<Page>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
------------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 0-20047
CORPORATE OFFICE PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 23-2947217
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8815 CENTRE PARK DRIVE, SUITE 400, COLUMBIA MD 21045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 730-9092
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
On August 8, 2001, 20,695,973 shares of the Company's Common Shares of
Beneficial Interest, $0.01 par value, were issued.
================================================================================
1
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TABLE OF CONTENTS
FORM 10-Q
<Table>
<Caption>
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations for the three and six months ended June 30, 2001
and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000
(unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3: Quantitative and Qualitative Disclosures About Market Risk 27
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 27
Item 2: Changes in Securities 28
Item 3: Defaults Upon Senior Securities 28
Item 4: Submission of Matters to a Vote of Security Holders 28
Item 5: Other Information 28
Item 6: Exhibits and Reports on Form 8-K 28
SIGNATURES 34
</Table>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
June 30, December 31,
2001 2000
-------------- ---------------
(unaudited)
ASSETS
Investment in real estate:
Operating properties, net $725,437 $ 711,413
Projects under construction or development 54,554 36,558
- -------------------------------------------------------------------------------------------------------------------------
Total commercial real estate properties, net 779,991 747,971
Investments in and advances to unconsolidated real estate joint ventures 12,009 3,616
- -------------------------------------------------------------------------------------------------------------------------
Investment in real estate 792,000 751,587
Cash and cash equivalents 2,962 4,981
Restricted cash 9,633 2,703
Accounts receivable, net 4,855 3,245
Investment in and advances to other unconsolidated entities 2,041 6,124
Deferred rent receivable 9,804 8,644
Deferred charges, net 16,357 12,905
Prepaid and other assets 9,383 4,501
Furniture, fixtures and equipment, net 1,772 147
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $848,807 $ 794,837
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage and other loans payable $475,999 $ 474,349
Accounts payable and accrued expenses 13,361 10,227
Rents received in advance and security deposits 4,023 3,883
Dividends and distributions payable 7,918 7,090
Fair value of derivatives 2,232 --
Other liabilities 10,637 --
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 514,170 495,549
- -------------------------------------------------------------------------------------------------------------------------
Minority interests:
Preferred Units in the Operating Partnership 24,367 24,367
Common Units in the Operating Partnership 78,900 81,069
Other consolidated partnerships 224 124
- -------------------------------------------------------------------------------------------------------------------------
Total minority interests 103,491 105,560
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
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 (1 share issued) -- --
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) 13 12
544,000 designated as Series D Cumulative Convertible Redeemable Preferred
Shares of beneficial interest (544,000 shares issued
with an aggregate liquidation preference of $13,600 at June 30, 2001) 5 --
1,150,000 designated as Series E Cumulative Redeemable Preferred Shares of
beneficial interest (1,150,000 shares issued with an
aggregate liquidation preference of $28,750 at June 30, 2001) 11 --
Common Shares of beneficial interest ($0.01 par value; 45,000,000
shares authorized, shares issued of 20,692,663 at June 30, 2001 and
20,575,936 at December 31, 2000) 207 206
Additional paid-in capital 249,618 209,388
Cumulative dividends in excess of net income (12,776) (11,064)
Value of unearned restricted Common Share grants (3,042) (3,399)
Treasury Shares, at cost (166,600 shares) (1,415) (1,415)
Accumulated other comprehensive loss (1,475) --
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 231,146 193,728
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $848,807 $ 794,837
=========================================================================================================================
</Table>
See accompanying notes to financial statements.
