EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following table contains selected financial data for each of the years
ended December 31, 1996 through 2000. Our selected financial data for the years
reported is not comparable due to our growth resulting from property
acquisitions, completed construction and other changes in our organization.
Since this information is only a summary, you should refer to our consolidated
financial statements and the section of this report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information.
CORPORATE OFFICE PROPERTIES TRUST
(DOLLAR AND SHARE INFORMATION IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues
Rental revenue ......................... $ 93,309 $ 70,101 $ 35,676 $ 6,122 $ 2,477
Tenant recoveries and other revenue .... 15,684 11,011 4,538 496 32
--------- --------- --------- --------- ---------
Total revenues ..................... 108,993 81,112 40,214 6,618 2,509
--------- --------- --------- --------- ---------
Expenses
Property operating ..................... 31,235 22,325 9,632 728 31
General and administrative ............. 4,867 3,204 1,890 533 372
Interest ............................... 30,454 21,808 12,207 2,855 1,246
Amortization of deferred financing costs 1,382 975 423 64 13
Depreciation and other amortization .... 16,977 12,075 6,285 1,267 554
Reformation costs (1) .................. -- -- 637 -- --
Termination of advisory agreement (2) .. -- -- -- 1,353 --
--------- --------- --------- --------- ---------
Total expenses ..................... 84,915 60,387 31,074 6,800 2,216
--------- --------- --------- --------- ---------
Income (loss) before equity in (loss)
income of Service Companies, gain on
sales of rental properties, minority
interests and extraordinary item ....... 24,078 20,725 9,140 (182) 293
Equity in (loss) income of Service
Companies .............................. (310) 198 139 -- --
--------- --------- --------- --------- ---------
Income (loss) before gain on sales of
rental properties, minority interests
and extraordinary item ................. 23,768 20,923 9,279 (182) 293
Gain on sales of rental properties ........ 107 1,140 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before minority interests
and extraordinary item ................. 23,875 22,063 9,279 (182) 293
Minority interests ........................ (8,588) (6,077) (4,583) (785) --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ... 15,287 15,986 4,696 (967) 293
Extraordinary item - loss on early
retirement of debt ................... (153) (903) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ......................... 15,134 15,083 4,696 (967) 293
Preferred Share dividends ................. (3,802) (2,854) (327) -- --
--------- --------- --------- --------- ---------
Net income (loss) available to Common
Shareholders ........................... $ 11,332 $ 12,229 $ 4,369 $ (967) $ 293
========= ========= ========= ========= =========
Basic earnings (loss) per Common Share
Income (loss) before extraordinary
item ................................. $ 0.61 $ 0.77 $ 0.48 $ (0.60) $ 0.21
========= ========= ========= ========= =========
Net income (loss) ...................... $ 0.60 $ 0.72 $ 0.48 $ (0.60) $ 0.21
========= ========= ========= ========= =========
Diluted earnings (loss) per Common Share
Income (loss) before extraordinary
item ................................. $ 0.60 $ 0.70 $ 0.47 $ (0.60) $ 0.21
========= ========= ========= ========= =========
Net income (loss) ...................... $ 0.59 $ 0.66 $ 0.47 $ (0.60) $ 0.21
========= ========= ========= ========= =========
Weighted average shares
outstanding - basic .................... 18,818 16,955 9,099 1,601 1,420
Weighted average shares
outstanding - diluted .................. 19,213 22,574 19,237 1,601 1,420
1
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA (AS OF PERIOD END):
Investment in real estate .................. $ 751,734 $ 696,489 $ 546,887 $ 188,625 $ 23,070
Total assets ............................... $ 794,837 $ 721,034 $ 563,677 $ 193,534 $ 24,197
Mortgage and other loans payable ........... $ 474,349 $ 399,627 $ 306,824 $ 114,375 $ 14,658
Total liabilities .......................... $ 495,549 $ 416,298 $ 317,700 $ 117,008 $ 15,026
Minority interests ......................... $ 105,560 $ 112,635 $ 77,196 $ 64,862 $ --
Shareholders' equity ....................... $ 193,728 $ 192,101 $ 168,781 $ 11,664 $ 9,171
Debt to market capitalization .............. 57.3% 57.6% 58.7% 53.1% 66.3%
Debt to undepreciated real estate assets ... 60.4% 55.9% 55.1% 59.6% 58.6%
OTHER FINANCIAL DATA (FOR THE YEAR ENDED):
Cash flows provided by (used in):
Operating activities .................... $ 35,026 $ 32,296 $ 12,863 $ 3,216 $ 840
Investing activities .................... $ (73,256) $(125,836) $(183,650) $ 973 $ 127
Financing activities .................... $ 40,835 $ 93,567 $ 169,741 $ (1,052) $ (967)
Funds from operations - basic (3) (7) ...... $ 34,587 $ 27,428 $ 11,778 $ 365 $ 847
Funds from operations - diluted (3) (7) .... $ 37,504 $ 31,401 $ 15,517 $ 1,085 $ 847
Adjusted funds from operations -
diluted (4) (7) ......................... $ 30,554 $ 26,056 $ 13,194 $ 790 $ 780
Cash dividends declared per Common Share ... $ 0.78 $ 0.74 $ 0.66 $ 0.50 $ 0.50
Payout ratio (5) (7) ....................... 66.98% 64.31% 77.69% 166.74% 83.83%
Interest coverage (6) ...................... 2.38 2.56 2.36 1.88 1.69
Ratio of earnings to combined fixed charges
and Preferred Share dividends ........... 1.33 1.48 1.33 0.75 1.23
PROPERTY DATA (AS OF PERIOD END):
Number of properties owned ................. 83 79 57 17 7
Total rentable square feet owned (in
thousands) .............................. 6,473 6,076 4,977 1,852 370
(1) Reflects a non-recurring expense of $637 associated with our reformation as
a Maryland REIT during the first quarter of 1998.
(2) Reflects a non-recurring expense of $1,353 associated with the termination
of an advisory agreement during the fourth quarter of 1997.
(3) We consider Funds from Operations ("FFO") to be meaningful to investors as
a measure of the financial performance of an equity REIT when considered
with the financial data presented under generally accepted accounting
principles ("GAAP"). Under the National Association of Real Estate
Investment Trusts' ("NAREIT") definition, FFO means net income (loss)
computed using generally accepted accounting principles, excluding gains
(or losses) from debt restructuring and sales of property, plus real
estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Further, if the conversion
of securities into Common Shares is dilutive, we exclude any GAAP income
allocated to these securities in computing FFO. The FFO we present may not
be comparable to the FFO of other REITs since they may interpret the
current NAREIT definition of FFO differently or they may not use the
current NAREIT definition of FFO. FFO is not the same as cash generated
from operating activities or net income determined in accordance with GAAP.
FFO is not necessarily an indication of our cash flow available to fund
cash needs. Additionally, it should not be used as an alternative to net
income when evaluating our financial performance or to cash flow from
operating, investing and financing when evaluating our liquidity or ability
to make cash distributions or pay debt service.
(4) We compute adjusted funds from operations-diluted by subtracting
straight-line rent adjustments and recurring capital improvements from
funds from operations-diluted.
(5) We compute payout ratio by dividing total Common and convertible Preferred
Share dividends and total distributions reported for the year by funds from
operations-diluted.
(6) We compute interest coverage by dividing earnings before interest,
depreciation and amortization by interest expense. We compute earnings
before interest, depreciation and amortization by subtracting property
operating and general and administrative expenses from the sum of total
revenues and equity in income of Service Companies.
(7) The amounts reported for 1998 and 1997 are restated from amounts previously
reported due to a change in NAREIT's definition of FFO.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OVERVIEW
Over the last three years, we:
o acquired 69 office properties;
o completed construction of seven new office properties;
o sold all of our nine retail properties and three office properties;
o financed acquisitions and construction activities using debt, proceeds
from sales of properties and issuing Common Shares of beneficial
interest ("Common Shares"), Preferred Shares and ownership interests
in Corporate Office Properties, L.P., our Operating Partnership; and
o added management and other staffing functions in 1998 to support the
growth of our portfolio and enhance our organizational infrastructure
to more efficiently meet tenant needs.
As a result of these activities during the last three years, we grew our
portfolio of office properties from 10 properties totaling 1.5 million square
feet to 83 properties totaling 6.5 million square feet. Due to these significant
changes in our real estate portfolio and operating structure, our results of
operations changed dramatically.
We conduct almost all of our operations through our 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. The Operating Partnership also owned the principal economic
interest and, collectively with our Chief Executive Officer and Chief Operating
Officer, 49.5% of the voting stock of Corporate Office Management, Inc. ("COMI")
at December 31, 2000. On January 1, 2001, the Operating Partnership acquired all
of the stock in COMI which it did not previously own. We refer to COMI and its
subsidiaries as the "Service Companies". Interests in our Operating Partnership
are in the form of Common and Preferred Units. As of December 31, 2000, we owned
approximately 66% of the outstanding Common Units and approximately 55% of the
outstanding Preferred Units. The remaining Common and Preferred Units in our
Operating Partnership were owned by third parties, which included certain of our
officers and Trustees.
We are organized and have operated in a manner that permits us to satisfy
the requirements for taxation as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986.
In this section, we discuss our financial condition and results of
operations for 2000 and 1999. This section includes discussions on:
o why various components of our Consolidated Statements of Operations
changed from 1999 to 2000 and from 1998 to 1999;
o what our primary sources and uses of cash were in 2000;
o how we raised cash for acquisitions and other capital expenditures
during 2000;
o how we intend to generate cash for future capital expenditures; and
o the computation of our funds from operations for 2000, 1999 and 1998.
You should refer to our consolidated financial statements and selected
financial data table 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 of our business. Statements that are not
historical facts, including statements about our beliefs and expectations, are
forward-looking statements. These statements are not guarantees of future
performance, events or results and involve potential risks and uncertainties.
Accordingly, actual results may differ materially. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
Important facts that may affect these expectations, estimates or
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 and financing
availability; interest rates; adverse changes in the real estate markets
including, among other things, competition with other companies; risks of real
estate acquisition and development; governmental actions and initiatives and
environmental requirements.
3
CORPORATE OFFICE PROPERTIES TRUST
OPERATING DATA VARIANCE ANALYSIS
(DOLLARS FOR THIS TABLE ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Years Ended December 31,
--------------------------------------------------
2000 1999 Variance % Change
---- ---- -------- --------
Revenues
Rental revenue $ 93,309 $ 70,101 $ 23,208 33%
Tenant recoveries and other revenue 15,684 11,011 4,673 42%
--------- --------- ---------
Total revenues 108,993 81,112 27,881 34%
--------- --------- ---------
Expenses
Property operating 31,235 22,325 8,910 40%
General and administrative 4,867 3,204 1,663 52%
Interest and amortization of deferred
financing costs 31,836 22,783 9,053 40%
Depreciation and other amortization 16,977 12,075 4,902 41%
Reformation costs -- -- -- N/A
--------- --------- ---------
Total expenses 84,915 60,387 24,528 41%
--------- --------- ---------
Income before equity in (loss) income of Service
Companies, gain on sales of rental properties,
minority interests and extraordinary item 24,078 20,725 3,353 16%
Equity in (loss) income of Service Companies (310) 198 (508) (257%)
Gain on sales of rental properties 107 1,140 (1,033) (91%)
--------- --------- ---------
Income before minority interests and
extraordinary item 23,875 22,063 1,812 8%
Minority interests (8,588) (6,077) (2,511) 41%
Extraordinary item - loss on early
retirement of debt (153) (903) 750 (83%)
--------- --------- ---------
Net income 15,134 15,083 51 0%
Preferred Share dividends (3,802) (2,854) (948) (33%)
--------- --------- ---------
Net income available to Common Shareholders $ 11,332 $ 12,229 $ (897) (7%)
========= ========= =========
Basic earnings per Common Share
Income before extraordinary item $ 0.61 $ 0.77 $ (0.16) (21%)
Net income $ 0.60 $ 0.72 $ (0.12) (17%)
Diluted earnings per Common Share
Income before extraordinary item $ 0.60 $ 0.70 $ (0.10) (14%)
Net income $ 0.59 $ 0.66 $ (0.07) (11%)
For the Years Ended December 31,
------------------------------------------------
1999 1998 Variance % Change
---- ---- -------- --------
Revenues
Rental revenue $ 70,101 $ 35,676 $ 34,425 96%
Tenant recoveries and other revenue 11,011 4,538 6,473 143%
--------- --------- ---------
Total revenues 81,112 40,214 40,898 102%
--------- --------- ---------
Expenses
Property operating 22,325 9,632 12,693 132%
General and administrative 3,204 1,890 1,314 70%
Interest and amortization of deferred
financing costs 22,783 12,630 10,153 80%
Depreciation and other amortization 12,075 6,285 5,790 92%
Reformation costs -- 637 (637) (100%)
--------- --------- ---------
Total expenses 60,387 31,074 29,313 94%
--------- --------- ---------
Income before equity in (loss) income of Service
Companies, gain on sales of rental properties,
minority interests and extraordinary item 20,725 9,140 11,585 127%
Equity in (loss) income of Service Companies 198 139 59 42%
Gain on sales of rental properties 1,140 -- 1,140 N/A
--------- --------- ---------
Income before minority interests and
extraordinary item 22,063 9,279 12,784 138%
Minority interests (6,077) (4,583) (1,494) 33%
Extraordinary item - loss on early
retirement of debt (903) -- (903) N/A
--------- --------- ---------
Net income 15,083 4,696 10,387 221%
Preferred Share dividends (2,854) (327) (2,527) 773%
--------- --------- ---------
Net income available to Common Shareholders $ 12,229 $ 4,369 $ 7,860 180%
========= ========= =========
Basic earnings per Common Share
Income before extraordinary item $ 0.77 $ 0.48 $ 0.29 60%
Net income $ 0.72 $ 0.48 $ 0.24 50%
Diluted earnings per Common Share
Income before extraordinary item $ 0.70 $ 0.47 $ 0.23 49%
Net income $ 0.66 $ 0.47 $ 0.19 40%
4
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Our total revenues increased $27.9 million or 34%, of which $23.2 million
was generated by rental revenue and $4.7 million by tenant recoveries and other
revenue. Tenant recovery revenue includes payments from tenants as reimbursement
for property taxes, insurance and other property operating expenses. Included in
this change in total revenue is the following:
o $24.3 million increase attributable to 30 properties acquired and
seven newly-constructed properties placed in service since January 1,
1999.
