay down our Revolving Credit Facility using proceeds from long-term borrowings
38
collateralized by our properties as attractive financing conditions arise and equity issuances as attractive equity market conditions arise.
Our Revolving Credit Facility from the beginning of the periods reported herein until March 10, 2004 was with Bankers Trust Company. However, on March 10, 2004, we obtained a new Revolving Credit Facility with a group of lenders headed by Wachovia Bank, National Association. The new Revolving Credit Facility with Wachovia Bank, National Association has a maximum principal of $300.0 million, a three-year term (with an additional one-year extension available) and a variable interest rate based on the 30-day LIBOR rate plus 1.25% to 1.55% (as determined by our leverage levels at different points in time). The facility has a fee of 0.125% to 0.25% on the amount of the credit facility that is unused. Amounts available under thethis Revolving Credit Facility are generally computed based on 65%60% of the appraised value of properties pledged as collateral.unencumbered asset pool value. As of November 7, 2003,May 4, 2004, the maximum amount available under our Revolving Credit Facility was $122.9$235.1 million, of which $61.9$77.1 million was unused.
In 2003, we entered intoWe had a secured revolving credit facility with Wachovia Bank, National Association for a maximum principal amount of $25.0 million.million that was repaid using proceeds from the new Revolving Credit Facility.
Certain of our mortgage loans require that we comply with a number of restrictive financial covenants, including leverage ratio, adjusted consolidated net worth, minimum property interest coverage, minimum property hedged interest coverage, minimum consolidated interest coverage, minimum fixed charge coverage, minimum debt service coverage, maximum consolidated unhedged floating rate debt and maximum consolidated total indebtedness. As of November 7, 2003, $6.1 million was unused, although such amount is not available for borrowing until additional properties are pledged as collateral.March 31, 2004, we were in compliance with these financial covenants.
Off-Balance Sheet Arrangements
This section describes significant changes in our off-balance sheet arrangements from those described in the section entitled “Off-Balance Sheet Arrangements” in our 2002 Annual Report on Form 10-K. We own real estate through joint ventures when suitable equity partners are available at attractive terms. Each of our real estate joint ventures has a two-member management committee that is responsible for making major decisions (as set forth in the joint venture agreement), and we control one of the management committee positions in each case.
During the nine months ended September 30, 2003, we acquired a 20% interest in a construction joint venture that is managed by us, bringing our total investments in such joint ventures to two as of period end. The primary purpose of this joint venture structure is to enable us to leverage most of the equity requirements and reduce our risk in the project’s construction. We have the option to acquire our joint venture partner’s interest in this new joint venture for a pre-determined purchase price over a limited period of time. The earliest date that we can exercise this purchase option is September 1, 2004 for a purchase price of $4.9 million. If we do not elect to exercise this purchase option, our partner can take control of the joint venture’s management committee by appointing an additional position to the committee. We could be required to purchase our partner’s interest for a minimum purchase price of $4.9 million in the event that the joint venture defaults on its obligations as landlord or does not meet established construction completion timeframes. We serve as the sole guarantor for repayment of the joint venture’s construction loan, which has a total commitment of $20.0 million but from which no funds were advanced as of September 30, 2003. We also have a unilateral obligation to make additional capital contributions of up to $4.5 million if construction overruns or certain other events occur. We earn construction, property management and guaranty fees from this joint venture.
During the nine months ended September 30, 2003, we contributed an office building into a joint venture in exchange for cash and a 20% interest in the joint venture. This joint venture enabled us to dispose of most of our investment in a property that we believe realized most of its earnings growth potential. We manage the joint venture’s property operations and any required construction projects and earn fees for these services. Our joint venture partner has preference in receiving distributions of cash flows for a defined return; once our partner receives its defined return, we are entitled to receive distributions for a defined return and, once we receive that return, remaining distributions of cash flows are allocated based on percentages defined in the joint venture agreement.
3239
Mortgage and other loans payable at September 30, 2003 consisted of the following:
Teachers Insurance and Annuity Association of America, 6.89%, maturing November 2008 |
| $ | 77,697 |
|
Bankers Trust Company, Revolving Credit Facility, LIBOR + 1.75%, maturing March 2004 (1) |
| 61,000 |
| |
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 |
| 56,391 |
| |
KeyBank National Association, LIBOR + 2.0%, maturing July 2004 (2) |
| 45,000 |
| |
KeyBank National Association, LIBOR + 1.75%, maturing November 2004 |
| 36,000 |
| |
Metropolitan Life Insurance Company, 6.91%, maturing June 2007 |
| 33,381 |
| |
Teachers Insurance and Annuity Association of America, 7.0%, maturing March 2009 |
| 33,318 |
| |
Allstate Life Insurance Company, 5.6%, maturing January 2013 |
| 29,033 |
| |
State Farm Life Insurance Company, 6.51%, maturing August 2012 |
| 27,253 |
| |
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 (1) |
| 26,218 |
| |
Transamerica Life Insurance and Annuity Company, 7.18%, maturing August 2009 |
| 25,705 |
| |
State Farm Life Insurance Company, 7.9%, maturing April 2008 |
| 25,115 |
| |
Transamerica Occidental Life Insurance Company, 7.3%, maturing May 2008 |
| 20,441 |
| |
Allstate Life Insurance Company, 6.93%, maturing July 2008 |
| 20,267 |
| |
Manufacturers and Traders Trust Company, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 20,198 |
| |
Allstate Life Insurance Company, 5.6%, maturing January 2013 |
| 19,356 |
| |
Wachovia Bank, National Association, LIBOR + 1.9%, maturing January 2005 (4) |
| 18,900 |
| |
Jolly Knolls, LLC, 3%, maturing December 2007 (5) |
| 17,241 |
| |
Transamerica Life Insurance and Annuity Company, 8.3%, maturing October 2005 |
| 16,953 |
| |
KeyBank National Association, LIBOR + 2.0%, maturing August 2004 |
| 16,000 |
| |
Northwestern Mutual Life Insurance Company, 7.0%, maturing February 2010 |
| 15,619 |
| |
Allstate Life Insurance Company, 7.14%, maturing September 2007 |
| 15,503 |
| |
Allfirst Bank, LIBOR + 1.75%, maturing January 2005 (2) |
| 14,780 |
| |
IDS Life Insurance Company, 7.9%, maturing March 2008 |
| 13,137 |
| |
Bank of America, LIBOR + 1.75%, maturing December 2003 (6) |
| 12,776 |
| |
SunTrust Bank, LIBOR + 1.5%, maturing January 2004 (7) |
| 11,920 |
| |
Citizens Bank, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 11,881 |
| |
Allfirst Bank, LIBOR +1.75%, maturing April 2004 |
| 10,834 |
| |
Provident Bank, LIBOR + 1.85%, maturing January 2005 (2)(3) |
| 7,921 |
| |
Teachers Insurance and Annuity Association of America, 8.35%, maturing October 2006 |
| 7,644 |
| |
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 |
| 5,525 |
| |
Citibank Federal Savings Bank, 6.93%, maturing July 2008 |
| 4,825 |
| |
Seller loan, 5.95%, maturing May 2007 |
| 1,466 |
| |
|
| $ | 759,298 |
|
(1) May be extended for a one-year period, subject to certain conditions.