3
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CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
For the three months ended For the six months ended,
June 30, June 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
Real Estate Operations:
Revenues
Rental revenue $25,960 $23,154 $51,579 $45,060
Tenant recoveries and other revenue 2,951 3,263 7,033 7,218
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Revenue from real estate operations 28,911 26,417 58,612 52,278
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Expenses
Property operating 8,558 7,437 17,024 15,045
Interest 7,762 7,404 15,956 14,338
Amortization of deferred financing costs 546 311 929 617
Depreciation and other amortization 4,957 4,307 9,857 8,180
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Expenses from real estate operations 21,823 19,459 43,766 38,180
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Earnings from real estate operations before equity in income
of unconsolidated real estate joint ventures 7,088 6,958 14,846 14,098
Equity in income of unconsolidated real estate joint ventures 124 -- 154 --
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Earnings from real estate operations 7,212 6,958 15,000 14,098
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Service operations:
Revenues 1,136 -- 2,176 --
Expenses (875) -- (2,244) --
Equity in loss of unconsolidated Service Companies (118) (48) (118) (1)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Earnings (losses) from service operations 143 (48) (186) (1)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
General and administrative expense (1,329) (1,160) (2,775) (2,508)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Income before gain on sales of properties, minority interests,
income taxes, extraordinary item and cumulative effect of
accounting change 6,026 5,750 12,039 11,589
Gain on sales of properties 1,596 57 1,596 57
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Income before minority interests, income taxes, extraordinary
item and cumulative effect of accounting change 7,622 5,807 13,635 11,646
Minority interests:
Common Units in the Operating Partnership (1,816) (1,517) (3,372) (3,151)
Preferred Units in the Operating Partnership (572) (548) (1,144) (1,096)
Other consolidated entities (58) (4) (54) (11)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Income before income taxes, extraordinary item and cumulative
effect of accounting change 5,176 3,738 9,065 7,388
Income tax (expense) benefit, net of minority interests (29) -- 52 --
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Income before extraordinary item and cumulative effect
of accounting change 5,147 3,738 9,117 7,388
Extraordinary item-loss on early retirement of debt, net of
minority interests (66) (26) (136) (26)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Income before cumulative effect of accounting change 5,081 3,712 8,981 7,362
Cumulative effect of accounting change, net of minority
interests -- -- (174) --
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
NET INCOME 5,081 3,712 8,807 7,362
Preferred Share dividends (1,613) (1,119) (2,494) (2,239)
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,468 $ 2,593 $ 6,313 $ 5,123
================================================================= =============== ================ =============== ===============
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item and cumulative effect of
accounting change $ 0.18 $ 0.15 $ 0.33 $ 0.29
Extraordinary item (0.01) (0.01) -- --
Cumulative effect of accounting change -- -- (0.01) --
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Net income $ 0.17 $ 0.14 $ 0.32 $ 0.29
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item and cumulative effect of
accounting change $ 0.17 $ 0.14 $ 0.32 $ 0.28
Extraordinary item -- -- -- --
Cumulative effect of accounting change -- -- (0.01) --
- ----------------------------------------------------------------- --------------- ---------------- --------------- ---------------
Net income $ 0.17 $ 0.14 $ 0.31 $ 0.28
================================================================= =============== ================ =============== ===============
</Table>
See accompanying notes to financial statements.
4
<Page>
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
For the six months ended June 30,
----------------------------------
2001 2000
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $8,807 $ 7,362
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 4,437 4,242
Depreciation and other amortization 9,857 8,180
Amortization of deferred financing costs 929 617
Equity in (income) loss of unconsolidated entities (36) 1
Gain on sales of properties (1,596) (57)
Extraordinary item - loss on early retirement of debt 206 42
Cumulative effect of accounting change 263 --
Increase in deferred rent receivable (1,477) (1,439)
Increase in accounts receivable, restricted cash and
prepaid and other assets 449 (759)
Increase in accounts payable, accrued expenses, rents
received in advance and security deposits 95 2,247
Other 656 --
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,590 20,436
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of and additions to commercial real estate
properties (38,228) (36,308)
Proceeds from sales of rental properties 3,797 602
Investments in and advances to unconsolidated real estate
joint ventures (8,239) --
Cash from acquisition of Service Companies 568 --
Investments in and advances to other unconsolidated entities (564) (435)
Leasing commissions paid (2,019) (3,218)
Increase in restricted cash, investing activities (4,262) --
Advances to certain real estate joint ventures (6,235) --
Other (748) (3,378)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (55,930) (42,737)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage and other loans payable 83,037 41,118
Repayments of mortgage and other loans payable (74,427) (4,712)
Deferred financing costs paid (3,290) (1,246)
Increase in other liabilities 1,027 --
Purchase of Treasury Shares -- (1,415)
Net proceeds from issuance of Preferred Shares 38,844 --
Net proceeds from issuance of Common Shares 424 151
Net proceeds from issuance of share options 280 4
Dividends paid (9,674) (8,937)
Distributions paid (4,900) (4,408)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 31,321 20,555
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,019) (1,746)
CASH AND CASH EQUIVALENTS
Beginning of period 4,981 2,376
- ----------------------------------------------------------------------------------------------------------
End of period $ 2,962 $ 630
- ----------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
5
<Page>
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE 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 June 30, 2001, our portfolio included 91
office properties, including six owned through joint ventures.
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 owns Corporate Office Management, Inc. ("COMI") (together
with its subsidiaries defined as the "Service Companies"). Prior to January
1, 2001, the Operating Partnership owned the principal economic interest in
COMI but only owned 1% of COMI's voting stock (see Note 7). A summary of our
Operating Partnership's forms of ownership and the percentage of those
ownership forms owned by COPT as of June 30, 2001 follows:
<Table>
<Caption>
% Owned by COPT
---------------
Common Units 66%
Series A Preferred Units 100%
Series B Preferred Units 100%
Series C Preferred Units 0%
Series D Preferred Units 100%
Series E Preferred Units 100%
</Table>
NOTE 2 BASIS OF PRESENTATION
These notes to our interim financial statements highlight significant
changes to the notes to the financial statements included in our 2000 Annual
Report on Form 10-K. As a result, these notes to our interim financial
statements should be read together with the financial statements and notes
thereto included in our 2000 Annual Report on Form 10-K. The interim
financial statements on the previous pages reflect all adjustments which we
believe are necessary for the fair presentation of our financial position and
results of operations for the interim periods presented. These adjustments
are of a normal recurring nature. The results of operations for such interim
periods are not necessarily indicative of the results for a full year.