o $3.4 million increase attributable to 45 office properties owned
throughout both reporting periods due mostly to increases in rental
rates on renewed space, additional lease termination revenue and
steady occupancy.
o $1.0 million decrease attributable to properties sold since January 1,
1999.
Our total expenses increased $24.5 million or 41% due to the effects of the
increases in property operating, interest expense and amortization of deferred
financing costs, depreciation and other amortization and general and
administrative expenses described below.
Our property operating expenses increased $8.9 million or 40%. Included in
this change is the following:
o $6.9 million increase attributable to 30 properties acquired and seven
newly-constructed properties placed in service since January 1, 1999.
o $1.9 increase attributable to 45 office properties owned throughout
both reporting periods. $1.2 million of this increase is attributable
to increased repairs and maintenance costs, $424,000 of which is
increased snow removal and $221,000 of which is increased heating and
air conditioning unit maintenance costs.
Our interest expense and amortization of deferred financing costs increased
$9.1 million or 40% due to a 38% increase in our average outstanding debt
balance resulting from our 1999 and 2000 acquisitions and construction activity
and an increase in interest rates on our variable rate and refinanced debt. Our
depreciation and other amortization expense increased $4.9 million or 41%, $4.0
million of which is attributable to 30 properties acquired and seven
newly-constructed properties placed in service since January 1, 1999. Our
general and administrative expenses increased $1.7 million or 52% due mostly to
our responsibility for an increased percentage of COMI's personnel and overhead
related expenses in the current year and the expense associated with Common
Shares subject to forfeiture restrictions issued to certain of our officers in
December 1999 and January 2000.
Our income before minority interests and extraordinary item also includes a
$1.0 million decrease in our gain realized on the sales of rental properties and
a $508,000 decrease in our equity in income of the Service Companies. These
Service Companies were not included as consolidated subsidiaries in our
financial statements. As a result of the above factors, income before minority
interests and extraordinary item increased by $1.8 million or 8%. The amounts
reported for minority interests on our Consolidated Statements of Operations
represent primarily the portion of the Operating Partnership's net income not
allocated to us. Our income allocation to minority interests increased $2.5
million or 41% due to the increase in the Operating Partnership's net income
combined with a higher percentage ownership by minority interests during the
current year.
The factors discussed above combined with a $750,000 decrease in
extraordinary losses on early retirement of debt collectively resulted in a
$51,000 increase in net income. There was a $948,000 increase in Preferred Share
dividends resulting mostly from the issuance of Series B Cumulative Redeemable
Preferred
5
Shares of beneficial interest ("Series B Preferred Shares") in July 1999, offset
somewhat by the absence of dividends on the Series A Cumulative Convertible
Preferred Shares of beneficial interest ("Series A Preferred Shares") converted
into Common Shares in September 2000. As a result of all of the above, net
income available to Common Shareholders decreased $897,000 or 7%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Our total revenues increased $40.9 million or 102%, of which $34.4 million
was generated by rental revenue and $6.5 million by tenant recoveries and other
revenue. Our growth in revenues was due primarily to our property acquisitions
in 1998 and 1999, although revenues increased $700,000 or 4% on the operations
of office properties owned since the beginning of 1998 and $2.0 million due to
additional interest and real estate service revenue earned in 1999, offset by a
$1.6 million decrease due to the absence of revenues from Midwest region retail
properties sold during 1999.
Our total expenses increased $29.3 million or 94% due mostly to the effects
of the increases in property operating, interest expense and amortization of
deferred financing costs, depreciation and other amortization and general and
administrative expenses described below. However, our 1998 expenses also
included $637,000 in nonrecurring costs associated with our reformation into a
Maryland REIT in March 1998.
Our property operating expenses increased $12.7 million or 132% due mostly
to our property acquisitions, although property operating expenses increased
$268,000 or 7% on the operations of office properties owned since the beginning
of 1998. Our property operating expenses increased as a percentage of total
revenue from 24% to 28% due to more of our leases being written on a gross basis
(meaning we incur operating expenses) versus a net basis (meaning the tenant
incurs operating expenses directly). Our interest expense and amortization of
deferred financing costs increased $10.2 million or 80% due mostly to our
borrowings and assumptions of debt needed to finance property acquisitions which
amount includes a decrease of $724,000 attributable to our Midwest region retail
property sales. Our depreciation and other amortization expense increased $5.8
million or 92% due mostly to our property acquisitions which amount includes a
decrease of $359,000 attributable to our Midwest region retail property sales.
Our general and administrative expenses increased $1.3 million or 70%. Much
of this increase is due to the management and other staffing functions added
during 1998 that were in place for all of 1999. Approximately $255,000 of this
increase is due to additional professional fees for audit, legal and tax
preparation required to support the increased complexity of our organization
resulting from our growth and the creation of our Operating Partnership and the
Service Companies. This increase was partially offset by a $235,000 decrease in
costs expensed in exploring possible acquisitions that did not occur.
Our income before minority interests and extraordinary item also includes
the gain we realized on the sale of six of our retail properties in 1999 and a
$59,000 increase in our equity in the income of the Service Companies. As a
result of the above factors, our income before minority interests and
extraordinary item increased by $12.8 million or 138%. Our income allocation to
minority interests increased $1.5 million or 33% due to the increase in the
Operating Partnership's net income. However, the percentage of income allocated
to minority interests decreased due to a higher weighted average ownership of
the Operating Partnership by us during the year.
Our net income available to Common Shareholders increased $7.9 million or
180% due to the factors discussed above, partially offset by a $903,000 loss on
the early retirement of debt and a $2.5 million increase in Preferred Share
dividends due to the Series A Preferred Shares issued in 1998 that were in place
for the entire year and the Series B Preferred Shares issued in 1999. Our
diluted earnings per Common Share on net income increased $0.19 per share or 40%
due to the effect of the increase in net income being proportionately greater
than the dilutive effects of issuing additional Common Shares and securities
that are convertible into our Common Shares.
6
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations represented our primary source of liquidity
to fund dividends and distributions, pay debt service and fund working capital
requirements. We expect to continue to use cash provided by operations to meet
our short-term capital needs, including all property expenses, general and
administrative expenses, debt service, dividend and distribution requirements
and recurring capital improvements and leasing commissions. We do not anticipate
borrowing to meet these requirements.
We historically have financed our property acquisitions using a
combination of borrowings secured by our properties, proceeds from sales of
properties and the equity issuances of Common and Preferred Units in our
Operating Partnership and Common and Preferred Shares. We use our secured
revolving credit facility with Deutsche Banc Alex. Brown (the "Revolving Credit
Facility") to finance much of our investing and financing activities. We pay
down our Revolving Credit Facility using proceeds from long-term borrowings
collateralized by our properties as attractive financing conditions arise and
equity issuances as attractive equity market conditions arise. We also have a
$50.0 million line of credit with Prudential Securities Credit Corporation (the
"Prudential Credit Facility"). Amounts available under the Revolving Credit
Facility and the Prudential Credit Facility are generally computed based on 65%
of the appraised value of properties pledged as collateral. As of February 12,
2001, the maximum amount available under our Revolving Credit Facility was $93.0
million, of which $19.0 million was unused. As of February 12, 2001, the maximum
amount available under the Prudential Credit Facility was $29.1 million all of
which was borrowed.
As of December 31, 2000, we had $237.9 million in mortgage and other loans
payable maturing in 2001. Included in these 2001 loan maturities are two loans
totaling $109.0 million that may be extended for a one-year period and a $4.8
million loan that may be extended for a two-year period, all subject to certain
conditions. As of December 31, 2000, we were in compliance with the necessary
conditions for us to extend these loans. The 2001 maturities as of December 31,
2000 also include $82.2 million on the Revolving Credit Facility, which we are
negotiating to extend by approximately three years. While we expect for the
extension of this loan to occur, we would need to locate alternative financing
in the event that it does not. We expect to repay the remaining balance of the
2001 loan maturities through a combination of borrowings from existing credit
facilities and new loans and cash from operations.
We expect to meet our long-term capital needs through a combination of cash
from operations, additional borrowings from existing credit facilities and new
loans and additional equity issuances of Common Shares, Preferred Shares, Common
Units and/or Preferred Units.
We have no other material contractual obligations as of December 31, 2000
for property acquisitions or material capital costs other than the completion of
construction and development projects that were underway and tenant improvements
and leasing costs in the ordinary course of business.
INVESTING AND FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2000
During 2000, we acquired two operating properties and seven parcels of land
for an aggregate acquisition cost of $30.0 million. These acquisitions were
financed by:
o using $10.8 million in proceeds under our Revolving Credit Facility,
o assuming $10.7 million in mortgage and other loans, and
o using cash reserves for the balance.
During 2000, we completed the construction of five office buildings
totaling 380,760 square feet. Costs incurred on these buildings through December
31, 2000 totaled $46.5 million. We have $32.7 million in construction loan
facilities for three of these buildings of which $23.8 million was borrowed at
December 31, 2000. We also borrowed $6.5 million for one of these buildings
under a construction loan facility that was subsequently refinanced. The balance
of the costs was funded primarily using proceeds from the Revolving Credit
Facility and cash from operations.
7
As of December 31, 2000, we had construction activities underway on three
new buildings totaling 301,000 square feet that were 23% pre-leased. Estimated
costs upon completion for these projects total approximately $51.0 million.
Costs incurred on these buildings through December 31, 2000 totaled $26.4
million. We have construction loan facilities in place totaling $36.9 million to
finance the construction of these projects. Borrowings under these facilities
totaled $8.0 million at December 31, 2000 all of which was drawn upon during
2000. We also borrowed under the Revolving Credit Facility to finance these
activities. As of December 31, 2000, we also had a $358,000 net investment in
joint ventures constructing two new buildings totaling 268,000 square feet.
As of December 31, 2000, we also had development activities underway on two
parcels of land.
As of December 31, 2000, we had a $3.6 million investment in an
unconsolidated real estate joint venture. This investment was acquired during
2000 using $3.5 million in proceeds under our Revolving Credit Facility.
During 2000, we sold two retail properties and one office property for
$11.6 million of which $6.9 million was used to pay off mortgage loans payable
on the properties. Net proceeds from these sales after property level debt
repayments and transaction costs totaled $4.3 million, $2.0 million of which was
used to repay a portion of our Revolving Credit Facility and the remainder
applied to working capital.
During 2000, we received $106.5 million in borrowings from mortgages and
other loans payable other than our Revolving Credit Facility, the proceeds of
which were used as follows:
o $40.7 million to repay other loans,
o $34.1 million to finance construction activities,
o $10.7 million to finance acquisitions,
o $8.0 million to pay down our Revolving Credit Facility, and
o the balance applied to cash reserves.