(2) May be extended for two six-month periods, subject to certain conditions
(3) Total additional borrowings of up to $10,500 under these three loans may be available to fund tenant improvements and leasing commissions at a later date.
(4) Individual borrowings under this line of credit have one-year maturities.
(5) Note with a face value of $18,433, discounted using a rate of 6%. The lender is an affiliate of Constellation Real Estate, Inc.
(6) Construction loan with a total commitment of $14,000.
(7) May be extended for a six-month period, subject to certain conditions.
We have guaranteed the repayment of $277.7 million of the mortgage and other loans set forth above.
Tabular Disclosure of Contractual Obligationsobligations
The following table summarizes certain of our material contractual cash obligations associated with investing and financing activities as of September 30, 2003March 31, 2004 (in thousands):
33
|
| For the Periods Ended December 31, |
|
|
| |||||||||||
|
| 2003 |
| 2004 to 2005 |
| 2006 to 2007 |
| Thereafter |
| Total |
| |||||
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage loans payable (1) |
| $ | 15,341 |
| $ | 322,511 |
| $ | 139,299 |
| $ | 282,147 |
| $ | 759,298 |
|
Acquisitions of properties (2) |
| 9,013 |
| — |
| — |
| — |
| 9,013 |
| |||||
Capital lease obligations (3) |
| 9 |
| 45 |
| 3 |
| — |
| 57 |
| |||||
Operating leases (3) |
| 323 |
| 2,329 |
| 1,174 |
| 32,093 |
| 35,919 |
| |||||
Total contractual cash obligations |
| $ | 24,686 |
| $ | 324,885 |
| $ | 140,476 |
| $ | 314,240 |
| $ | 804,287 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other commitments (4) |
|
|
|
|
|
|
|
|
|
|
| |||||
Guarantees of joint venture loans (5) |
| $ | — |
| $ | 15,711 |
| $ | — |
| $ | — |
| $ | 15,711 |
|
|
| For the Periods Ended December 31, |
|
|
| ||||||||||||
Contractual obligations (1)(8) |
| 2004 |
| 2005 to 2006 |
| 2007 to 2008 |
| Thereafter |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage loans payable (2) |
| $ | 47,439 |
| $ | 189,830 |
| $ | 396,306 |
| $ | 196,180 |
| $ | 829,755 |
| |
Acquisitions of properties (3) |
| 30,100 |
| — |
| — |
| — |
| 30,100 |
| ||||||
New construction and development contracts (4) |
| 56,869 |
| — |
| — |
| — |
| 56,869 |
| ||||||
Third-party construction and development contracts (5) |
| 20,538 |
| — |
| — |
| — |
| 20,538 |
| ||||||
Capital expenditures for operating properties (6) |
| 4,085 |
| — |
| — |
| — |
| 4,085 |
| ||||||
Operating leases (7) |
| 915 |
| 1,903 |
| 792 |
| 31,711 |
| 35,321 |
| ||||||
Capital lease obligations (7) |
| 19 |
| 18 |
| — |
| — |
| 37 |
| ||||||
Other purchase obligations (7) |
| 496 |
| 1,045 |
| 900 |
| 2,234 |
| 4,675 |
| ||||||
Total contractual cash obligations |
| $ | 160,461 |
| $ | 192,796 |
| $ | 397,998 |
| $ | 230,125 |
| $ | 981,380 |
| |
(1) The contractual obligations set forth in this table generally exclude individual contracts that had a value of less than $20 thousand. 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) Our loan maturities in 20032004 include $12.8$25.9 million in December 2003August that is currentlywe expect to refinance using proceeds from the new Revolving Credit Facility with Wachovia Bank and $3.4 million in May that we intend to negotiate an extension. The remaining balance represents scheduled principal amortization payments that we expect to pay using cash flow from operations.
(3) Represents contractual obligations at March 31, 2004 to purchase (i) a building in Northern Baltimore County, Maryland, which was acquired on April 15, 2004 primarily using borrowings under negotiation for an extensionthe Revolving Credit Facility and (ii) two buildings in St. Mary’s County, Maryland, one of one year.which was acquired on May 5, 2004 and the other which we expect to acquire by July 2004. We expect this extension to be completed, but infunds these acquistions through the event that it is not, we would repay this loanassumption of mortgage loans and borrowings under the Revolving Credit Facility for the balance.