We use 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 the majority 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:
- - COPT;
- - the Operating Partnership and its subsidiaries; and
- - Corporate Office Properties Holdings, Inc. (we own 100%).
The Service Companies became a consolidated subsidiary of the Operating
Partnership effective January 1, 2001 (see Note 7). Prior to that date, we
accounted for our investment in the Service Companies using the equity method
of accounting (discussed below).
6
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EQUITY METHOD
We use the equity method of accounting when we own an interest in an
entity and can exert significant influence over the entity's operations but
cannot control the entity's operations. Under the equity method, we report:
- - our ownership interest in the entity's capital as an investment on our
Consolidated Balance Sheets and
- - our percentage share of the earnings or losses from the entity in our
Consolidated Statements of Operations.
COST METHOD
We use the cost method of accounting when we own an interest in an
entity and cannot exert significant influence over the entity's operations.
Under the cost method, we report:
- - the cost of our investment in the entity as an investment on our
Consolidated Balance Sheets and
- - distributions to us of the entity's earnings in our Consolidated Statements
of Operations.
NOTE 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:
- - our reported amounts of assets and liabilities in our Consolidated Balance
Sheets at the dates of the financial statements;
- - our disclosure of contingent assets and liabilities at the dates of the
financial statements; and
- - 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.
ACCOUNTING FOR CERTAIN REAL ESTATE JOINT VENTURES
We contributed parcels of land into two real estate joint ventures. Each
of these joint ventures is engaged in the construction of an office building.
In exchange for the contributions of land, we received joint venture
interests and $9.6 million in cash. In each case, we have an option to
acquire the joint venture partners' interests for a pre-determined purchase
price over a limited period of time. We account for our interests in these
joint ventures as follows:
- - the costs associated with these land parcels at the time of their
respective contributions are reported as projects under construction or
development on our Consolidated Balance Sheets;
- - the cash received from these joint ventures in connection with the land
contributions is reported as other liabilities on our Consolidated Balance
Sheets. These liabilities are being accreted towards the pre-determined
purchase price over the period in which we have an option to acquire the
joint venture partners' interests. We also report interest expense in
connection with the accretion of these liabilities; and
- - once construction of the buildings on these land parcels is complete and
operations commence, we will begin reporting 100% of the revenues and
expenses associated with these properties on our Consolidated Statements of
Operations.
We do not report ongoing construction costs and debt activity for these
projects relating to periods after the respective land contributions.
DERIVATIVES
We are exposed to the effect of interest rate changes in the normal
course of business. We use interest rate swap and interest rate cap
agreements to reduce the impact of such interest rate changes. Interest rate
differentials that arise under these contracts are recognized in interest
expense over the life of the respective
7
<Page>
contracts. We do not use such derivatives for trading or speculative
purposes. We also only enter into contracts with major financial institutions
based upon their credit ratings and other risk factors.
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". 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:
- - the accumulated other comprehensive loss component of shareholders' equity
("AOCL"), net of the share attributable to minority interests, for any
derivatives designated as cash flow hedges to the extent such derivatives
are deemed effective;
- - other revenue or expense on our Statement of Operations for any derivatives
designated as cash flow hedges to the extent such derivatives are deemed
ineffective; or
- - other revenue or expense on our Statement of Operations for any derivatives
designated as fair value hedges.
We use standard market conventions and techniques such as discounted
cash flow analysis, option pricing models, replacement cost and termination
cost in computing the fair value of derivatives at each balance sheet date.
The following table sets forth derivative contracts we had in place as
of June 30, 2001 and their respective fair values ("FV"):
<Table>
<Caption>
Notional
Nature of Amount One-Month Effective Expiration FV at
Derivative (in millions) LIBOR base Date Date 6/30/01
- ------------------ ------------- ---------- --------- ---------- -------
Interest rate cap $ 50.0 7.70% 5/25/00 5/31/02 $ --
Interest rate cap 50.0 7.00% 9/13/00 10/13/01 --
Interest rate cap 25.0 7.00% 10/17/00 10/13/01 --
Interest rate swap 100.0 5.76% 1/2/01 1/2/03 (2,232)
-------
Total $(2,232)
=======
</Table>
We have designated each of these derivatives as cash flow hedges. At
June 30, 2001, the interest rate swap is effective while the interest rate
caps are not effective. At adoption on January 1, 2001, we reduced AOCL and
minority interests in total by $246 as a cumulative effect adjustment to
recognize the net fair value of our interest rate swap contract on that date.