INVESTING AND FINANCING ACTIVITY SUBSEQUENT TO THE YEAR ENDED DECEMBER 31, 2000
In January 2001, we issued 544,000 Series D Cumulative Convertible
Redeemable Preferred Shares of beneficial interest ("Series D Preferred Shares")
to a foreign trust at a price of $22.00 per share for proceeds totaling $12.0
million. These shares are nonvoting and are redeemable for cash at $25.00 per
share at our option on or after January 25, 2006. These shares are also
convertible on or after January 1, 2004 into Common Shares on the basis of 2.2
Common Shares for each Series D Preferred Share. 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 $1.00 per share, which is equal to 4% of the $25.00 per share redemption
price. We contributed the net proceeds to our Operating Partnership in exchange
for 544,000 Series D Preferred Units. The Series D Preferred Units carry terms
that are substantially the same as the Series D Preferred Shares. The Operating
Partnership used most of the proceeds to pay down the Revolving Credit Facility.
STATEMENT OF CASH FLOWS
We generated net cash flow from operating activities of $35.0 million for
the year ended December 31, 2000, an increase of $2.7 million from the year
ended December 31, 1999. Our increase in cash flows from operating activities is
due mostly to income generated from our newly acquired and newly constructed
properties. Our net cash flow used in investing activities for the year ended
December 31, 2000 decreased $52.6 million from the prior year due mostly to an
$87.6 million decrease in cash outlays associated with purchases of and
additions to commercial real estate properties offset by a $26.7 million
decrease in proceeds from rental property sales. Our net cash flow provided by
financing activities for the year ended December 31, 2000 decreased $52.7
million from the prior year due mostly to an $108.2 million decrease in proceeds
from mortgage and other loans payable and a $29.4 million decrease in proceeds
from the issuance of Preferred Shares offset by a $91.9 million decrease in
repayments of mortgage and other loans payable.
8
FUNDS FROM OPERATIONS
We consider Funds from Operations ("FFO") to be meaningful to investors as
a measure of the financial performance of an equity REIT when considered with
the financial data presented under generally accepted accounting principles
("GAAP"). Under the National Association of Real Estate Investment Trusts'
("NAREIT") definition, FFO means net income (loss) computed using generally
accepted accounting principles, excluding gains (or losses) from debt
restructuring and sales of property, plus real estate-related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Further, if the conversion of securities into Common Shares is
dilutive, we exclude any GAAP income allocated to these securities in computing
FFO. The FFO we present may not be comparable to the FFO of other REITs since
they may interpret the current NAREIT definition of FFO differently or they may
not use the current NAREIT definition of FFO. FFO is not the same as cash
generated from operating activities or net income determined in accordance with
GAAP. FFO is not necessarily an indication of our cash flow available to fund
cash needs. Additionally, it should not be used as an alternative to net income
when evaluating our financial performance or to cash flow from operating,
investing and financing when evaluating our liquidity or ability to make cash
distributions or pay debt service. Our FFO for 2000, 1999 and 1998 are
summarized in the following table.
9
For the Years Ended December 31,
----------------------------------
(Dollars and shares in thousands)
2000 1999 1998(1)
---- ---- -------
Income before minority interests and
extraordinary item ................................. $ 23,875 $ 22,063 $ 9,279
Add: Real estate related depreciation and
amortization ....................................... 16,887 11,987 6,238
Less: Preferred Unit distributions ................... (2,240) (2,620) (3,412)
Less: Preferred Share dividends ...................... (3,802) (2,854) (327)
Less: Minority interest in other consolidated
partnership ........................................ (26) (8) --
Less: Gain on sales of rental properties ............. (107) (1,140) --
-------- -------- --------
Funds from operations ................................ 34,587 27,428 11,778
Add: Preferred Unit distributions .................... 2,240 2,620 3,412
Add: Convertible Preferred Share dividends ........... 677 1,353 327
-------- -------- --------
Funds from operations assuming conversion of share
options, Common Unit warrants, Preferred Units and
Preferred Shares ................................... 37,504 31,401 15,517
Less: Straight line rent adjustments ................. (4,107) (2,766) (1,785)
Less: Recurring capital improvements ................. (2,843) (2,579) (538)
-------- -------- --------
Adjusted funds from operations assuming conversion of
share options, Common Unit warrants, Preferred Units
and Preferred Shares ............................... $ 30,554 $ 26,056 $ 13,194
======== ======== ========
Weighted average Common Shares ....................... 18,818 16,955 9,099
Conversion of weighted average Common Units .......... 9,652 4,883 2,614
-------- -------- --------
Weighted average Common Shares/Units ................. 28,470 21,838 11,713
Assumed conversion of share options .................. 164 9 24
Assumed conversion of Common Unit Warrants ........... 231 -- --
Conversion of weighted average Preferred Shares ...... 918 1,845 449
Conversion of weighted average Preferred Units ....... 2,371 5,680 7,500
-------- -------- --------
Weighted average Common Shares/Units assuming
conversion of share options, Common Unit warrants,
Preferred Units and Preferred Shares ............... 32,154 29,372 19,686
======== ======== ========
(1) The amounts reported for 1998 are restated from amounts previously reported
due to a change in NAREIT's definition of FFO.
INFLATION
We have not been significantly impacted by inflation during the periods
presented in this report. This is mostly because of 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 that are based on historical expense levels. In
addition, some of our tenants are obligated to pay their share of all of a
building's operating expenses. These arrangements reduce our exposure to
increases in such costs resulting from inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, the most predominant of which is
changes 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
10
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 December 31, 2000, 43% of our mortgage and other loans payable
balance carried fixed interest rates. We also use interest rate swap and
interest rate cap agreements to reduce the impact of interest rate changes.
The following table sets forth our long-term debt obligations, principal
cash flows by scheduled maturity and weighted average interest rates at December
31, 2000 (dollars in thousands):
For the Years Ended December 31,
-------------------------------------------------------------------------------------
2001(1) 2002(2) 2003 2004 2005 Thereafter Total
------- ------- ---- ---- ---- ---------- -----
Long term debt:
Fixed rate $ 3,349 $ 3,607 $3,885 $29,728 $20,214 $140,932 $ 201,715
Average interest rate 7.44% 7.44% 7.45% 7.46% 7.46% 7.12% 7.33%
Variable rate $234,551 $34,164 $ 39 $ 43 $ 3,837 $ -- $ 272,634
Average interest rate 8.52% 8.30% 8.04% 8.04% 8.04% 0% 8.05%
(1) Includes $100.0 million maturity in October that may be extended for a
one-year period, subject to certain conditions. Also includes an $8.9
million maturity in October that may be extended for a one-year term and a
$4.8 million maturity in February that may be extended for a two-year
period, subject to certain conditions.
(2) Includes $10.0 million maturity in March and $6.1 million in maturities in
July that may be extended for one-year terms, subject to certain
conditions.
The fair market value of our mortgage and other loans payable was $481.1
million at December 31, 2000 and $387.5 million at December 31, 1999.
The following table sets forth derivative contracts we had in place as of
December 31, 2000 and their respective fair market values ("FMV"):
Notional
Nature of Amount One-Month Effective Expiration FMV at
Derivative (in millions) LIBOR base Date Date 12/31/00
---------- ------------- ---------- --------- ---------- --------
Interest rate cap $ 50.0 7.70% 5/25/00 5/31/02 $ 4,000
Interest rate cap 50.0 7.00% 9/13/00 10/13/01 1,000
Interest rate cap 25.0 7.00% 10/17/00 10/13/01 1,000
Interest rate swap 100.0 5.76% 1/2/01 1/2/03 (246,000)
---------
Total $(240,000)
=========
Based on our variable rate debt balances, our interest expense would have
increased $1.4 million in 2000 and $727,000 in 1999 if interest rates were 1%
higher. Interest expense in 2000 would have been more sensitive to a change in
interest rates than 1999 due to a higher average variable debt balance in 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". The statement's effective date was delayed
until 2001. Accordingly, we adopted this standard beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet at fair value with the
offset to:
o the other comprehensive income component of shareholders' equity
("OCI") for any derivatives designated as cash flow hedges to the
extent such derivatives are deemed effective;
o other income or expense on our Statement of Operations for any
derivatives designated as cash flow hedges to the extent such
derivatives are deemed ineffective; or
11
o other income or expense on our Statement of Operations for any
derivatives designated as fair value hedges.
At December 31, 2000, we had in place three interest rate cap contracts and one
interest rate swap contract. We have designated each of these derivatives as
cash flow hedges. We expect the interest rate swap contract to be substantially
effective. We do not expect the interest rate cap contracts to be effective. At
adoption on January 1, 2001, we reduced OCI by $246,000 as a cumulative effect
adjustment to recognize the net fair value of our interest rate swap contract.
We also recognized an unrealized loss of $258,000 on the book value associated
with our derivatives at January 1, 2001.
Effective July 1, 2000, the FASB issued FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." FIN No. 44 clarifies the application
of the Accounting Principle Board's Opinion No. 25, "Accounting for Stock Issued
to Employees" for certain issues, including the definition of the term
"employee", the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
previous issuances and the accounting for an exchange of stock compensation
awards in a business combination. We adopted FIN No. 44 effective July 1, 2000.
The primary impact of our adoption of this Interpretation is that we and the
Service Companies recognize additional expenses from share options issued to
employees for the following:
o the share price appreciation and future vesting relating to share
options that were repriced in 1999, and
o the issuance of share options to employees of Corporate Realty
Management, LLC and Martin G. Knott, LLC.
Our adoption of this Interpretation resulted in a $83,000 increase in general
and administrative expenses and $67,000 decrease in our equity in income of the
Service Companies in 2000.
REIT MODERNIZATION ACT
In December 1999, legislation containing the REIT Modernization Act was
signed into law. This law is effective January 1, 2001 and includes the
following changes:
o REITs are now allowed to own up to 100% investments in the stock of a
taxable REIT subsidiary ("TRS"), subject to certain restrictions
relating to the size of such investments. TRSs can provide services to
REIT tenants and others without adversely impacting the income
requirements to which REITs are subject;
o REITs are no longer able to enter into new arrangements to own more
than 10% of the vote or value of the securities in a non-REIT C
corporation unless such C corporation elects to be treated as a TRS;
and
o the percentage of REIT taxable income that REITs are required to
distribute to shareholders is reduced from 95% to 90%.
On January 1, 2001, we acquired all of the stock in COMI which we did not
previously own. We also elected to have COMI treated as a TRS effective January
1, 2001. Since we own all of the voting interests in COMI and control its
operations effective January 1, 2001, we began combining the accounts of COMI
and its subsidiaries with our accounts on that date.
12
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31,
-------------------
2000 1999
---- ----
ASSETS
Investment in real estate:
Operating properties, net $ 711,560 $ 662,664
Projects under construction 36,558 33,825
--------- ---------
Total commercial real estate properties, net 748,118 696,489
Investment in unconsolidated real estate joint venture 3,616 --
--------- ---------
Investment in real estate 751,734 696,489
Cash and cash equivalents 4,981 2,376
Restricted cash 2,703 2,041
Accounts receivable, net 3,245 1,928
Investment in and advances to other unconsolidated entities 6,124 3,661
Deferred rent receivable 8,644 4,634
Deferred charges, net 12,905 7,525
Prepaid and other assets 4,501 2,380
--------- ---------
TOTAL ASSETS $ 794,837 $ 721,034
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage and other loans payable $ 474,349 $ 399,627
Accounts payable and accrued expenses 10,227 6,597
Rents received in advance and security deposits 3,883 3,776
Dividends and distributions payable 7,090 6,298
--------- ---------
Total liabilities 495,549 416,298
--------- ---------
Minority interests:
Preferred Units in the Operating Partnership 24,367 24,367
Common Units in the Operating Partnership 81,069 88,170
Other consolidated partnerships 124 98
--------- ---------
Total minority interests 105,560 112,635
--------- ---------
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred Shares ($0.01 par value; 5,000,000 shares authorized);
1,025,000 designated as Series A Convertible Preferred Shares of
beneficial interest (shares issued of 1 at December 31, 2000 and
984,308 with an aggregate liquidation preference of $24,608 at
December 31, 1999) -- 10
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) 12 12
Common Shares of beneficial interest ($0.01 par value; 45,000,000 shares
authorized, shares issued of 20,575,936 at December 31, 2000 and
17,646,046 at December 31, 1999) 206 176
Additional paid-in capital 209,388 202,867
Cumulative dividends in excess of net income (11,064) (7,547)
Value of unearned restricted Common Share grants (3,399) (3,417)
Treasury Shares, at cost (166,600 shares at December 31, 2000) (1,415) --
--------- ---------
Total shareholders' equity 193,728 192,101
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 794,837 $ 721,034
========= =========
See accompanying notes to financial statements.