(4) Represents contractual obligations pertaining to new construction and development activities. We expect to finance these costs primarily using proceeds from our Revolving Credit Facility.Facility and construction loans.
(2)(5) Represents the second phase of a 108-acre land parcel thatcontractual obligations pertaining to projects for which we are under contract to acquire from Constellation Real Estate, Inc., a related party. We acquired the first phaseacting as construction manager on behalf of this project on January 24, 2003 for $21,339, of which $18,433 was financed by a seller-provided mortgage loan that we recorded at a discount of $1,516 (see Note 4 to the Consolidated Financial Statements).unrelated parties who are our clients. We expect to acquire the second phasebe reimbursed in full for these costs by November 2003our clients.
(6) Represents contractual obligations pertaining to capital expenditures for our operating properties. We expect to finance all of these costs using mostly proceedscash flow from an additional seller-provided mortgage loan.operations.
(3)(7) We expect to pay these items using cash generatedflow from operations.
(4)(8) Not included in this section are amounts contingently payable by us to acquire the membership interests of certain real estate joint venture partners or make additional contributionspartners. See Note 16 to fund construction overruns in joint ventures.
(5) We do not expect to have to fulfill our obligation as guarantorthe Consolidated Financial Statements for further discussion of joint venture loans.such amounts.
In addition to the commitments set forth above, we had contractual obligations to incur the following:
• tenant improvement costs on leases in place at September 30, 2003 that we expect to fund using cash flows from operations;
•preliminary construction costs on projects that we expect to finance initially using cash reserves and long-term using construction loan facilities expected to be obtained; and
•costs under construction projects that we manage for third parties; these third parties are under contract to reimburse us for these costs.
We had no other material contractual obligations as of September 30, 2003.
Investing and financing activities for the nine months ended September 30, 2003activity subsequent to March 31, 2004
During the nine months ended September 30, 2003,On April 14, 2004, we acquired seven office buildings totaling 993,479 square feet for $165.0 million and a parceltwo parcels of land located in Chantilly, Virginia for $21.3 million. These acquisitions were financed$4.0 million using the following:borrowings under our Revolving Credit Facility.
•$76.5 million fromOn April 15, 2004, we acquired a 178,764 square foot office property located in Northern Baltimore County, Maryland for a purchase price of $16,450 primarily using borrowings under new mortgage loans;our Revolving Credit Facility.
•$63.9 million in proceeds from the sale of
On April 23, 2004, we sold 2,750,000 common shares in an underwritten public offering;
•$33.0offering at a net price of $21.243 per share. We contributed the net proceeds totaling approximately $58.4 million from borrowings underto our Operating Partnership in exchange for 2,750,000 common units. We initially used the proceeds to pay down our Revolving Credit Facility;Facility. We intend to re-borrow most of the amount by which the Revolving Credit Facility was paid down to (1) repay a $26.0 million mortgage maturing in August 2004 and (2) redeem for $31.3 million our Series B Preferred Shares of beneficial interest.
40
On April 26, 2004, we sold for $9.6 million a land parcel in Columbia Maryland and a land parcel in Linthicum, Maryland. We issued to the buyer a $5.6 million mortgage loan bearing interest at 5.5% and a maturity date of July 2005; the balance of the acquisition was in the form of cash from the buyer that was applied to cash reserves for use in the real estate acquisition discussed below. Upon completion of the sale, we entered into an agreement with the buyer to lease the land parcels for an aggregate monthly payment of $10,000 beginning July 1, 2004 until April 30, 2005, at which time the rent reduces to $1,000 per month until 2079. The buyer in this transaction has an option to contribute the two land parcels into our Operating Partnership between January 1, 2005 and February 28, 2005 in exchange for extinguishment of the $5.6 million mortgage loan with us and $4.0 million in funds escrowedcommon units in our Operating Partnership; a unit price ranging from $24.45 to $25.90 will be used to determine the number of units in the Operating Partnership that the buyer would receive if the option were exercised. If the buyer in this transaction does not exercise its option to contribute the two land parcels into our Operating Partnership, we have the option to re-acquire the property anytime after March 15, 2005 for the same consideration described in the previous sentence.
On April 29, 2004, we acquired a parcel of land adjacent to an office property sales;that we own in Herndon, Virginia for a purchase price of $9.6 million using $4.0 million in proceeds from the transaction described above and
•cash reserves for the balance.
Other future cash requirements for investing and financing activities
As previously discussed, we had construction activities underway on four office properties totaling 426,538 square feet that were 64% pre-leased as of March 31, 2004. We estimate remaining costs to be incurred will total approximately $35.0 million upon completion of these properties, much of which we expect to incur in the remainder of 2004. We have $14.5 million remaining to be borrowed under construction loan facilities totaling $24.7 million for two of these properties; we expect to fund the remaining costs for these activities using primarily borrowings from our Revolving Credit Facility.
We intend to develop thetwo new parcelparcels of land acquired during 2003 and construct multiple buildingsoffice properties on the land. We expect that the land will require approximately $2.0$2.3 million in development-related costs over the next two years prior to commencement of construction activities on the buildings; we expect to fund these costs using a combination of cash flow from operations and proceeds from our Revolving Credit Facility. When
34
construction of the buildings is ready to commence, we expect to obtain construction loans to finance the construction activities. In addition, as construction of the buildings commences, we will need to pay down the portionportions of the existing loanloans on the property that isare attributable to the land where the construction is taking place (the total loan balance at September 30, 2003March 31, 2004 was $18.4$22.0 million, excluding a discountdiscounts recorded on the loan)loans); in addition to the scheduled amortization of the existing loans during the last nine months of 2004, we expect to fund these loan pay downs primarily using proceeds from our Revolving Credit Facility. While the timing of development and construction activities is dependent on the demand for office space in the real estate market, we expect to commence construction in 2004 on three buildings on this land parcel that will total approximately $59.0 million upon completion; we expect to fund $45.0 million of these costs with proceeds from new construction loans.