We also recognized an unrealized loss of $263 ($174 net of minority
interests' portion) on the book value associated with these derivatives at
January 1, 2001; this loss is reported as a cumulative effect of an
accounting change on our Consolidated Statements of Operations.
During the six months ended June 30, 2001, we reduced AOCL and minority
interests in total by an additional $1,986 to recognize the decrease in the
fair value of the interest rate swap during that period. We also recognized
an unrealized loss of $6 to recognize the change in the fair value of the
interest rate caps; this loss is included in tenant recoveries and other
revenue on the Consolidated Statements of Operations.
Over time, the unrealized loss held in AOCL and minority interests
associated with our interest rate swap will be reclassified to earnings.
Within the next twelve months, we expect to reclassify to earnings an
estimated $1.5 million of the balances held in AOCL and minority interests.
MINORITY INTERESTS
As discussed previously, we consolidate the accounts of our Operating
Partnership and its subsidiaries into our financial statements. However, we
do not own 100% of the Operating Partnership. Our Operating Partnership also
does not own 11% of one of its subsidiary partnerships. In addition, COMI
does not own 20% of one of its subsidiaries. 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.
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 of beneficial interest ("Common Shares") outstanding during the
period. Our computation of diluted EPS is similar except that:
8
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- - the denominator is increased to include the weighted average number of
potential additional Common Shares that would have been outstanding if
securities that are convertible into our Common Shares were converted and
- - the numerator is adjusted to add back any convertible preferred dividends
and any other changes in income or loss that would result from the assumed
conversion into Common Shares.
Our computation of diluted EPS does not assume conversion of securities into
our Common Shares if conversion of those securities would increase our
diluted EPS in a given period. 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):
<Table>
<Caption>
Three months ended June 30, Six months ended June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ -----------
Numerator:
Net income available to Common Shareholders $ 3,468 $ 2,593 $ 6,313 $ 5,123
Add: Cumulative effect of accounting change, net -- -- 174 --
Add: Extraordinary item, net 66 26 136 26
------------ ------------ ------------ -----------
Numerator for basic earnings per share before
extraordinary item and cumulative effect of
accounting change 3,534 2,619 6,623 5,149
Add: Series D Preferred Share dividends 136 -- 236 --
------------ ------------ ------------ -----------
Numerator for diluted earnings per share before
extraordinary item and cumulative effect of
accounting change 3,670 2,619 6,859 5,149
Less: Extraordinary item, net (66) (26) (136) (26)
------------ ------------ ------------ -----------
Numerator for diluted earnings per share for net
income before cumulative effect of accounting change 3,604 2,593 6,723 5,123
Less: Cumulative effect of accounting change, net -- -- (174) --
------------ ------------ ------------ -----------
Numerator for diluted earnings per share for net income $ 3,604 $ 2,593 $6,549 $ 5,123
============ ============ ============ ===========
Denominator (all weighted averages):
Common Shares - basic 20,077 18,014 20,034 17,683
Assumed conversion of share options 334 181 287 119
Assumed conversion of Common Unit warrants -- 476 -- 476
Conversion of Series D Preferred Shares 1,197 -- 1,038 --
------------ ------------ ------------ -----------
Denominator for diluted earnings per share 21,608 18,671 21,359 18,278
============ ============ ============ ===========
Basic earnings per Common Share
Income before extraordinary item and cumulative
effect of accounting change $ 0.18 $ 0.15 $ 0.33 $ 0.29
Extraordinary loss (0.01) (0.01) -- --
Cumulative effect of accounting change -- -- (0.01) --
------------ ------------ ------------ -----------
Net income $ 0.17 $ 0.14 $ 0.32 $ 0.29
============ ============ ============ ===========
Diluted earnings per Common Share
Income before extraordinary item and cumulative
effect of accounting change $ 0.17 $ 0.14 $ 0.32 $ 0.28
Extraordinary item -- -- -- --
Cumulative affect of accounting change -- -- (0.01) --
------------ ------------ ------------ -----------
Net income $ 0.17 $ 0.14 $ 0.31 $ 0.28
============ ============ ============ ===========
</Table>
Our diluted EPS computation for the three and six months ended June 30,
2001 only assumes conversion of share options and Series D Cumulative
Convertible Redeemable Preferred Shares of beneficial interest (the "Series D
Preferred Shares") because conversions of Preferred Units, Series A
Convertible Preferred Shares of beneficial interest (the "Series A Preferred
Shares") and Common Units would increase diluted EPS in those periods. Our
diluted EPS computation for the three and six months ended June 30, 2000 only
assumes conversion of share options and Common Unit Warrants because
conversions of Series A Convertible Preferred Shares, Preferred Units and
Common Units would increase diluted EPS in those periods.