13
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31,
--------------------------------------
2000 1999 1998
-------- ------- --------
REVENUES
Rental revenue $ 93,309 $70,101 $ 35,676
Tenant recoveries and other revenue 15,684 11,011 4,538
-------- ------- --------
Total revenues 108,993 81,112 40,214
-------- ------- --------
EXPENSES
Property operating 31,235 22,325 9,632
General and administrative 4,867 3,204 1,890
Interest 30,454 21,808 12,207
Amortization of deferred financing costs 1,382 975 423
Depreciation and other amortization 16,977 12,075 6,285
Reformation costs -- -- 637
-------- ------- --------
Total expenses 84,915 60,387 31,074
-------- ------- --------
Income before equity in (loss) income of Service Companies,
gain on sales of rental properties, minority interests and
extraordinary item 24,078 20,725 9,140
Equity in (loss) income of Service Companies (310) 198 139
-------- ------- --------
Income before gain on sales of rental properties, minority
interests and extraordinary item 23,768 20,923 9,279
Gain on sales of rental properties 107 1,140 --
-------- ------- --------
Income before minority interests and extraordinary item 23,875 22,063 9,279
Minority interests
Common Units in the Operating Partnership (6,322) (3,449) (1,171)
Preferred Units in the Operating Partnership (2,240) (2,620) (3,412)
Other consolidated partnership (26) (8) --
-------- ------- --------
Income before extraordinary item 15,287 15,986 4,696
Extraordinary item - loss on early retirement of debt (153) (903) --
-------- ------- --------
NET INCOME 15,134 15,083 4,696
Preferred Share dividends (3,802) (2,854) (327)
-------- ------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 11,332 $12,229 $ 4,369
======== ======= ========
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item $ 0.61 $ 0.77 $ 0.48
Extraordinary item (0.01) (0.05) --
-------- ------- --------
Net income $ 0.60 $ 0.72 $ 0.48
======== ======= ========
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item $ 0.60 $ 0.70 $ 0.47
Extraordinary item (0.01) (0.04) --
-------- ------- --------
Net income $ 0.59 $ 0.66 $ 0.47
======== ======= ========
See accompanying notes to financial statements.
14
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Value of
Cumulative Unearned
Additional Dividends in Restricted
Preferred Common Paid-in Excess of Net Common
Shares Shares Capital Income Share Grants
--------- ------ ---------- ------------- ------------
Balance at December 31, 1997 $ -- $ 23 $ 16,620 $ (4,979) $ --
Common Shares issued to the public (7,500,000
Shares) -- 75 72,640 -- --
Common Shares issued in connection with
acquisitions (7,030,793 Shares) -- 70 73,248 -- --
Series A Convertible Preferred Shares issued in
connection with acquisitions (984,308 Shares) 10 -- 24,598 -- --
Exercise of share options (5,000 Shares) -- -- 27 -- --
Adjustments to minority interests resulting
from changes in ownership of Operating
Partnership by COPT -- -- (11,331) -- --
Net income -- -- -- 4,696 --
Dividends -- -- -- (6,916) --
--------- --------- --------- --------- ---------
Balance at December 31, 1998 10 168 175,802 (7,199) --
Conversion of Common Units to Common Shares
(372,295 Shares) -- 4 3,137 -- --
Series B Cumulative Redeemable Preferred Shares
issued to the public (1,250,000 Shares) 12 -- 29,422 -- --
Restricted Common Share grants issued (471,875
Shares) -- 4 3,476 -- (3,480)
Value of earned restricted share grants -- -- -- -- 63
Adjustments to minority interests resulting from
changes in ownership of Operating Partnership
by COPT -- -- (8,970) -- --
Net income -- -- -- 15,083 --
Dividends -- -- -- (15,431) --
--------- --------- --------- --------- ---------
Balance at December 31, 1999 22 176 202,867 (7,547) (3,417)
Conversion of Common Units to Common Shares
(1,047,545 Shares) -- 11 8,514 -- --
Conversion of Preferred Shares (984,307 Shares) (10) 19 (9) -- --
Restricted Common Share grants
issued (12,500 Shares) -- -- 97 -- (97)
Value of earned restricted share grants -- -- 4 -- 115
Exercise of share options (24,467 Shares) -- -- 169 -- --
Issuance of share options -- -- 206 -- --
Acquisition of Treasury Shares (166,600 Shares) -- -- -- -- --
Adjustments to minority interests resulting from
changes in ownership of Operating
Partnership by COPT -- -- (2,460) -- --
Net income -- -- -- 15,134 --
Dividends -- -- -- (18,651) --
--------- --------- --------- --------- ---------
Balance at December 31, 2000 $ 12 $ 206 $ 209,388 $ (11,064) $ (3,399)
========= ========= ========= ========= =========
Treasury
Shares Total
-------- -----
Balance at December 31, 1997 $ -- $ 11,664
Common Shares issued to the public (7,500,000
Shares) -- 72,715
Common Shares issued in connection with
acquisitions (7,030,793 Shares) -- 73,318
Series A Convertible Preferred Shares issued in
connection with acquisitions (984,308 Shares) -- 24,608
Exercise of share options (5,000 Shares) -- 27
Adjustments to minority interests resulting
from changes in ownership of Operating
Partnership by COPT -- (11,331)
Net income -- 4,696
Dividends -- (6,916)
--------- ---------
Balance at December 31, 1998 -- 168,781
Conversion of Common Units to Common Shares
(372,295 Shares) -- 3,141
Series B Cumulative Redeemable Preferred Shares
issued to the public (1,250,000 Shares) -- 29,434
Restricted Common Share grants issued (471,875
Shares) -- --
Value of earned restricted share grants -- 63
Adjustments to minority interests resulting from
changes in ownership of Operating Partnership
by COPT -- (8,970)
Net income -- 15,083
Dividends -- (15,431)
--------- ---------
Balance at December 31, 1999 -- 192,101
Conversion of Common Units to Common Shares
(1,047,545 Shares) -- 8,525
Conversion of Preferred Shares (984,307 Shares) -- --
Restricted Common Share grants
issued (12,500 Shares) -- --
Value of earned restricted share grants -- 119
Exercise of share options (24,467 Shares) -- 169
Issuance of share options -- 206
Acquisition of Treasury Shares (166,600 Shares) (1,415) (1,415)
Adjustments to minority interests resulting from
changes in ownership of Operating
Partnership by COPT -- (2,460)
Net income -- 15,134
Dividends -- (18,651)
--------- ---------
Balance at December 31, 2000 $ (1,415) $ 193,728
========= =========
See accompanying notes to financial statements.
15
CORPORATE OFFICE PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,134 $ 15,083 $ 4,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 8,588 6,077 4,583
Depreciation and other amortization 16,977 12,075 6,285
Amortization of deferred financing costs 1,382 975 423
Equity in loss (income) of Service Companies 310 (198) (139)
Gain on sales of rental properties (107) (1,140) --
Extraordinary item - loss on early retirement of debt 153 903 --
Increase in deferred rent receivable (4,113) (2,766) (1,784)
Increase in accounts receivable, restricted cash and prepaid
and other assets (4,225) (1,690) (4,286)
Increase in accounts payable, accrued expenses, rents received
in advance and security deposits 927 2,977 3,085
--------- --------- ---------
Net cash provided by operating activities 35,026 32,296 12,863
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of and additions to commercial real estate properties (65,130) (152,749) (180,649)
Proceeds from sales of rental properties 4,435 31,163 --
Investment in unconsolidated real estate joint venture (3,616) -- --
Investments in and advances (to) from other unconsolidated
entities (2,773) (1,112) 288
Leasing commissions paid (6,176) (3,275) (1,468)
Change in prepaid and other assets 4 137 (1,821)
--------- --------- ---------
Net cash used in investing activities (73,256) (125,836) (183,650)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage and other loans payable 140,479 248,639 117,962
Repayments of mortgage and other loans payable (69,493) (161,417) (10,192)
Deferred financing costs paid (1,774) (3,064) (1,627)
Net proceeds from issuance of Preferred Shares -- 29,434 --
Net proceeds from issuance of Common Shares 286 63 72,237
Net proceeds from issuance of share options 206 -- --
Purchase of Treasury Shares (1,415) -- --
Dividends paid (18,265) (14,528) (3,848)
Distributions paid (9,189) (5,560) (4,791)
--------- --------- ---------
Net cash provided by financing activities 40,835 93,567 169,741
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,605 27 (1,046)
CASH AND CASH EQUIVALENTS
Beginning of year 2,376 2,349 3,395
--------- --------- ---------
End of year $ 4,981 $ 2,376 $ 2,349
========= ========= =========
See accompanying notes to financial statements.
16
CORPORATE OFFICE PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION
Corporate Office Properties Trust ("COPT") and subsidiaries (the "Company")
is a fully 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 and is the successor to a corporation organized in
1988. As of December 31, 2000, our portfolio included 83 office properties.
We conduct almost all of our operations principally 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"). The Operating Partnership also owned at December
31, 2000 the principal economic interest and, collectively with our Chief
Executive Officer and Chief Operating Officer, 49.5% of the voting stock of
Corporate Office Management, Inc. ("COMI") (together with its subsidiaries
defined as the "Service Companies"). On January 1, 2001, the Operating
Partnership acquired all of the stock in COMI which it did not previously own.
See Note 6 for a description of the activities of the Service Companies. A
summary of our Operating Partnership's forms of ownership and the percentage of
those ownership forms owned by COPT follows:
December 31,
-----------------------
2000 1999
---- ----
Common Units 66% 60%
Series A Preferred Units 100% 100%
Series B Preferred Units 100% 100%
Series C Preferred Units 0% 0%
2. BASIS OF PRESENTATION
We use three different accounting methods to report our investments in
entities: the consolidation method, the equity method and the cost method.
CONSOLIDATION METHOD
We use the consolidation method when we own 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:
o COPT,
o the Operating Partnership and its subsidiary partnerships and LLCs,
and
o Corporate Office Properties Holdings, Inc. (we own 100%).
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:
17
o our ownership interest in the entity's capital as an investment on our
Consolidated Balance Sheets and
o our percentage share of the earnings or losses from the entity in our
Consolidated Statements of Operations.
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:
o the cost of our investment in the entity as an investment on our
Consolidated Balance Sheets and
o distributions to us of the entity's earnings in our Consolidated
Statements of Operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
We make estimates and assumptions when preparing financial statements under
generally accepted accounting principles. These estimates and assumptions affect
various matters, including:
o our reported amounts of assets and liabilities in our Consolidated
Balance Sheets at the dates of the financial statements,
o our disclosure of contingent assets and liabilities at the dates of
the financial statements, and
o our reported amounts of revenues and expenses in our Consolidated
Statements of Operations during the reporting periods.
These estimates involve judgements 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.
COMMERCIAL REAL ESTATE PROPERTIES
We report commercial real estate properties at our depreciated cost. The
amounts reported for our commercial real estate properties include our costs of:
o acquisitions,
o development and construction,
o building and land improvements, and
o tenant improvements paid by us.
We capitalize interest expense, real estate taxes and other costs
associated with real estate under construction to the cost of the real estate.
We start depreciating newly constructed properties when we place them in
service.
We depreciate our assets evenly over their estimated useful lives as
follows:
o Building and building improvements.............40 years
o Land improvements..............................20 years
o Tenant improvements............................Related lease terms
o Equipment and personal property................3-10 years
We recognize an impairment loss on a real estate asset if its undiscounted
expected future cash flows are less than its depreciated cost. We have not
recognized impairment losses on our real estate assets to date.
We expense property maintenance and repair costs when incurred.
18
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash and liquid investments that
mature three months or less from when they are purchased. Cash equivalents are
reported at cost, which almost equals their fair value. We maintain our cash in
bank accounts which may exceed federally insured limits at times. We have not
experienced any losses in these accounts in the past and believe we are not
exposed to significant credit risk.
ACCOUNTS RECEIVABLE
Our accounts receivable are reported net of an allowance for bad debts of
$74 at December 31, 2000 and $10 at December 31, 1999.
REVENUE RECOGNITION
We recognize rental revenue evenly over the term of tenant leases. Many of
our leases include contractual rent increases. For these leases, we average the
rents over the lease term to evenly recognize revenues. We report revenues
recognized in advance of payments received as deferred rent receivable on our
Consolidated Balance Sheets. We report prepaid tenant rents as rents received in
advance on our Consolidated Balance Sheets.