During the nine months ended September 30, 2003, a building totaling 123,743 square feet that was partially operational and 63% pre-leased at December 31, 2002 became 100% operational. We estimate that costs incurred for this project will total approximately $23.5 million upon completion of this project. Costs incurred on this project through September 30, 2003 totaled $22.0 million, of which $376,000 was incurred in the nine months ended September 30, 2003. We have a construction loan facility in place totaling $14.0 million to finance the construction of this project; borrowings under this facility totaled $12.8 million at September 30, 2003. We also used borrowings from our Revolving Credit Facility and cash reserves funded by a portion of our debt refinancing proceeds.
During the nine months ended September 30, 2003, we had construction activities underway on two buildings totaling 244,824 square feet that are 100% pre-leased. We estimate that costs incurred will total approximately $41.0 million upon completion of these projects. Costs incurred on these projects through September 30, 2003 totaled $11.8 million.
The table below sets forth the major components of our 2003 property additions (in thousands):
|
| For the Nine |
| |
Acquisitions |
| $ | 185,116 | (1) |
Construction and development |
| 6,301 |
| |
Tenant improvements on operating properties |
| 6,282 | (2) | |
Capital improvements on operating properties |
| 2,740 |
| |
|
| $ | 200,439 |
|
(1) Includes $19,895 in deferred costs recorded in connection with acquisitions.
(2) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction and development.
Our investments in unconsolidated real estate joint ventures increased $1.6repay an additional $3.4 million during the nine months ended September 30, 2003 due primarily to our investment in Route 46 Partners, LLC and fundingremainder of construction costs of NBP 140, LLC and Gateway 67, LLC, which are discussed in Note 5 to our Consolidated Financial Statements.
During the nine months ended September 30, 2003, we sold an office building and two land parcels for $21.3 million. We also contributed an office building into a joint venture and subsequently received a $20.0 million cash distribution; we provided a loan of $3.3 million to an affiliate of our partner in the joint venture (the loan was repaid in October 2003). The net proceeds from these transactions after transaction costs and the $3.3 million loan provided by us totaled $36.9 million; these proceeds were used as follows:
• $29.4 million to pay down our Revolving Credit Facility; and
• $7.5 million to fund a cash escrow that was subsequently applied towards an acquisition.
During 2003, we borrowed $132.0 million2004 using borrowings under mortgages and other loans, excluding our Revolving Credit Facility; the proceeds from these borrowings were used as follows:
35
• $76.5 million to finance acquisitions;
• $36.1 million for the repurchase of the Series C Preferred Units of our Operating Partnership described below;
• $12.4 million to pay down our Revolving Credit Facility;
• $1.2 million to finance construction activities; and
• the balance to fund cash reserves.
On May 27, 2003, we sold 5,290,000 common shares in an underwritten public offering at a price of $15.03 per share for net proceeds of $79.4 million. We contributed the net proceeds from the sale to our Operating Partnership in exchange for 5,290,000 common units. The Operating Partnership, in turn, used $63.9 million of the proceeds to fund a property acquisition and the balance to pay down our Revolving Credit Facility.
On June 16, 2003,As of March 31, 2004, we redeemed allhad development activities underway on three new office properties estimated to total 483,000 square feet. We estimate that costs for these properties will total approximately $86.3 million. As of the 1,016,662 Series C Preferred Units in our Operating Partnership for $36.1March 31, 2004, costs incurred on these properties totaled $7.9 million using proceeds from a newly acquired $40.0 million mortgage loan. As a result of the repurchase, we recognized an $11.2 million reduction to net income available to common shareholders associated with the excess of the repurchase price over the sum of the recorded book value of the units and the accrued and unpaid returnbalance is expected to the unitholder.
On August 11, 2003, we completed the sale of 2,200,000 Series G Preferred Shares at a price of $25.00 per share for net proceeds of $53.2 million. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after August 11, 2008. Holdersbe incurred from April 2004 to 2006. We expect to fund approximately $60.4 million of these shares are entitled to cumulative dividends, payable quarterly (ascosts using borrowings from new construction loans and if declared by the Board of Trustees). Dividends accruebalance using borrowings from the date of issue at the annual rate of $2.00 per share, which is equal to 8% of the $25.00 per share redemption price. We contributed the net proceeds to our Operating Partnership in exchange for 2,200,000 Series G Preferred Units. The Series G Preferred Units carry terms that are substantially the same as the Series G Preferred Shares. The Operating Partnership used most of the net proceeds to pay down our Revolving Credit Facility.
Cash FlowsWe estimate that we will incur additional tenant improvement, leasing and construction completion costs of $3.6 million during 2004 for three newly-constructed buildings that are 100% operational. We expect to use remaining balances available under a construction loan facility and borrowings under the Revolving Credit Facility to finance these costs.
We generated net cash flow from operatingexpect to redeem our Series B Preferred Shares for $31.3 million on or after July 15, 2004 using borrowings under our Revolving Credit Facility.