9
<Page>
RECLASSIFICATION
We reclassified certain amounts from prior periods to conform to the
current period presentation of our consolidated financial statements. These
reclassifications did not affect consolidated net income or shareholders'
equity.
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". We adopted this standard
beginning January 1, 2001. SFAS 133 establishes accounting and reporting
standards for derivative financial instruments and for hedging activities.
See section above entitled "Derivatives" for further discussion on this
pronouncement.
In June 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142")
which are effective July 1, 2001 and January 1, 2002, respectively. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 142, amortization of
goodwill, including goodwill recorded in past business combinations, will
discontinue upon adoption of this standard. In addition, goodwill recorded as
a result of business combinations completed during the six-month period
ending December 31, 2001 will not be amortized. All goodwill and intangible
assets will be tested for impairment in accordance with the provisions of the
Statement. We are currently reviewing the provisions of SFAS 141 and SFAS 142
and assessing the impact of adoption.
NOTE 4 COMMERCIAL REAL ESTATE PROPERTIES
Operating properties consisted of the following:
<Table>
<Caption>
June 30, December 31,
2001 2000
------------ ------------
Land $142,461 $140,018
Buildings and improvements 624,635 604,666
------------ ------------
767,096 744,684
Less: accumulated depreciation (41,659) (33,271)
------------ ------------
$725,437 $711,413
============ ============
</Table>
Projects we had under construction or development consisted of the
following:
<Table>
<Caption>
June 30, December 31,
2001 2000
------------ ------------
Land $24,488 $ 19,069
Construction in progress 30,066 17,489
------------ ------------
$54,554 $36,558
============ ============
</Table>
2001 ACQUISITIONS
We acquired for $15,486 on May 14, 2001 two office buildings totaling
110,675 square feet and a 30,855 square foot office building undergoing
redevelopment. These properties are located in Columbia, Maryland.
2001 CONSTRUCTION/DEVELOPMENT
During the six months ended June 30, 2001, we completed the construction
of one office building totaling 78,460 square feet. The building is located
in the Baltimore/Washington Corridor.
As of June 30, 2001, we also had construction underway on six new
buildings in the Baltimore/Washington Corridor.
2001 DISPOSITION
We sold a 65,277 square foot office building located in Cranbury, New
Jersey for $11,525 on June 18, 2001. We realized a gain of $1,596 on the sale
of this property.
NOTE 5 INVESTMENTS IN UNCONSOLIDATED REAL ESTATE JOINT VENTURES
During 2001, we acquired interests in the following newly organized
joint ventures:
- - 80% interest in MOR Montpelier LLC, which recently completed the
construction of a 43,785 square foot office building in Columbia, Maryland,
on February 1, 2001.
- - 40% interest in Airport Square Partners, LLC on March 7, 2001. On March 21,
2001, this joint venture acquired five office buildings located in the
Baltimore/Washington Corridor for $33,617 using cash from
10
<Page>
member capital contributions and proceeds from a $25,000 mortgage loan
payable. We are acting as guarantor for the payment of 25% of this mortgage
loan payable, which amount is not to exceed $6,250.
- - 80% interest in Gateway 70 LLC, which is developing a parcel of land
located in Columbia, Maryland, on April 5, 2001.
- - 40% interest in Airport Square XXII, LLC, which is developing a parcel of
land located in Linthicum, Maryland, on May 3, 2001.
- - 80% interest in MOR Forbes LLC, which is constructing a 55,000 square foot
office property in Lanham, Maryland, on May 18, 2001.
Our investment in and advances to unconsolidated real estate joint
ventures are accounted for using the equity method of accounting and included
the following:
<Table>
<Caption>
June 30, December 31,
2001 2000
----------- -----------
Gateway 67, LLC $ 3,760 $3,616
Airport Square Partners, LLC 3,551 --
Gateway 70 LLC 2,234 --
MOR Montpelier LLC 920 --
MOR Forbes LLC 906 --
Airport Square XXII, LLC 638 --
----------- -----------
$12,009 $3,616
=========== ===========
</Table>
On July 2, 2001, we acquired the remaining 60% interest in Airport
Square Partners, LLC for $6,908.
NOTE 6 ACCOUNTS RECEIVABLE
Our accounts receivable are reported net of an allowance for bad debts
of $145 at June 30, 2001 and $74 at December 31, 2000.
NOTE 7 INVESTMENT IN AND ADVANCES TO OTHER UNCONSOLIDATED ENTITIES
From September 1998 through December 2000, the Operating Partnership
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 during that time period. 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 accounted for the
acquisition of COMI using the purchase method of accounting. We also elected
to have COMI treated as a Taxable REIT Subsidiary under the REIT
Modernization Act effective January 1, 2001.