Some of our retail tenants' leases provide for additional rental payments
if the tenants meet certain sales targets. We do not recognize additional rental
revenue under these leases until the tenants meet the sales targets.
We recognize tenant recovery income as revenue in the same period we incur
the related expenses. Tenant recovery income includes payments from tenants as
reimbursement for property taxes, insurance and other property operating
expenses.
We recognize fees for services provided by us once services are rendered,
fees are determinable and collectibility assured.
MAJOR TENANTS
During 2000, 31% of our total rental revenue was earned from five major
tenants, including 21% percent from our two largest tenants. During 1999, 39% of
our total rental revenue was earned from five major tenants, including 27% from
our two largest tenants. During 1998, 50% of our total rental revenue was earned
from five major tenants, including 31% from our two largest tenants. The United
States Government and Unisys were our largest two tenants in each of these
years.
GEOGRAPHICAL CONCENTRATION
Our operations are geographically concentrated in the Mid-Atlantic region
of the United States. Our rental revenue derived from this region as a
percentage of total rental revenue totaled 100% in 2000, 99% in 1999 and 59% in
1998.
DEFERRED CHARGES
We capitalize costs that we incur to obtain new tenant leases or extend
existing tenant leases. We amortize these costs evenly over the lease terms.
When tenant leases are terminated early, we expense any unamortized deferred
leasing costs associated with those leases.
We also capitalize costs for long-term financing arrangements and amortize
these costs over the related loan terms. We expense any unamortized loan costs
as an extraordinary item when loans are retired early.
MINORITY INTERESTS
As discussed previously, we consolidate the accounts of our Operating
Partnership into our financial statements. However, we do not own 100% of the
Operating Partnership. Our Operating Partnership also does
19
not own 11% of one of its subsidiary partnerships. 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 economically to our Common Shares of beneficial interest
("Common Shares"). Common Units are also exchangeable into our Common Shares,
subject to certain conditions.
Our Operating Partnership issued 974,662 Series C Preferred Units in
connection with a property acquisition in December 1999. Our Operating
Partnership issued 42,000 additional Series C Preferred Units on July 1, 2000 in
connection with the cancellation of ten-year detachable warrants exercisable for
an additional number of Common Units. Owners of these units are entitled to a
priority annual return equal to 9% of their liquidation preference through
December 20, 2009, 10.5% for the five following years and 12% thereafter. These
units are convertible, subject to certain restrictions, into Common Units in the
Operating Partnership on the basis of 2.381 Common Units for each Series C
Preferred Unit, plus any accrued return. The Common Units would then be
exchangeable for Common Shares, subject to certain conditions. The Series C
Preferred Units also carry a liquidation preference of $25.00 per unit, plus any
accrued return, and may be redeemed for cash by the Operating Partnership at any
time after the tenth anniversary of their issuance.
Our Operating Partnership issued 2,100,000 preferred units in connection
with an October 1997 property acquisition (the "Initial Preferred Units"). These
units were converted into Common Units on the basis of 3.5714 Common Units for
each Initial Preferred Unit in October 1999. Prior to converting these units,
owners were entitled to a priority annual return equal to 6.5% of their
liquidation preference.
INTEREST RATE SWAP AGREEMENTS
We recognize the interest rate differential to be paid or received on
interest rate swap agreements as an adjustment to interest expense. We amortize
gains and losses on terminated interest rate swaps accounted for as hedges over
the remaining lives of the related swaps; we recognize any unamortized gain or
loss when the underlying debt is terminated.
INCOME TAXES
We have elected to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code. As a REIT, we generally will not be subject to
Federal income tax if we distribute at least 95% of our REIT taxable income to
our shareholders and satisfy certain other requirements (see discussion below).
As a result, we do not report income tax expense on our Consolidated Statements
of Operations. If we fail to qualify as a REIT in any tax year, we will be
subject to Federal income tax on our taxable income at regular corporate rates.
In December 1999, legislation containing the REIT Modernization Act was
signed into law. This law is effective January 1, 2001 and includes the
following changes:
o REITs are now allowed to own up to 100% investments in the stock of a
taxable REIT subsidiary ("TRS"), subject to certain restrictions
relating to the size of such investments. TRSs can provide services to
REIT tenants and others without adversely impacting the income
requirements to which REITs are subject;
o REITs are no longer able to enter into new arrangements to own more
than 10% of the vote or value of the securities in a non-REIT C
corporation unless such C corporation elects to be treated as a TRS;
and
o the percentage of REIT taxable income that REITs are required to
distribute to shareholders is reduced from 95% to 90%.
On January 1, 2001, we acquired all of the stock in COMI which we did not
previously own. We also elected to have COMI treated as a TRS effective January
1, 2001.
20
For Federal income tax purposes, dividends to shareholders may be
characterized as ordinary income, capital gains or return of capital (which is
generally non-taxable). The characterization of dividends declared during each
of the last three years was as follows (unaudited):
2000 1999 1998
---- ---- ----
Ordinary income 71.0% 79.3% 77.4%
Return of capital 29.0% -- 22.6%
Long term capital gain -- 20.7% --
We are subject to certain state and local income and franchise taxes. The
expense associated with these state and local taxes is included in general and
administrative expense on our Consolidated Statements of Operations. We did not
separately state these amounts on our Consolidated Statements of Operations
because they are insignificant.
EARNINGS PER SHARE ("EPS")
We present both basic and diluted EPS. We compute basic EPS by dividing
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:
o 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
o 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.
21
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 year. A summary of the numerator and denominator for
purposes of basic and diluted EPS calculations is as follows (dollars and shares
in thousands, except per share data):
2000 1999 1998
-------- -------- --------
Numerator:
Net income available to Common Shareholders $ 11,332 $ 12,229 $ 4,369
Add: Extraordinary loss 153 903 --
-------- -------- --------
Numerator for basic earnings per share before
extraordinary item 11,485 13,132 4,369
Add: Minority interests - Initial Preferred Units -- 2,559 3,412
Add: Minority interests - Common Units -- -- 1,171
-------- -------- --------
Numerator for diluted earnings per share before
extraordinary item 11,485 15,691 8,952
Less: Extraordinary loss (153) (903) --
-------- -------- --------
Numerator for diluted earnings per share for net income $ 11,332 $ 14,788 $ 8,952
======== ======== ========
Denominator (all weighted averages):
Common Shares - basic 18,818 16,955 9,099
Assumed conversion of share options 164 9 24
Assumed conversion of Common Unit warrants 231 -- --
Conversion of Initial Preferred Units -- 5,610 7,500
Assumed conversion of Common Units -- -- 2,614
-------- -------- --------
Denominator for diluted earnings per share 19,213 22,574 19,237
======== ======== ========
Basic earnings per Common Share:
Income before extraordinary item $ 0.61 $ 0.77 $ 0.48
Extraordinary item (0.01) (0.05) --
-------- -------- --------
Net income $ 0.60 $ 0.72 $ 0.48
======== ======== ========
Diluted earnings per Common Share:
Income before extraordinary item $ 0.60 $ 0.70 $ 0.47
Extraordinary item (0.01) (0.04) --
-------- -------- --------
Net income $ 0.59 $ 0.66 $ 0.47
======== ======== ========
Our diluted EPS computation for 2000 assumes no conversions of Preferred
Units or Common Units since such conversions would increase diluted EPS for that
year. Our diluted EPS computation for 1999 only assumes conversion of Initial
Preferred Units because conversions of the Series A Cumulative Convertible
Preferred Shares of beneficial interest ("Series A Preferred Shares"), Series C
Preferred Units and Common Units would increase diluted EPS for that year. Our
diluted EPS computation for 1998 does not assume conversion of the Series A
Preferred Shares since such conversions would increase diluted EPS for that
year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include primarily notes receivable, mortgage and
other loans payable and interest rate derivatives. The fair values of notes
receivable were not materially different from their carrying or contract values
at December 31, 2000 and 1999. See Note 8 for fair value of mortgage and other
loans payable information.
22
The following table sets forth derivative contracts we had in place as of
December 31, 2000 and their respective fair market values ("FMV"):
Notional FMV at
Nature of Amount One Month Effective Expiration 12/31/00
Derivative (in millions) LIBOR base Date Date (in thousands)
---------- ------------- ---------- --------- ---------- --------------
Interest rate cap $ 50.0 7.70% 5/25/00 5/31/02 $ 4
Interest rate cap 50.0 7.00% 9/13/00 10/13/01 1
Interest rate cap 25.0 7.00% 10/17/00 10/13/01 1
Interest rate swap 100.0 5.76% 1/2/01 1/2/03 (246)
-----
Total $(240)
=====
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". The statement's effective date was delayed
until 2001. Accordingly, we adopted this standard beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet at fair value with the
offset to:
o the other comprehensive income component of shareholders' equity
("OCI") for any derivatives designated as cash flow hedges to the
extent such derivatives are deemed effective;
o other income or expense on our Statement of Operations for any
derivatives designated as cash flow hedges to the extent such
derivatives are deemed ineffective; or
o other income or expense on our Statement of Operations for any
derivatives designated as fair value hedges.
At December 31, 2000, we had in place three interest rate cap contracts and one
interest rate swap contract. We have designated each of these derivatives as
cash flow hedges. We expect the interest rate swap contract to be substantially
effective. We do not expect the interest rate cap contracts to be effective. At
adoption on January 1, 2001, we reduced OCI by $246 as a cumulative effect
adjustment to recognize the net fair value of our interest rate swap contract.
We also recognized an unrealized loss of $258 on the book value associated with
our derivatives at January 1, 2001.
Effective July 1, 2000, the FASB issued FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." FIN No. 44 clarifies the application
of the Accounting Principle Board's Opinion No. 25, "Accounting for Stock Issued
to Employees" for certain issues, including the definition of the term
"employee", the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
previous issuances and the accounting for an exchange of stock compensation
awards in a business combination. We adopted FIN No. 44 effective July 1, 2000.
The primary impact of our adoption of this Interpretation is that we and the
Service Companies recognize additional expenses from share options issued to
employees for the following:
o the share price appreciation and future vesting relating to share
options that were repriced in 1999, and
o the issuance of share options to employees of CRM and MGK (all defined
in Note 6).
23
4. COMMERCIAL REAL ESTATE PROPERTIES
Operating properties consisted of the following:
December 31,
-------------------------
2000 1999
--------- ---------
Land $ 140,018 $ 135,641
Buildings and improvements 604,666 544,967
Furniture, fixtures and equipment 344 335
--------- ---------
745,028 680,943
Less: accumulated depreciation (33,468) (18,279)
--------- ---------
$ 711,560 $ 662,664
========= =========
Projects we had under construction or development at December 31, 2000
consisted of the following:
December 31,
-------------------
2000 1999
------- -------
Land $19,069 $13,158
Construction in progress 17,489 20,667
------- -------
$36,558 $33,825
======= =======
2000 ACQUISITIONS
We acquired the following office properties during 2000:
Number
Date of of Total Rentable Initial
Project Name Location Acquisition Buildings Square Feet Cost
- ------------------ ------------- ----------- --------- -------------- ----------
7240 Parkway Drive Hanover, MD 4/18/00 1 73,500 $7,464
9140 Route 108 Columbia, MD 12/14/00 1 150,000 7,149
We also acquired the following properties during 2000:
o a parcel of land located in Cranbury, New Jersey for $633 on March 20,
2000,
o a parcel of land located in Columbia, Maryland for $4,036 on March 29,
2000,
o a parcel of land located in Annapolis Junction, Maryland for $3,022 on
May 26, 2000 from Constellation (defined below),
o a parcel of land located in Cranbury, New Jersey for $283 on June 5,
2000,
o a parcel of land located in Annapolis Junction, Maryland for $364 on
June 30, 2000 from Constellation,
o a parcel of land located in Columbia, Maryland for $3,958 on September
28, 2000, and
o a parcel of land located in Annapolis Junction, Maryland for $3,055 on
November 13, 2000 from Constellation.
All of these land parcels are contiguous to certain of our existing operating
properties. Constellation Real Estate and its affiliates (collectively
"Constellation") owned 43% of our Common Shares outstanding at December 31,
2000. Constellation also controlled two of the nine positions on our Board of
Trustees at December 31, 2000.
24
2000 CONSTRUCTION/DEVELOPMENT
During 2000, we completed the construction of five office buildings
totaling 380,760 square feet. Three of these buildings totaling 303,697 square
feet are located in the Baltimore/Washington Corridor, one building with 57,280
square feet is located in Dayton, New Jersey and one building with 19,783 square
feet is located in Harrisburg, Pennsylvania.