41
During the remainder of 2004 and beyond, we expect to complete other acquisitions of properties and commence construction and development activities in addition to the ones previously described. We expect to finance these activities as we have in the past, using mostly a combination of $53.5 million for the nine months ended September 30, 2003, an increase of $11.6 million from the nine months ended September 30, 2002; this increase was due primarily to income generated from our newly-acquired and newly-constructed properties. Our net cash flow used in investing activities for the nine months ended September 30, 2003 increased $33.7 million from the nine months ended September 30, 2002 due primarily to a $54.7 million increase in purchases of and additions to commercial real estate, offset by a $28.3 million increase in proceeds from sales of properties. Our net cash flow from financing activities for the nine months ended September 30, 2003 increased $28.5 million from the nine months ended September 30, 2002; this increase includes the following: (1) a $109.3 million increase in proceeds from the issuanceadditional equity issuances of common and/or preferred shares, borrowings from new loans and preferred shares; (2) a $15.3 million increase in cash from other liabilities; (3) a $48.2 million decrease in proceeds from mortgages and other loans payable; (4) $35.6 million in cash used to repurchase the Series C Preferred Units; and (5) a $15.5 million increase in repayments of mortgages and other loans payable.borrowings under our Revolving Credit Facility.
Funds From Operations
Funds from operations (“FFO”) meansis defined as net income computed using GAAP, excluding gains (or losses) from sales of real estate, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. 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. Additionally, the repurchase of the Series C Preferred Units in the Operating Partnership for an amount in excess of their recorded book value was a
36
transaction not contemplated in the NAREIT definition of FFO; we believe that the exclusion of such an amount from FFO is appropriate.
Accounting for real estate assets using historical cost accounting under GAAP assumes that the value of real estate assets diminishes predictably over time. NAREIT stated in its April 2002 White Paper on Funds from Operations that “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results forreal estate companies that use historical cost accounting to be insufficient by themselves.” As a result, the concept of FFO was created by NAREIT for the REIT industry to “address this problem.” We agree with the concept of FFO and believe that FFO is useful to investors as a supplemental measure of operating performance. 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, although the FFO we present may not be comparable to the FFO presented by other REITs since they may interpret the current NAREIT definition of FFO differently or they may not use the current NAREIT definition of FFO. We believe that net income is the most directly comparable GAAP measure to FFO.
Basic funds from operations (“Basic FFO”) is FFO adjusted to (1) subtract preferred share dividends and (2) add back GAAP net income allocated to common units in the Operating Partnership not owned by us. 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; common units in the Operating Partnership are also 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.
Diluted funds from operations per share (“Diluted FFO per share”) is (1) Basic FFO adjusted to add back any convertible preferred share dividends and any other changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares 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. However, the computation of Diluted FFO per share does not assume conversion of securities that are convertible into common shares if the conversion of those securities would increase Diluted FFO per share in a given period. 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 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.
42
Diluted funds from operations (“Diluted FFO”) is Basic FFO adjusted to add back any convertible preferred share dividends and any other changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. However, the computation of Diluted FFO does not assume conversion of securities that are convertible into common shares if the conversion of those securities would increase Diluted FFO per share in a given period. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, a supplementary measure used by most equity REITs.share. In addition, since most equity REITs provide Diluted FFO information to the investment community, we believe Diluted FFO is a useful supplemental measure for comparing us to other equity REITs. We believe that the numerator for diluted earnings per share is the most directly comparable GAAP measure to Diluted FFO.
Our Basic FFO, Diluted FFO per share and Diluted FFO for the three and nine months ended September 30,March 31, 2004 and 2003 and 2002 and reconciliations of (1) net income to Basic FFO, and (2) the numerator for diluted earnings per share to Diluteddiluted FFO and (3) the denominator for diluted earnings per share to the denominator for diluted FFO per share are set forth in the following table (dollars and shares in thousands)thousands, except per share data):
3743
|
| For the three months ended March 31, |
| ||||
|
| 2004 |
| 2003 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 8,993 |
| $ | 7,987 |
|
Add: Real estate-related depreciation and amortization |
| 10,261 |
| 7,944 |
| ||
Add: Depreciation and amortization on unconsolidated real estate entities |
| 106 |
| 36 |
| ||
Less: Gain on sales of real estate properties, excluding development and development portion (1) |
| (23 | ) | (2,843 | ) | ||
FFO |
| 19,337 |
| 13,124 |
| ||
Add: Minority interests-common units in the Operating Partnership |
| 1,405 |
| 2,233 |
| ||
Less: Preferred share dividends |
| (4,456 | ) | (2,533 | ) | ||
Basic FFO |
| 16,286 |
| 12,824 |
| ||
Add: Preferred unit distributions |
| — |
| 572 |
| ||
Add: Convertible preferred share dividends |
| 21 |
| 136 |
| ||
Add: Restricted common share dividends |
| — |
| 83 |
| ||