We accounted for our investment in COMI and its subsidiaries 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 consolidating the accounts of COMI and its subsidiaries with
our accounts on that date.
On February 28, 2001, we acquired a 7.7% interest in Paragon Smart
Technologies, LLC ("Paragon"), an entity that provides a wide range of
computer consulting services to businesses. Paragon also provides broadband
Internet access and companion services to commercial real estate owners in
the Baltimore/Washington Corridor. We account for our investment in Paragon
using the equity method of accounting.
11
<Page>
Our investment in and advances to other unconsolidated entities included
the following:
<Table>
<Caption>
June 30, December 31,
2001 2000
-------- ------------
Investment in MediTract, LLC $1,621 $1,621
Investment in Paragon 420 --
Total investment in Service Companies -- 4,503(1)
------ ------
$2,041 $6,124
====== ======
</Table>
(1) Our total investment in the Service Companies at December 31, 2000 included
a $2,005 note receivable and $2,001 in advances receivable.
NOTE 8 DEFERRED CHARGES
Deferred charges consisted of the following:
<Table>
<Caption>
June 30, December 31,
2001 2000
---------- ------------
Deferred leasing costs $11,721 $10,800
Deferred financing costs 8,759 6,108
Deferred other 1,975 --
------- -------
22,455 16,908
Accumulated amortization (6,098) (4,003)
------- -------
Deferred charges, net $16,357 $12,905
======= =======
</Table>
NOTE 9 SHAREHOLDERS' EQUITY
In January 2001, we issued 544,000 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 by the holder 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.
In April 2001, we completed the sale of 1,150,000 Series E Cumulative
Redeemable Preferred Shares of beneficial interest (the "Series E Preferred
Shares") to the public at a price of $25.00 per share. These shares are
nonvoting and are redeemable for cash at $25 per share at our option on or after
July 15, 2006. 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 $2.5625 per share, which is
equal to 10.25% of the $25.00 per share redemption price. We contributed the net
proceeds to our Operating Partnership in exchange for 1,150,00 Series E
Preferred Units. The Series E Preferred Units carry terms that are substantially
the same as the Series E Preferred Shares.
On December 16, 1999, we issued 471,875 Common Shares subject to forfeiture
restrictions to certain officers. 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 72,646 of these
shares, including 48,428 shares that lapsed in 2001.
We issued 36,208 Common Shares in connection with the exercise of share
options in 2001.
12
<Page>
A summary of the activity in the accumulated other comprehensive loss
component of shareholders' equity for the six months ended June 30, 2001
follows:
<Table>
<Caption>
Balance, December 31, 2000 $ --
Cumulative effect adjustment on January 1, 2001 for unrealized loss on
interest rate swap, net of minority interests (163)
Unrealized loss on interest rate swap for six months ended June 30, 2001,
net of minority interests (1,312)
---------
Balance, June 30, 2001 $ (1,475)
=========
</Table>
NOTE 10 DIVIDENDS AND DISTRIBUTIONS
The following summarizes our dividends/distributions for the six months
ended June 30, 2001:
<Table>
<Caption>
Dividend/
Distribution Total
Per Dividend/
Record Date Payable Date Share/Unit Distribution
----------------- ---------------- ----------- ------------
Series B Preferred Shares:
Fourth Quarter 2000 December 29, 2000 January 16, 2001 $ 0.625 $ 781
First Quarter 2001 March 31, 2001 April 16, 2001 $ 0.625 $ 781
Second Quarter 2001 June 29, 2001 July 16, 2001 $ 0.625 $ 781
Series D Preferred Shares:
First Quarter 2001 March 31, 2001 April 16, 2001 $0.2222 $ 121
Second Quarter 2001 June 29, 2001 July 16, 2001 $0.2500 $ 136
Series E Preferred Shares:
Second Quarter 2001 June 29, 2001 July 16, 2001 $0.7047 $ 810
Common Shares:
Fourth Quarter 2000 December 29, 2000 January 16, 2001 $ 0.20 $3,990
First Quarter 2001 March 31, 2001 April 16, 2001 $ 0.20 $4,003
Second Quarter 2001 June 29, 2001 July 16, 2001 $ 0.20 $4,023
Series C Preferred Units:
Fourth Quarter 2000 December 29, 2000 January 16, 2001 $0.5625 $ 572
First Quarter 2001 March 31, 2001 April 16, 2001 $0.5625 $ 572