As of December 31, 2000, we had construction underway on three new
buildings and development underway on two parcels of land and also had a $358
net investment in joint ventures constructing two additional new buildings.
2000 DISPOSITIONS
We sold the following properties during 2000:
Property Date of Total Rentable Sales
Project Name Location Type(1) Sale Square Feet Price
- ---------------- ------------ -------- -------- -------------- -------
Minot Retail Minot, ND R 6/19/00 46,134 $2,970
Tred Avon Easton, MD R 11/10/00 149,191 5,800
3 Centre Drive Cranbury, NJ O 12/28/00 20,436 2,790
(1) "R" indicates retail property; "O" indicates office property.
We recognized a $107 net gain on the sale of these properties in 2000.
1999 ACQUISITIONS
We acquired the following office properties during 1999:
Number
Date of of Total Rentable Initial
Project Name Location Acquisition Buildings Square Feet Cost
- ------------------ -------------------- ----------- --------- -------------- ----------
Airport Square XXI Linthicum, MD 2/23/99 1 67,913 $ 6,751
Parkway Crossing Properties Hanover, MD 4/16/99 2 99,026 9,524
Commons Corporate Center (1) Hanover, MD 4/28/99 8 250,413 25,442
Princeton Executive Center Monmouth Junction, NJ 6/24/99 1 61,300 6,020
Gateway Central (2) Harrisburg, PA 8/12/99 3 55,726 5,960
Gateway International (3) Linthicum, MD 11/18/99 2 198,438 24,316
Corporate Gateway Center (4) Harrisburg, PA 12/3/99 9 417,138 40,082
Timonium Business Park (5) Timonium, MD 12/21/99 2 233,623 30,001
Brown's Wharf (5) Baltimore, MD 12/21/99 1 103,670 10,607
(1) Does not include $400 allocated to projects under construction and $50
relating to land under a ground lease.
(2) Acquired 89% ownership interest from an officer and Trustee of ours.
(3) Does not include $1,973 allocated to projects under construction.
(4) Acquired 49% interest on September 15, 1999. Acquired remaining 51%
interest on December 3, 1999 (discussed below).
(5) See discussion below.
In June 1999, we sold Brown's Wharf and assigned our rights to purchase the
Timonium Business Park to an unrelated third party. Simultaneously with these
transactions, we entered into a contract with the third party under which the
third party had the right to transfer these three office buildings to us on or
before March 31, 2000. In December 1999, we acquired Brown's Wharf and the
Timonium Business Park from the third party for $40,608 which is reflected in
the table above. Due to the nature of this agreement, we did not recognize a
gain or loss on the sale of Brown's Wharf. We also continued to depreciate
Brown's Wharf throughout 1999.
25
On September 15, 1999, we acquired a 49% interest in Corporate Gateway
General Partnership ("Corporate Gateway"), a newly organized joint venture, for
$2,952. On the same day, the joint venture acquired nine office buildings
located in Greater Harrisburg, Pennsylvania from First Industrial Realty Trust,
Inc., a publicly held real estate investment company where Jay Shidler, the
Chairman of our Board of Trustees, serves as Chairman of the Board of Directors.
Corporate Gateway acquired these buildings for $39,925 using cash and proceeds
from a $34,247 loan payable to our Operating Partnership. The loan carried an
interest rate of 10%. We accounted for our investment in Corporate Gateway at
that time using the equity method of accounting. On December 3, 1999, we
acquired the remaining 51% interest in Corporate Gateway. The recorded cost of
the nine office buildings upon completion of these transactions totaled $40,082
which is reflected in the table above.
We issued 974,662 Series C Preferred Units and 377,251 Common Units in our
Operating Partnership in connection with 1999 office property acquisitions.
We also acquired the following properties during 1999:
o a parcel of land located in Annapolis Junction, Maryland that is contiguous
to certain of our existing operating properties for $2,908 on May 28, 1999
from Constellation,
o a 57,000 square foot warehouse facility for redevelopment into office space
located on 8.5 acres of land that is contiguous to properties we own in
South Brunswick, New Jersey for $2,172 on July 9, 1999,
o a parcel of land located in Linthicum, Maryland that is contiguous to
certain of our existing operating properties for $1,970 on August 1, 1999
from CDS (see Note 6),
o a parcel of land located in Annapolis Junction, Maryland that is contiguous
to certain of our existing operating properties for $2,945 on October 21,
1999 from Constellation, and
o a parcel of land located in Harrisburg, Pennsylvania that is contiguous to
certain of our existing operating properties for $191 on November 4, 1999
from an officer and Trustee of ours.
1999 DISPOSITIONS
We sold the following properties during 1999:
Property Date of Total Rentable Sales
Project Name Location Type(1) Sale Square Feet Price
- ------------------- ----------------- --------- -------- -------------- -------
Cranberry Square Westminster, MD R 1/22/99 139,988 $18,900
Delafield Retail Delafield, WI R 2/26/99 52,800 3,303
Indianapolis Retail Indianapolis, IN R 3/09/99 67,541 5,735
Plymouth Retail Plymouth, MN R 3/09/99 67,510 5,465
Glendale Retail Glendale, WI R 5/04/99 36,248 1,900
Peru Retail Peru, IL R 6/16/99 60,232 3,750
Browns Wharf (2) Baltimore, MD O 6/24/99 103,670 10,575
Oconomowoc Retail Oconomowoc, WI R 6/25/99 39,272 2,575
Brandon One Riviera Beach, MD O 12/30/99 38,513 1,260
(1) "R" indicates retail property; "O" indicates office property.
(2) See discussion in portion of this note entitled "1999 Acquisitions".
We recognized a $1,140 net gain on the sale of these properties in 1999.
1999 CONSTRUCTION
During 1999, we completed the construction of two office properties
totaling 202,219 square feet. The office buildings are located in Annapolis
Junction, Maryland and Columbia, Maryland. We also completed an expansion
project that increased the rentable square footage of one of our properties by
6,350 square feet.
26
5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE JOINT VENTURE
In 2000, we acquired an 80% interest in Gateway 67, LLC, a newly organized
joint venture developing a parcel of land located in Columbia, Maryland. We
account for our investment in this joint venture using the equity method of
accounting. Our investment in this joint venture at December 31, 2000 totaled
$3,616.
6. INVESTMENT IN AND ADVANCES TO OTHER UNCONSOLIDATED ENTITIES
Since September 1998, the Operating Partnership has owned 95% of the
capital stock in COMI, including 1% of the voting common stock. COMI provided us
with asset management, managerial, financial and legal support from September
1998 through December 2000. On January 1, 2001, we acquired all of the stock in
COMI which we did not previously own for $26 and all of COMI's employees became
employees of the Operating Partnership. We also elected to have COMI treated as
a TRS effective January 1, 2001.
COMI owns interests in the following entities:
Date of Percentage
Entity Name Type of Service Business Acquisition Ownership
- ------------------------------------------- ---------------------------- ------------ -----------
Corporate Realty Management, LLC ("CRM") Real Estate Management 9/28/98 100%(1)
Corporate Development Services, LLC ("CDS") Construction and Development 9/28/98 100%
Martin G. Knott and Associates, LLC ("MGK") Heating and Air Conditioning 8/31/99 80%
(1) COMI acquired 75% of CRM on September 28, 1998. COMI acquired the remaining
25% on July 18, 2000.
We accounted for our investment in COMI and its subsidiaries, CRM, CDS and
MGK, using the equity method of accounting through December 31, 2000. Since we
own all of the voting interests in COMI and control its operations effective
January 1, 2001, we began combining the accounts of COMI and its subsidiaries
with our accounts on that date.
In 2000, we acquired a 6% interest in MediTract, LLC ("MediTract"), an
entity engaged in the development of an Internet based contract imaging and
management system. We account for our investment in MediTract using the cost
method of accounting.
Our investment in and advances to other unconsolidated entities included
the following:
December 31,
-----------------
2000 1999
------ ------
Notes receivable (1) $2,005 $2,005
Equity investment in Service Companies 497 807
Advances receivable 2,001 849
------ ------
Total investment in Service Companies 4,503 3,661
Investment in MediTract 1,621 --
------ ------
Total $6,124 $3,661
====== ======
(1) The note receivable carries an interest rate of Prime plus 2% through
its maturity on September 28, 2003.
27
7. DEFERRED CHARGES
Deferred charges consisted of the following:
December 31,
-----------------
2000 1999
------ ------
Deferred financing costs $ 6,108 $4,592
Deferred leasing costs 10,800 4,658
Deferred other -- 24
------- ------
16,908 9,274
Accumulated amortization (4,003) (1,749)
------- ------
Deferred charges, net $12,905 $7,525
======= ======
28
8. MORTGAGE AND OTHER LOANS PAYABLE
Mortgage and other loans payable consisted of the following:
December 31,
----------------------
2000 1999
-------- --------
Deutsche Banc Alex. Brown, Term Credit Facility, LIBOR + 1.75%, maturing October 2001 (1) $100,000 $100,000
Deutsche Banc Alex. Brown, Revolving Credit Facility, LIBOR + 1.75%, maturing May 2001 82,245 57,500
Teachers Insurance and Annuity Association of America, 6.89%, maturing November 2008 82,160 83,470
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 59,036 59,801
Prudential Securities Credit Corp., LIBOR + 1.5%, maturing June 2001 29,091 --
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 27,374 27,750
Transamerica Life Insurance and Annuity Company, 8.3%, maturing October 2005 17,597 --
Allfirst Bank, LIBOR + 1.75%, maturing May 2002 11,993 12,290
Bank of America, LIBOR + 1.75%, maturing March 2002 (2) 9,978 --
Allfirst Bank, LIBOR + 1.75%, maturing October 2001 (3) 9,019 4,490
Teachers Insurance and Annuity Association of America, 8.35%, maturing October 2006 7,974 --
Provident Bank of Maryland, LIBOR + 1.75%, maturing July 2001 (4) 7,000 --
Allfirst Bank, LIBOR + 1.75%, maturing May 2002 (5) 6,350 --
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 6,047 6,214
Summit Bank, LIBOR + 1.75%, maturing February 2001 (6) 4,843 --
Allfirst Bank, LIBOR + 1.75%, maturing July 2002 (7) 4,500 --
Mellon Bank, yield on 5-year Treasury Securities + 2%, maturing August 2005 (8) 3,989 4,304
Bank of America, LIBOR + 1.75%, maturing September 2001 2,000 --
Provident Bank of Maryland, LIBOR + 1.75%, maturing July 2002 (9) 1,626 --
Seller loan, 8.0%, maturing May 2007 1,527 1,542
Bank of America, LIBOR + 1.75%, repaid November 2000 -- 16,720
Provident Bank of Maryland, LIBOR + 1.75%, repaid September 2000 -- 8,642
Allfirst Bank, LIBOR + 1.6%, repaid September 2000 -- 8,167
Bank of Maryland, LIBOR + 1.75%, repaid August 2000 -- 3,437
Provident Bank of Maryland, LIBOR + 1.75%, repaid November 2000 -- 2,825
Northern Life Insurance Company, 8%, repaid June 2000 -- 2,475
-------- --------
$474,349 $399,627
======== ========
(1) May be extended for a one-year period, subject to certain conditions.
(2) Construction loan with a total commitment of $13,440. Loan may be extended
for a one-year period, subject to certain conditions.
(3) Construction loan with a total commitment of $12,375. Loan may be extended
for a one-year period, subject to certain conditions.
(4) Loan may be extended for a three-month period, subject to certain
conditions.
(5) Construction loan with a total commitment of $9,325.
(6) Construction loan with a total commitment of $6,900. Loan may be extended
for a two-year period, subject to certain conditions.
(7) Loan was increased to $6,500 in February 2001. It may be extended for a
one year period, subject to certain conditions.
(8) Construction loan with a total commitment of $4,549.
(9) Construction loan with a total commitment of $11,855. Loan may be extended
for a one-year period subject to certain conditions.
In the case of each of our mortgage and construction loans, we have
pledged certain of our real estate assets as collateral. We use the term
collateralized to describe this arrangement. As of December 31, 2000,
substantially all of our real estate properties were collateralized on loan
obligations. Certain of our mortgage loans require that we comply with a
number of restrictive financial covenants, including adjusted consolidated
net worth, minimum property interest coverage, minimum property hedged
interest coverage, minimum consolidated interest coverage, maximum
consolidated unhedged floating rate debt and maximum consolidated total
indebtedness. As of December 31, 2000, we were in compliance with these
financial covenants.