Expense associated with dilutive options |
| — |
| 6 |
| ||
Diluted FFO |
| $ | 16,307 |
| $ | 13,621 |
|
|
|
|
|
|
| ||
Weighted average common shares |
| 29,814 |
| 23,323 |
| ||
Conversion of weighted average common units |
| 8,863 |
| 8,990 |
| ||
Weighted average common shares/units - basic FFO |
| 38,677 |
| 32,313 |
| ||
Assumed conversion of weighted average convertible preferred units |
| — |
| 2,421 |
| ||
Assumed conversion of share options |
| 1,749 |
| 1,015 |
| ||
Assumed conversion of weighted average convertible preferred shares |
| 539 |
| 1,197 |
| ||
Restricted common shares |
| — |
| 330 |
| ||
Weighted average common shares/units - diluted FFO |
| 40,965 |
| 37,276 |
| ||
|
|
|
|
|
| ||
Diluted FFO per share |
| $ | 0.40 |
| $ | 0.37 |
|
|
|
|
|
|
| ||
Other information: |
|
|
|
|
| ||
Straight-line rent adjustments |
| $ | (766 | ) | $ | (1,177 | ) |
Recurring capital improvements |
| $ | (3,023 | ) | $ | (2,756 | ) |
Amortization of origination value of leases on acquired properties into rental revenue |
| $ | (309 | ) | $ | (549 | ) |
|
|
|
|
|
| ||
Numerator for diluted earnings per share |
| $ | 4,558 |
| $ | 5,590 |
|
Add: Minority interests-common units in the Operating Partnership |
| 1,405 |
| 2,233 |
| ||
Add: Real estate-related depreciation and amortization |
| 10,261 |
| 7,944 |
| ||
Add: Depreciation and amortization on unconsolidated real estate entities |
| 106 |
| 36 |
| ||
Add: Preferred unit distributions |
| — |
| 572 |
| ||
Add: Expense on dilutive options |
| — |
| 6 |
| ||
Add: Restricted common share dividends |
| — |
| 83 |
| ||
Less: Gain on sales of real estate properties, excluding redevelopment portion (1) |
| (23 | ) | (2,843 | ) | ||
Diluted FFO |
| $ | 16,307 |
| $ | 13,621 |
|
|
|
|
|
|
| ||
Denominator for diluted earnings per share |
| 32,102 |
| 25,492 |
| ||
Weighted average common units |
| 8,863 |
| 8,990 |
| ||
Conversion of weighted average convertible preferred units |
| — |
| 2,421 |
| ||
Restricted common shares |
| — |
| 330 |
| ||
Additional dilutive options |
| — |
| 43 |
| ||
Denominator for Diluted FFO per share |
| 40,965 |
| 37,276 |
|
|
| For the three months |
| For the nine months |
| ||||||||
|
| 2003 |
| 2002 (1) |
| 2003 |
| 2002 (1) |
| ||||
Net income |
| $ | 8,582 |
| $ | 6,162 |
| $ | 22,807 |
| $ | 17,341 |
|
Add: Real estate-related depreciation and amortization |
| 9,337 |
| 7,384 |
| 26,389 |
| 22,066 |
| ||||
Add: Depreciation and amortization on unconsolidated real estate entities |
| 86 |
| 40 |
| 183 |
| 126 |
| ||||
Add: Minority interests-common units in the Operating Partnership |
| 1,763 |
| 1,541 |
| 5,334 |
| 4,367 |
| ||||
Less: Preferred share dividends |
| (3,157 | ) | (2,533 | ) | (8,224 | ) | (7,600 | ) | ||||
Less: Gain on sales of real estate properties, excluding redevelopment portion (2) |
| (23 | ) | (19 | ) | (2,874 | ) | (112 | ) | ||||
Basic FFO |
| 16,588 |
| 12,575 |
| 43,615 |
| 36,188 |
| ||||
Add: Preferred unit distributions |
| — |
| 572 |
| 1,049 |
| 1,716 |
| ||||
Add: Convertible preferred share dividends |
| 136 |
| 136 |
| 408 |
| 408 |
| ||||
Add: Restricted common share dividends |
| — |
| 71 |
| — |
| 208 |
| ||||
Expense associated with dilutive options |
| 1 |
| 3 |
| 10 |
| 36 |
| ||||
Diluted FFO |
| $ | 16,725 |
| $ | 13,357 |
| $ | 45,082 |
| $ | 38,556 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares |
| 28,832 |
| 23,029 |
| 25,886 |
| 22,215 |
| ||||
Conversion of weighted average common units |
| 8,909 |
| 9,149 |
| 8,954 |
| 9,381 |
| ||||
Weighted average common shares/units - basic FFO |
| 37,741 |
| 32,178 |
| 34,840 |
| 31,596 |
| ||||
Conversion of weighted average preferred units |
| — |
| 2,421 |
| 1,472 |
| 2,421 |
| ||||
Conversion of share options |
| 1,480 |
| 978 |
| 1,302 |
| 935 |
| ||||
Conversion of weighted average preferred shares |
| 1,197 |
| 1,197 |
| 1,197 |
| 1,197 |
| ||||
Restricted common shares |
| — |
| 317 |
| — |
| 317 |
| ||||
Weighted average common shares/units - diluted FFO |
| 40,418 |
| 37,091 |
| 38,811 |
| 36,466 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other information: |
|
|
|
|
|
|
|
|
| ||||
Straight-line rent adjustments |
| $ | 1,293 |
| $ | 867 |
| $ | 3,779 |
| $ | 2,072 |
|
Recurring capital improvements |
| $ | 3,122 |
| $ | 1,649 |
| $ | 7,742 |
| $ | 4,649 |
|
Amortization of origination value of leases on acquired properties into rental revenue |
| $ | 347 |
| $ | 366 |
| $ | 1,465 |
| $ | 1,916 |
|
|
|
|
|
|
|
|
|
|
| ||||
Numerator for diluted earnings per share |
| $ | 5,561 |
| $ | 3,759 |
| $ | 3,359 |
| $ | 10,149 |
|
Add: Minority interests-common units in the Operating Partnership |
| 1,763 |
| 1,541 |
| 5,334 |
| 4,367 |
| ||||
Add: Real estate-related depreciation and amortization |
| 9,337 |
| 7,384 |
| 26,389 |
| 22,066 |
| ||||
Add: Depreciation and amortization on unconsolidated real estate entities |
| 86 |
| 40 |
| 183 |
| 126 |
| ||||
Add: Preferred unit distributions |
| — |
| 572 |
| 1,049 |
| 1,716 |
| ||||
Add: Expense on dilutive options |
| 1 |
| 9 |
| 10 |
| 36 |
| ||||
Add: Repurchase of Series C Preferred Units in excess of recorded book value |
| — |
| — |
| 11,224 |
| — |
| ||||
Add: Restricted common share dividends |
| — |
| 71 |
| — |
| 208 |
| ||||
Add: Convertible preferred share dividends |
| — |
| — |
| 408 |
| — |
| ||||
Less: Gain on sales of real estate properties, excluding redevelopment portion (2) |
| (23 | ) | (19 | ) | (2,874 | ) | (112 | ) | ||||
Diluted FFO |
| $ | 16,725 |
| $ | 13,357 |
| $ | 45,082 |
| $ | 38,556 |
|
44
(1) In 2003, we recorded a reclassificationGains from the sale of real estate that are attributable to sales of non-operating properties are included in connection with our accounting under Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). We also recorded in 2003 a reclassification of 2002 losses on early retirement of debt in connection with our adoption of Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (“SFAS No. 145”) on January 1, 2003. These reclassifications changed Basic FFO and Diluted FFO from what was reported in prior filings with the Securities and Exchange Commission. See Note 3 to the Consolidated Financial Statements for additional information pertaining to these adjustments and SFAS 141 and 145.