Second Quarter 2001 June 29, 2001 July 16, 2001 $0.5625 $ 572
Common Units:
Fourth Quarter 2000 December 29, 2000 January 16, 2001 $ 0.20 $1,878
First Quarter 2001 March 31, 2001 April 16, 2001 $ 0.20 $1,878
Second Quarter 2001 June 29, 2001 July 16, 2001 $ 0.20 $1,861
</Table>
13
<Page>
NOTE 11 SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
<Table>
<Caption>
For the six months ended
June 30,
---------------------------------
2001 2000
------------- --------------
Supplemental schedule of non-cash investing and
financing activities:
Acquisition of Service Companies:
Investments in and advances to other unconsolidated
entities $ (4,529) $ --
Restricted cash 5 --
Accounts receivable, net 2,005 --
Deferred costs, net 1,537 --
Prepaid and other assets 1,033 --
Furniture, fixtures and equipment, net 1,603 --
Mortgage and other loans payable (40) --
Accounts payable and accrued expenses (2,106) --
Rents received in advance and security deposits (20) --
Other liabilities (10) --
Minority interest (46) --
======== =======
Cash from acquisition of Service Companies $ (568) $ --
======== =======
Debt repaid in connection with sales of rental properties $ 7,000 $ 2,432
======== =======
Debt repaid using proceeds from new debt $ 91,521 $ --
======== =======
Debt assumed in connection with acquisitions $ -- $ 3,078
======== =======
(Decrease) increase in accrued capital improvements $ (855) $ 2,902
======== =======
Reclassification of other liabilities from projects under
construction or development (see Note 3) $ 9,600 $ --
======== =======
Dividends/distributions payable $ 7,918 $ 6,757
======== =======
Book value of derivatives reclassified from deferred
costs, net to fair value of derivatives $ 268 $ --
======== =======
Decrease in fair value of derivatives applied to
accumulated other comprehensive loss and minority
interests $ 2,232 $ --
======== =======
Adjustments to minority interests resulting from changes
in ownership of Operating Partnership by COPT $ (104) $ (458)
======== =======
Decrease in minority interests and increase in
shareholders' equity in connection with conversion of
Common Units into Common Shares $ 808 $ 8,527
======== =======
</Table>
NOTE 12 INCOME TAXES
Corporate Office Properties Trust 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 90% of our
REIT taxable income to our shareholders and satisfy certain other requirements
(see discussion below). 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 was effective January 1, 2001 and included the
following changes:
14
<Page>
- - 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;
- - 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
- - the percentage of REIT taxable income that REITs are required to distribute
to shareholders was 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. COMI is subject to Federal and state income taxes. COMI's income tax
benefit for the six months ended June 30, 2001 consisted of the following:
<Table>
Current
Federal $ 15
State 3
-------
18
-------
Deferred
Federal 50
State 10
-------
60
-------
Total $ 78
=======
</Table>
Items contributing to temporary differences that lead to deferred taxes
include depreciation and amortization, certain accrued compensation,
compensation made in the form of contributions to a deferred nonqualified
compensation plan and expenses associated with share options.
COMI's combined federal and state effective tax rate for the six months
ended June 30, 2001 was approximately 40%.
NOTE 13 INFORMATION BY BUSINESS SEGMENT
We have six business segments: Baltimore/Washington Corridor office,
Greater Philadelphia office, Northern/Central New Jersey office, Greater
Harrisburg office, retail (the last of which was sold in 2000) and service
operations. Our office properties represent our core-business. We manage our
retail properties and service operations each as single segments since they are
considered outside of our core-business.
15
<Page>
The table below reports segment financial information. Our retail and
service operations segments are not separately reported since they do not meet
the reporting thresholds. We measure the performance of our office property
segments based on total revenues less property operating expenses. Accordingly,
we do not report other expenses by segment in the table below.