29
Our mortgage loans mature on the following schedule (excluding extension
options):
2001................................... $237,900
2002................................... 37,771
2003................................... 3,924
2004................................... 29,771
2005................................... 24,051
Thereafter............................. 140,932
--------
Total.................................. $474,349
========
The fair value of our mortgage and other loans payable was $481,083 at
December 31, 2000 and $387,539 at December 31, 1999.
Weighted average borrowings under our secured revolving credit facility
with Deutsche Banc Alex. Brown totaled $80,286 in 2000 and $70,165 in 1999. The
weighted average interest rate on this credit facility totaled 8.13% in 2000 and
7.2% in 1999.
Weighted average borrowings under our revolving credit facility with
Prudential Securities totaled $6,232 in 2000. The weighted average interest rate
on this credit facility totaled 8.15% in 2000. No borrowings were made under
this loan in 1999.
Amounts available under our lines of credit with Deutsche Banc Alex. Brown
and Prudential Securities Credit Corporation are generally computed based on 65%
of the appraised value of properties pledged as collateral for these loans. As
of December 31, 2000, the maximum amount available under these lines of credit
totaled $122,139, of which $10,803 was unused.
We capitalized interest costs of $3,889 in 2000, $1,510 in 1999 and $77 in
1998.
We had mortgage loans payable that were retired early during 2000 and 1999
using proceeds from sales of properties and refinancings. We recognized a loss
on these early debt retirements of $153 in 2000 and $903 in 1999.
9. SHAREHOLDERS' EQUITY
PREFERRED SHARES
In 1998, we issued 984,308 Series A Preferred Shares. These shares are
nonvoting and are convertible after two years of issuance, subject to certain
conditions, into Common Shares on the basis of 1.8748 Common Shares for each
Series A Preferred Share. Holders of the Series A Preferred 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 $1.375
per share, which is equal to 5.5% of the $25.00 per share liquidation preference
of the shares. On September 28, 2000, 984,307 of these shares were converted
into 1,845,378 Common Shares.
In July 1999, we completed the sale of 1,250,000 Series B Cumulative
Redeemable Preferred Shares of beneficial interest ("Series B Preferred Shares")
to the public at a price of $25.00 per share. These shares are nonvoting and are
redeemable for cash at $25.00 per share at our option on or after July 15, 2004.
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 $2.50 per share, which is equal to 10% of the $25.00
per share redemption price. We contributed the net proceeds to our Operating
Partnership in exchange for 1,250,000 Series B Preferred Units. The Series B
Preferred Units carry terms that are substantially the same as the Series B
Preferred Shares.
30
COMMON SHARES
In April 1998, we completed the sale of 7,500,000 Common Shares to the
public at a price of $10.50 per share and contributed the net proceeds to our
Operating Partnership in exchange for 7,500,000 Common Units. Our Operating
Partnership used the proceeds to fund acquisitions.
In 1998, we issued 7,030,793 Common Shares in connection with an
acquisition.
Over the three years ended December 31, 2000, we had the following
transactions in which Common Units in our Operating Partnership were converted
into Common Shares on the basis of one Common Share for each Common Unit:
o 372,295 Common Units converted on August 4, 1999;
o 877,545 Common Units converted on March 16, 2000; and
o 170,000 Common Units converted on June 30, 2000.
On December 16, 1999, we issued 471,875 Common Shares subject to forfeiture
restrictions to certain officers. We issued an additional 12,500 of these shares
to an officer in 2000. The forfeiture restrictions of specified percentages of
these shares lapse annually through 2004 upon the Company's attainment of
defined earnings or shareholder return growth targets. These shares may not be
sold, transferred or encumbered while the forfeiture restrictions are in place.
Forfeiture restrictions lapsed on 8,593 of these shares during 1999 and 15,625
of these shares in 2000.
On November 3, 1999, the Board of Trustees authorized a share repurchase
program to buy up to 2,000,000 Common Shares in open market and privately
negotiated purchases depending on market conditions and other factors. Shares
repurchased under this program are summarized below.
Repurchase Number of Cost of
Date Shares Repurchase
---------- --------- ----------
3/31/00 6,600 $ 52
4/5/00 20,000 166
6/5/00 140,000 1,197
We issued Common Shares in connection with the exercise of share options of
24,467 in 2000 and 5,000 in 1998.
10. SHARE OPTIONS
In 1993, we adopted a share option plan for directors under which we have
75,000 Common Shares reserved for issuance. These options become exercisable
beginning on the first anniversary of their grant and expire ten years after the
date of grant.
In March 1998, we adopted a share option plan for Trustees, our employees
and employees of the Service Companies under which we have 3,175,739 Common
Shares reserved for issuance. Trustee options under this plan become exercisable
beginning on the first anniversary of their grant. Employees' options under this
plan generally become exercisable over a 3 to 5 year period. Options expire ten
years after the date of grant.
31
The following table summarizes share option transactions under the plans
described above:
Weighted
Range of Average
Exercise Exercise
Shares Price per Share Price per Share
--------- ----------------- ---------------
Outstanding at December 31, 1997 75,000 $5.25 - $10.38 $7.31
Granted - 1998 722,875 $9.25 - $12.25 $9.37
Forfeited - 1998 (6,050) $9.25 $9.25
Exercised - 1998 (5,000) $5.38 - $5.63 $5.51
---------
Outstanding at December 31, 1998 786,825 $5.25 - $12.25 $9.20
Granted - 1999 700,200 $7.38 - $9.25 $8.21
Forfeited - 1999 (59,050) $8.00 - $9.25 $8.48
1998 Options Repriced from (360,500) $9.25 $9.25
$9.25 to $8.00 during 1999 360,500 $8.00 $8.00
---------
Outstanding at December 31, 1999 1,427,975 $5.25 - $12.25 $8.46
Granted - 2000 977,425 $7.63 - $9.75 $8.23
Forfeited - 2000 (50,915) $7.63 - $8.00 $7.95
Exercised - 2000 (24,467) $5.25 - $8.00 $6.89
---------
Outstanding at December 31, 2000 2,330,018 $5.25 - $12.25 $8.46
=========
Available for future grant at December 31, 2000 445,564
=========
Exercisable at December 31, 1998 70,000 $5.25 - $10.38 $7.77
=========
Exercisable at December 31, 1999 312,467 $5.25 - $12.25 $8.73
=========
Exercisable at December 31, 2000 1,039,502 (1) $8.46
=========
(1) 27,500 of these options had an exercise price ranging from $5.25 to $5.63,
982,002 had an exercise price ranging from $6.82 to $10.38 and 30,000 had
an exercise price of $12.25.
The weighted average remaining contractual life of the options at December
31, 2000 was approximately eight years.
A summary of the weighted average grant-date fair value per option granted is as
follows:
2000 1999 1998
---- ---- ----
Weighted average grant-date fair value $1.03 $0.75 $0.98
Weighted average grant-date fair value - exercise price equals
Market price on grant-date $1.02 $0.90 $2.03
Weighted average grant-date fair value - exercise price exceeds
Market price on grant-date $0.99 $0.46 $0.95
Weighted average grant-date fair value - exercise price less than
Market price on grant-date $1.31 $0.98 $ --
We estimated the fair values using the Black-Scholes option-pricing model
using the following assumptions:
2000 1999 1998
---- ---- ----
Risk free interest rate 6.60% 5.57% 4.65%
Expected life - years 4.58 3.85 5.75
Expected volatility 26.04% 27.00% 30.00%
Expected dividend yield 8.17% 8.40% 6.80%
32
Effective July 1, 2000, we and the Service Companies recognize expenses
from share options issued to employees for the following:
o the share price appreciation and future vesting relating to share options
that were repriced in 1999, and
o the issuance of share options to employees of CRM and MGK.
Expenses from such share options are reflected in our Consolidated Statements of
Operations as an $83 increase in general and administrative expenses and a $67
decrease in our equity in income of the Service Companies in 2000.
Otherwise, we and our Service Companies do not record compensation expense
for share option grants unless the exercise price of such grants is less than
the market price on the option grant date. The following table summarizes
results as if we elected to account for share options based on Statement of
Financial Accounting Standards No. 123:
2000 1999 1998
---- ---- ----
Net income (loss) available to Common Shareholders, as reported $ 11,332 $12,229 $4,369
Net income (loss) available to Common Shareholders, pro forma 10,948 12,009 4,312
Earnings (loss) per Common Share, as reported 0.60 0.72 0.48
Earnings (loss) per Common Share, pro forma 0.58 0.71 0.47
Diluted earnings (loss) per Common Share, as reported 0.59 0.66 0.47
Diluted earnings (loss) per Common Share, pro forma 0.57 0.65 0.46
11. RELATED PARTY TRANSACTIONS
MANAGEMENT
We have a contract with COMI under which COMI provides asset management,
managerial, financial and legal support. Under the terms of this contract, we
reimburse COMI for personnel and other overhead-related expenses. We incurred
management fees and related costs under this contract of $4,420 in 2000, $3,072
in 1999 and $545 in 1998. We capitalized $402 of these fees in 2000, $430 in
1999 and $73 in 1998.
We have a management agreement with CRM under which CRM provides property
management services to most of our properties. Under the terms of this
arrangement, CRM is entitled to a fee equal to a percentage of revenue from
tenant billings (3% in 2000 and 1999 and 3.5% in 1998). CRM is also entitled to
reimbursement for direct labor and out-of-pocket costs. We incurred property
management fees and related costs with CRM of $5,208 in 2000, $3,743 in 1999 and
$557 in 1998.
We had a management agreement with Glacier Realty LLC ("Glacier"), a
company that was partially owned by one of our former Trustees. Under the
management agreement, Glacier was responsible for the management of our retail
properties for a base annual fee of $250 plus a percentage of Average Invested
Assets (as defined in the management agreement). Glacier was also entitled to
fees upon our acquisition or sale of any net-leased retail real estate property,
a fee that increased in the event that all or substantially all of the
net-leased retail real estate properties were sold. The management agreement,
entered into on October 14, 1997, had a term of five years. A fee was also due
in the event that the management agreement was terminated or not renewed. We
incurred fees under this agreement of $63 in 1999 and $250 in 1998. On March 19,
1999, our Operating Partnership issued 200,000 Common Units in exchange for all
of the ownership interests in Glacier. For accounting purposes, we recorded
$1,487, the value of this transaction, against the gain on the sale of our
retail properties in the Midwest region of the United States.
We also had a management agreement with a company for which one of our
Trustees serves on the Board of Directors. We incurred management fees and
related costs under this contract of $62 in 1999 and $87 in 1998.
33
CONSTRUCTION COSTS
We have a contract with CDS under which CDS provides construction and
development services. Under the terms of this contract, we reimburse CDS for
these services based on actual time incurred at market rates. We incurred $1,544
in 2000, $1,274 in 1999 and $214 in 1998 under this contract, a substantial
portion of which was capitalized into the cost of the related activities.
COMMON SHARE GRANTS
The Service Companies paid us $119 in 2000 and $63 in 1999 for the value of
Common Shares granted to certain of its employees.
RENTAL INCOME
We recognized revenue on office space leased to COMI and CRM of $538 in
2000, $420 in 1999 and $92 in 1998. We recognized revenue on office space leased
to Constellation of $712 in 2000, $944 in 1999 and $256 in 1998. We recognized
revenue on office space leased to a company for which one of our Trustees serves
on the Board of Directors in 2000 of $52.
INTEREST INCOME
We earned interest income on notes receivable from the Service Companies of
$325 in 2000, $253 in 1999 and $66 in 1998. We also earned interest income in
1999 of $723 on notes receivable from Corporate Gateway.
CONSTRUCTION FEES
The Service Companies earned construction management fees in 2000 of $19
from a related party. The Service Companies also earned construction management
fees in 1999 of $60 from an entity owned by an officer and Trustee of ours. We
earned construction management fees in 1998 of $60 from an entity owned by an
officer and Trustee of ours.
LEASING COMMISSION
We recognized leasing commissions of $502 in 2000 from related parties. The
Service Companies earned a leasing commission of $117 in 1999 from an entity
owned by an officer and Trustee of ours.
FEES EARNED FROM CONSTELLATION AND BGE
The Service Companies earned fees from a project consulting and management
agreement with Constellation of $150 in 2000, $1,100 in 1999 and $750 in 1998.
The Service Companies also earned fees and expense reimbursements of $101 in
2000, $500 in 1999 and $206 in 1998 under a property management agreement with
Baltimore Gas and Electric Company ("BGE"), an affiliate of Constellation.
ACQUISITION FEES
We earned an acquisition services fee in 1999 of $213 from Corporate
Gateway.
CONSULTING FEES
We earned fees for consulting services in 2000 of $225 from MediTract.