38
(2)FFO. Gains from newly-developed or re-developed properties less accumulated depreciation, if any, required under GAAP are also 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 compliance with the NAREIT definition of FFO, definition, although others may interpret the definition differently.
Recurring capital improvements are a measure of capitalized costs that in the words of NAREIT “produce a measure of operating performance that is recurring in nature.” Recurring capital improvements are defined as capital improvements, tenant improvements and leasing costs associated with our operating properties that are not (1) items contemplated prior to the acquisition of a property, (2) improvements associated with the expansion of a building or its improvements, (3) renovations to a building which change the underlying classification of the building (for example, from industrial to office or Class C office to Class B office) or (4) capital improvements that represent the addition of something new to the property rather than the replacement of something (for example, the addition of a new heating and air conditioning unit that is not replacing one that was previously there). We believe that recurring capital improvements is an important measure of performance for a REIT because it provides a measure of the capital improvements that the Company can expect to incur on an ongoing basis, which is significant to how we manage our business since we fund these improvements using cash flow from operations. As a result, it provides a further indication of the cash flow from operations that were available to fund other uses. We believe that tenant improvements, capital improvements and leasing costs associated with operating properties are the most directly comparable GAAP measures; a reconciliation of recurring capital improvements to these GAAP measures is set forth below (in thousands):
|
| For the three months ended |
| ||||
|
| 2004 |
| 2003 |
| ||
Total tenant improvements on operating properties |
| $ | 2,268 |
| $ | 2,315 |
|
Total capital improvements on operating properties |
| 836 |
| 296 |
| ||
Total leasing costs incurred for operating properties |
| 566 |
| 472 |
| ||
Less: Nonrecurring tenant improvements on operating properties |
| (112 | ) | (34 | ) | ||
Less: Nonrecurring capital improvements on operating properties |
| (505 | ) | (252 | ) | ||
Less: Nonrecurring leasing costs incurred on operating properties |
| (30 | ) | (41 | ) | ||
Recurring capital improvements |
| $ | 3,023 |
| $ | 2,756 |
|
Inflation
We were not significantly affected by inflation during the periods presented in this report due primarily to the relatively low inflation rates in our markets. 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. In addition, 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. QuantitativeQuantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, the most predominant of which is changingchange in interest rates. Increases in interest rates can result in increased interest expense under our Revolving Credit Facility and our other mortgage loans payable carrying variable interest rate terms. Increases in interest rates can also result in increased interest expense when our loans payable carrying fixed interest rate terms mature and need to be refinanced. Our debt strategy favors long-term, fixed-rate, secured debt over variable-rate debt to minimize the risk of short-term increases in interest rates. As of September 30, 2003, 64.8%March 31, 2004, 67.9% of our mortgage and other loans payable balance carried fixed interest rates. Werates and 87.9% of our fixed-rate loans were scheduled to mature after 2004. As of March 31, 2004, we also usehad one interest rate swap agreements to reducethat expires after 2004 that fixes the impactone-month LIBOR base rate on a notional amount of $50.0 million, or 6.0% of our
45
mortgage and other loans payable. As of March 31, 2004, the percentage of variable-rate loans (computed with the variable loan dollar amount being reduced by the $50.0 million interest rate changes.swap expiring after 2004) relative to total assets was 15.1%.
The following table sets forth information relating to our long-term debt obligations, including principal obligationscash flows by scheduled maturity and weighted average interest rates at September 30, 2003March 31, 2004 (dollars in thousands):
|
| For the Periods Ended December 31, |
|
|
| |||||||||||||||||
|
| 2003 (1) |
| 2004 (2) |
| 2005 (3) |
| 2006 |
| 2007 |
| Thereafter |
| Total |
| |||||||
Long term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed rate |
| $ | 2,267 |
| $ | 38,764 |
| $ | 29,611 |
| $ | 73,281 |
| $ | 66,018 |
| $ | 282,147 |
| $ | 492,088 |
|
Average interest rate |
| 7.10 | % | 6.86 | % | 6.88 | % | 6.80 | % | 6.47 | % | 6.24 | % | 6.48 | % | |||||||
Variable rate |
| $ | 13,074 |
| $ | 199,656 |
| $ | 54,480 |
| $ | — |
| $ | — |
| $ | — |
| $ | 267,210 |
|
Average interest rate |
| 2.79 | % | 2.90 | % | 2.93 | % | — |
| — |
| — |
| 2.88 | % |
(1) Includes a maturity of $12.8 million in December that is currently under negotiation for an extension of one year.
(2) Includes (i) a maturity of $11.9 million in January that may be extended for a six-month period, subject to certain conditions; (ii) maturities of $61.0 million in March and $25.8 million in August that may be extended for a one-year period, subject to certain conditions; and (iii) a maturity of $45.0 million in July that may be extended for two six-month periods, subject to certain conditions.