34
UTILITIES EXPENSE
BGE provided utility services to most of our properties in the
Baltimore/Washington Corridor during 2000, 1999 and 1998.
12. OPERATING LEASES
We lease our properties to tenants under operating leases with various
expiration dates extending to the year 2015. Gross minimum future rentals on
noncancelable leases at December 31, 2000 are as follows:
2001...................................... $ 96,055
2002...................................... 80,014
2003...................................... 69,096
2004...................................... 57,959
2005...................................... 50,710
Thereafter................................ 118,913
--------
Total................................... $472,747
========
The amounts above do not include the cancelable portion of future rentals
on long term leases with the United States Government that are structured with
consecutive automatic one-year renewable terms.
13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Interest paid, net of capitalized interest $28,029 $21,258 $12,876
------- ------- -------
Supplemental schedule of non-cash investing and financing activities:
Debt repaid in connection with sales of rental properties $ 6,943 $20,928 $ --
------- ------- -------
Debt assumed in connection with acquisitions $10,679 $26,620 $84,679
------- ------- -------
Increase in minority interests resulting from issuance of Preferred and
Common Units in connection with property acquisitions $ -- $28,309 $ 1,559
------- ------- -------
Increase in minority interests resulting from issuance of Common Units in
connection with Glacier transaction $ -- $ 1,487 $ --
------- ------- -------
Increase in shareholders' equity resulting from issuance of Common Shares and
Preferred Shares in connection with acquisitions $ -- $ -- $98,431
------- ------- -------
Note receivable balance applied to cost of property acquisition $ -- $ 1,575 $ --
------- ------- -------
Increase in accrued capital improvements $ 2,810 $ 1,212 $ 1,742
------- ------- -------
Adjustments to minority interests resulting from changes in ownership of
Operating Partnership by COPT $ 2,460 $ 8,970 $11,331
------- ------- -------
Dividends/distribution payable $ 7,090 $ 6,298 $ 4,692
------- ------- -------
Decrease in minority interests and increase in shareholders' equity in
connection with conversion of Common Units into Common Shares $ 8,527 $ 3,141 $ --
------- ------- -------
Changes in minority interests in connection with conversion of Preferred
Units into Common Units $ -- $52,500 $ --
------- ------- -------
Changes in shareholders' equity in connection with issuance of restricted
Common Shares $ 97 $ 3,480 $ --
------- ------- -------
35
14. INFORMATION BY BUSINESS SEGMENT
We have five segments: Baltimore/Washington Corridor office, Greater
Philadelphia office, Northern/Central New Jersey office, Greater Harrisburg
office and retail. Our office properties represent our core-business. We manage
our retail properties as a single segment since they are considered outside of
our core business.
The table below reports segment financial information. Our retail segment
is not separately reported since it does not meet the reporting thresholds. Our
segment entitled "Other" includes our retail segment and other 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. Accordingly, we do not report other expenses by segment in
the table below.
Baltimore/ Northern/
Washington Greater Central New Greater
Corridor Philadelphia Jersey Harrisburg
Office Office Office Office Other Total
-----------------------------------------------------------------------------
Year Ended December 31, 2000:
Revenues $ 66,548 $ 10,025 $ 20,311 $ 9,169 $ 2,940 $108,993
Property operating expenses 21,104 103 7,501 2,310 217 31,235
-------- -------- -------- -------- -------- --------
Income from operations $ 45,444 $ 9,922 $ 12,810 $ 6,859 $ 2,723 $ 77,758
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $ 66,455 $ 421 $ 10,069 $ 1,577 $ 97 $ 78,619
======== ======== ======== ======== ======== ========
Segment assets at December 31, 2000 $475,330 $106,349 $118,656 $ 71,210 $ 23,292 $794,837
======== ======== ======== ======== ======== ========
Year Ended December 31, 1999:
Revenues $ 45,716 $ 10,024 $ 17,764 $ 3,716 $ 3,892 $ 81,112
Property operating expenses 14,025 82 6,761 1,083 374 22,325
-------- -------- -------- -------- -------- --------
Income from operations $ 31,691 $ 9,942 $ 11,003 $ 2,633 $ 3,518 $ 58,787
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $148,577 $ 17 $ 14,364 $ 47,176 $ 331 $210,465
======== ======== ======== ======== ======== ========
Segment assets at December 31, 1999 $410,029 $107,516 $111,872 $ 70,648 $ 20,969 $721,034
======== ======== ======== ======== ======== ========
Year Ended December 31, 1998:
Revenues $ 13,548 $ 10,024 $ 9,997 $ 2,835 $ 3,810 $ 40,214
Property operating expenses 4,293 15 3,914 946 464 9,632
-------- -------- -------- -------- -------- --------
Income from operations $ 9,255 $ 10,009 $ 6,083 $ 1,889 $ 3,346 $ 30,582
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $275,502 $ -- $ 64,571 $ 18,019 $ 6,415 $364,507
======== ======== ======== ======== ======== ========
Segment assets at December 31, 1998 $277,751 $108,894 $ 97,035 $ 23,888 $ 56,109 $563,677
======== ======== ======== ======== ======== ========
36
The following table reconciles our income from operations for reportable
segments to income before extraordinary item as reported in our Consolidated
Statements of Operations.
Years Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Income from operations for reportable segments $ 77,758 $ 58,787 $ 30,582
Add:
Equity in (loss) income of Service Companies (310) 198 139
Gain on sales of rental properties 107 1,140 --
Less:
General and administrative (4,867) (3,204) (1,890)
Interest (30,454) (21,808) (12,207)
Amortization of deferred financing costs (1,382) (975) (423)
Depreciation and other amortization (16,977) (12,075) (6,285)
Reformation costs -- -- (637)
Minority interests (8,588) (6,077) (4,583)
-------- -------- --------
Income before extraordinary item $ 15,287 $ 15,986 $ 4,696
======== ======== ========
We did not allocate gain on sales of rental properties, 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 (loss) income of
Service Companies, general and administrative, reformation costs and minority
interests since these items represent general corporate expenses not
attributable to segments.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we are involved in legal actions arising
from our ownership and administration of properties. In management's opinion,
any liabilities that may result are not expected to 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.
OFFICE LEASE
We have a lease for our office in Bala Cynwyd, Pennsylvania. The monthly
rent under this lease is subject to an annual increase based on the Consumer
Price Index. Future minimum rental payments due under the term of this lease are
as follows:
2001................................. $171
2002................................. 171
2003................................. 128
----
Total................................ $470
====
37
16. QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 2000
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- -------
Revenues $25,861 $26,417 $28,039 $28,676
======= ======= ======= =======
Income before minority interests and
extraordinary item $ 5,839 $ 5,807 $ 6,065 $ 6,164
Minority interests (2,189) (2,053) (2,271) (2,075)
------- ------- ------- -------
Income before extraordinary item 3,650 3,754 3,794 4,089
Extraordinary item -- (42) (109) (2)
------- ------- ------- -------
Net income 3,650 3,712 3,685 4,087
Preferred Share dividends (1,120) (1,119) (781) (782)
------- ------- ------- -------
Net income available to Common
Shareholders $ 2,530 $ 2,593 $ 2,904 $ 3,305
======= ======= ======= =======
Basic earnings per share:
Income before extraordinary item $ 0.15 $ 0.15 $ 0.15 $ 0.17
======= ======= ======= =======
Net income $ 0.15 $ 0.14 $ 0.15 $ 0.17
======= ======= ======= =======
Diluted earnings per share:
Income before extraordinary item $ 0.14 $ 0.14 $ 0.15 $ 0.16
======= ======= ======= =======
Net income $ 0.14 $ 0.14 $ 0.14 $ 0.16
======= ======= ======= =======
Weighted average Common Shares-basic 17,352 18,014 19,934 19,947
======= ======= ======= =======
Weighted average Common Shares-diluted 17,878 18,671 20,173 29,611
======= ======= ======= =======
38
Year Ended December 31, 1999
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- -------
Revenues $18,523 $19,542 $20,460 $22,587
======= ======= ======= =======
Income before minority interests and
extraordinary item $ 5,588 $ 5,225 $ 5,490 $ 5,760
Minority interests (1,349) (1,523) (1,444) (1,761)
------- ------- ------- -------
Income before extraordinary item 4,239 3,702 4,046 3,999
Extraordinary item (694) (144) -- (65)
------- ------- ------- -------
Net income 3,545 3,558 4,046 3,934
Preferred Share dividends (338) (338) (1,060) (1,118)
------- ------- ------- -------
Net income available to Common
Shareholders $ 3,207 $ 3,220 $ 2,986 $ 2,816
======= ======= ======= =======
Basic earnings per share:
Income before extraordinary item $ 0.23 $ 0.20 $ 0.18 $ 0.17
======= ======= ======= =======
Net income $ 0.19 $ 0.19 $ 0.18 $ 0.16
======= ======= ======= =======
Diluted earnings per share:
Income before extraordinary item $ 0.19 $ 0.17 $ 0.16 $ 0.17
======= ======= ======= =======
Net income $ 0.17 $ 0.17 $ 0.16 $ 0.16
======= ======= ======= =======
Weighted average Common Shares-basic 16,802 16,802 17,037 17,176
======= ======= ======= =======
Weighted average Common
Shares-diluted on income before
extraordinary item 28,914 24,311 24,555 27,621
======= ======= ======= =======
Weighted average Common
Shares-diluted on net income 24,310 24,311 24,555 27,621
======= ======= ======= =======
39
17. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
We accounted for our 1999 and 2000 acquisitions 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 December 31, 2000.
We prepared our pro forma condensed consolidated financial information
presented below as if all of our 1999 and 2000 acquisitions had occurred on
January 1, 1999. Accordingly, we were required to make pro forma adjustments
where deemed necessary. The pro forma financial information is unaudited and is
not necessarily indicative of the results which actually would have occurred if
these acquisitions had occurred on January 1, 1999, nor does it intend to
represent our results of operations for future periods.
Year Ended December 31,
-------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
Pro forma total revenues $108,123 $95,237
======== =======
Pro forma net income available to Common Shareholders $ 11,182 $11,781
======== =======
Pro forma earnings per Common Share
Basic $ 0.59 $ 0.69
======== =======
Diluted $ 0.59 $ 0.64
======== =======
18. SUBSEQUENT EVENT
In January 2001, we issued 544,000 Series D Cumulative Convertible
Redeemable Preferred Shares of beneficial interest ("Series D Preferred Shares")
to a foreign trust at a price of $22.00 per share for proceeds totaling $11,968.
These shares are nonvoting and are redeemable for cash at $25.00 per share at
our option on or after January 25, 2006. These shares are also convertible on or
after January 1, 2004 into Common Shares on the basis of 2.2 Common Shares for
each Series D Preferred Share. 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 $1.00
per share, which is equal to 4% of the $25.00 per share redemption price. We
contributed the net proceeds to our Operating Partnership in exchange for
544,000 Series D Preferred Units. The Series D Preferred Units carry terms that
are substantially the same as the Series D Preferred Shares.
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Corporate Office Properties Trust
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Corporate
Office Properties Trust and its subsidiaries (the "Company") at December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 24, 2001
41
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Shares trade on the NYSE under the symbol "OFC". The table below
shows the range of the high and low sale prices for our Common Shares as
reported on the NYSE, as well as the quarterly Common Share dividends per share
declared.
PRICE RANGE
-------------------- DIVIDENDS
LOW HIGH PER SHARE
------- ------- ----------
2000
First Quarter.......................... $7.5000 $8.3750 $0.19
Second Quarter......................... 8.0000 9.2500 0.19
Third Quarter.......................... 8.7500 10.1250 0.20
Fourth Quarter......................... 8.9375 10.0000 0.20
1999
First Quarter.......................... $6.3750 $8.3125 $0.18
Second Quarter......................... 5.8750 8.6875 0.18
Third Quarter.......................... 7.0000 9.0000 0.19
Fourth Quarter......................... 7.0625 8.2500 0.19
The approximate number of holders of record of our shares was approximately
231 as of December 31, 2000. This number does not include shareholders whose
shares are held of record by a brokerage house or clearing agency, but does
include any such brokerage house or clearing agency as one record holder.
We will pay future dividends at the discretion of our Board of Trustees.
Our ability to pay cash dividends in the future will be dependent upon (i) the
income and cash flow generated from our operations, (ii) cash generated or used
by our financing and investing activities and (iii) the annual distribution
requirements under the REIT provisions of the Code described above and such
other factors as the Board of Trustees deems relevant. Our ability to make cash
dividends will also be limited by the terms of our Operating Partnership
Agreement and our financing arrangements as well as limitations imposed by state
law and the agreements governing any future indebtedness.
42