(3) Includes maturities totaling $54.8 million in January that may be extended for two six-month periods, subject to certain conditions.
|
| For the Periods Ended December 31, |
|
|
| |||||||||||||||||
|
| 2004 (1) |
| 2005 (2) |
| 2006 |
| 2007 |
| 2008 |
| Thereafter |
| Total |
| |||||||
Long term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed rate |
| $ | 35,526 |
| $ | 32,909 |
| $ | 76,703 |
| $ | 70,624 |
| $ | 151,682 |
| $ | 196,180 |
| $ | 563,624 |
|
Average interest rate |
| 6.79 | % | 6.61 | % | 6.53 | % | 6.19 | % | 6.94 | % | 6.04 | % | 6.34 | % | |||||||
Variable rate |
| $ | 11,913 |
| $ | 80,218 |
| $ | — |
| $ | 174,000 |
| $ | — |
| $ | — |
| $ | 266,131 |
|
Average interest rate |
| 2.22 | % | 2.55 | % | — |
| 2.67 | % | — |
| — |
| 1.93 | % |
The fair market value of our mortgage and other loans payable was $800.3approximately $869.2 million at September 30, 2003.March 31, 2004.
The following table sets forth information pertaining to our derivative contractscontract in place as of September 30, 2003March 31, 2004 and their respectiveits fair values:value:
39
Nature of |
| Notional |
| One-Month |
| Effective |
| Expiration |
| Fair value on |
|
| Notional |
| One-Month |
| Effective |
| Expiration |
| Fair value on |
| ||||
|
| (in millions) |
|
|
|
|
|
|
| (in thousands) |
| |||||||||||||||
Interest rate swap |
| $ | 50.0 |
| 2.308 | % | 1/2/03 |
| 1/3/05 |
| $ | (662 | ) |
| $ | 50.0 |
| 2.308 | % | 1/2/03 |
| 1/3/05 |
| $ | (429 | ) |
Interest rate swap |
| 50.0 |
| 1.520 | % | 1/7/03 |
| 1/2/04 |
| (64 | ) | |||||||||||||||
Total |
|
|
|
|
|
|
|
|
| $ | (726 | ) |
Based on our variable-rate debt balances, our interest expense would have increased by $1.1 million$390,000 during the ninethree months ended September 30, 2003March 31, 2004 if interest rates were 1% higher.
Item 4.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(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.
46
Not applicable
Item 2.2. Changes in Securities andSecurities, Use of Proceeds and Issuer Purchases of Equity Securities
a. Not applicable
b. Not applicable
c. During the three months ended September 30, 2003, 76,553March 31, 2004, 43,950 units of the Operating Partnership’s common units were exchanged to 76,553for 43,950 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.
d. Not applicable
40e. Not applicable
Item 3.3. Defaults Upon Senior SecuritiesSecurities
Not applicable
Item 4.4. Submission of Matters to a Vote of Security HoldersHolders
Not applicable
Item 55. Other Informati. Other Informationon
Not applicable
(a) Exhibits:
EXHIBIT |
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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). |
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4247
EXHIBIT |
| DESCRIPTION |
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31.2 |
| Certification of the Chief Operating Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith). |
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31.3 |
| 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). |
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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.) |
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32.2 |
| Certification of the Chief Operating 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.) |
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32.3 |
| 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.) |
43
b. We filed the following Current Reports on Form 8-K filed with the Securities and Exchange Commission in the quarterly period ended September 30, 2003:March 31, 2004:
Report, furnished to the SEC on July 30, 2003 and amended on August 1, 2003, containing Item 7, Item 9 and Item 12 disclosures that were furnished in connection with the release of earnings on July 30, 2003. We also through this report made available certain additional information pertaining to our properties and operations as of and for the period ended June 30, 2003, as well as disclosures that were furnished in connection with a non-GAAP financial measure used in a conference call with the investment community.
Report, furnished to the SEC on July 31, 2003 (the date of the report was July 30, 2003), containing Item 7 and Item 12 disclosures that were furnished in connection with the release of earnings on July 30, 2003. Through this report, we made available our press release associated with the release of such earnings, as well as disclosures that were furnished in connection with a non-GAAP financial measure used in the press release.
Report, filed with the SEC on August 4, 2003 (the date of the report was June 2, 2003), containing Item 5 and Item 7 disclosures that were filed in connection with the acquisition of 13200 Woodland Park Drive and the Dulles Tech/ Ridgeview properties. This report contained financial statements for the properties described herein, as well as certain pro forma financial statements. This report also contained a schedule supporting the computation of its ratio of earnings to fixed charges and preferred share dividends.
Report, filed with the SEC on August 7, 2003 (the date of the report was August 6, 2003), containing Item 5 and Item 7 disclosures that were filed in connection with our entry into an underwriting agreement with a firm for the public offering of cumulative redeemable preferred shares of beneficial interest.
Report, filed with the SEC on September 12, 2003, containing Item 5 disclosures that were filed in connection with the identification of non-GAAP financial measures used in the Company’s Annual Report on Form 10-K for the year 2002, which was filed with the SEC prior to the effective date of SEC Regulation G, and the reconciliations of such non-GAAP financial measures required under Regulation G.None
Pursuant to the requirements of the Securities 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 | ||||
| |||||
Date: |
| May 7, 2004 | By: | /s/ Randall M. Griffin | |
| |||||
|
| Randall M. Griffin | |||
|
| President and Chief Operating Officer | |||
| |||||
Date: |
| By: | /s/ Roger A. Waesche, Jr. | ||
| |||||
|
| Roger A. Waesche, Jr. | |||
|
|
| Executive Vice President and Chief | ||
4448