<Table>
<Caption>
Baltimore/ Northern/
Washington Greater Central New Greater
Corridor Philadelphia Jersey Harrisburg
Office Office Office Office Other Total
------------------------------------------------------------------------------
Three months ended June 30, 2001:
Revenues from real estate operations $ 18,654 $ 2,506 $ 4,998 $ 2,483 $ 270 $ 28,911
Property operating expenses 5,950 38 1,823 747 -- 8,558
-------- -------- -------- ------- ------- --------
Income from real estate operations $ 12,704 $ 2,468 $ 3,175 $ 1736 $ 270 $ 20,353
======== ======== ======== ======= ======= ========
Commercial real estate property
expenditures $ 26,326 $ 119 $ 289 $ 74 $ -- $ 26,808
======== ======== ======== ======= ======= ========
Three months ended June 30, 2000:
Revenues from real estate operations $ 16,297 $ 2,507 $ 4,968 $ 2,275 $ 370 $ 26,417
Property operating expenses 4,768 25 1,954 630 60 7,437
-------- -------- -------- ------- ------- --------
Income from real estate operations $ 11,529 $ 2,482 $ 3,014 $ 1,645 $ 310 $ 18,980
======== ======== ======== ======= ======= ========
Commercial real estate property
expenditures $ 23,167 $ 77 $ 2,480 $ 380 $ 36 $ 26,140
======== ======== ======== ======= ======= ========
Six months ended June 30, 2001:
Revenues $ 37,227 $ 5,012 $ 9,920 $ 5,272 $ 1,181 $ 58,612
Property operating expenses 11,908 58 3,717 1,341 -- 17,024
-------- -------- -------- ------- ------- --------
Income from operations $ 25,319 $ 4,954 $ 6,203 $ 3,931 $ 1,181 $ 41,588
======== ======== ======== ======= ======= ========
Commercial real estate property
expenditures $ 45,707 $ 260 $ 1,946 $ 770 $ -- $ 48,683
======== ======== ======== ======= ======= ========
Segment assets at June 30, 2001 $515,518 $105,769 $110,218 $71,179 $46,123 $848,807
======== ======== ======== ======= ======= ========
Six months ended June 30, 2000:
Revenues $ 32,127 $ 5,013 $ 9,674 $ 4,670 $ 794 $ 52,278
Property operating expenses 9,917 54 3,740 1,213 121 15,045
-------- -------- -------- ------- ------- --------
Income from operations $ 22,210 $ 4,959 $ 5,934 $ 3,457 $ 673 $ 37,233
======== ======== ======== ======= ======= ========
Commercial real estate property
expenditures $ 36,260 $ 77 $ 5,149 $ 726 $ 76 $ 42,288
======== ======== ======== ======= ======= ========
Segment assets at June 30, 2000 $445,188 $106,846 $116,695 $71,415 $20,090 $760,234
======== ======== ======== ======= ======= ========
</Table>
The following table reconciles our income from operations for reportable
segments to income before income taxes, extraordinary item and cumulative effect
of accounting change as reported in our Consolidated Statements of Operations.
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
------------ ----------- ----------- ------------
Income from operations for reportable segments $20,353 $18,980 $ 41,588 $ 37,233
Equity in income of unconsolidated real estate joint
ventures 124 -- 154 --
Earnings (losses) from service operations 143 (48) (186) (1)
Add: Gain on sales of properties 1,596 57 1,596 57
Less:
General and administrative (1,329) (1,160) (2,775) (2,508)
Interest (7,762) (7,404) (15,956) (14,338)
Amortization of deferred financing costs (546) (311) (929) (617)
Depreciation and other amortization (4,957) (4,307) (9,857) (8,180)
Minority interests (2,446) (2,069) (4,570) (4,258)
------- ------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change $ 5,176 $ 3,738 $ 9,065 $ 7,388
======= ======= ======== ========
</Table>
16
<Page>
We did not allocate gain on sales of 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 income of
unconsolidated real estate joint ventures, earnings (losses) from service
operations, general and administrative and minority interests since these items
represent general corporate items not attributable to segments.
NOTE 14 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 environment 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.
We are under contract to acquire four office buildings located in Columbia,
Maryland totaling 187,132 square feet for approximately $23.5 million.
NOTE 15 PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
We accounted for our 2000 and 2001 acquisitions and dispositions 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 June 30, 2001.
We prepared the pro forma condensed consolidated financial information
presented below as if all of our 2000 and 2001 acquisitions had occurred on
January 1, 2000. 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, 2000, nor does it intend to
represent our results of operations for future periods.
<Table>
<Caption>
Six months ended June 30,
----------------------------------
2001 2000
--------------- ---------------
Pro forma total revenues $ 60,566 $54,869
======== =======
Pro forma net income available to Common Shareholders $ 5,271 $ 4,990
======== =======
Pro forma earnings per Common Share
Basic $ 0.26 $ 0.28
======== =======
Diluted $ 0.26 $ 0.27
======== =======
</Table>
NOTE 16 SUBSEQUENT EVENTS
In August 2001, we acquired for a purchase price of $11,300 an office
building totaling 97,161 square feet located in Columbia, Maryland.
17
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this section, we discuss our financial condition and results of
operations for the three and six months ended June 30, 2001. This section
includes discussions on:
- - why various components of our Consolidated Statements of Operations changed
for the three and six months ended June 30, 2001 compared to the same
periods in 2000;
- - what our primary sources and uses of cash were in the six months ended
June 30, 2001;
- - how we raised cash for acquisitions and other capital expenditures
during the six months ended June 30, 2001;
- - how we intend to generate cash for future capital expenditures; and
- - the computation of our funds from operations.
You should refer to our consolidated financial statements and accompanying
notes and operating data variance analysis set forth below as you read this
section.
This section contains "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995, that are based on our current
expectations, estimates and projections about future events and financial trends
affecting the financial condition 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
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;
environmental requirements; and the other factors described in our most recent
Annual Report on Form 10-K under the heading "Risk Factors"
18
<Page>
CORPORATE OFFICE PROPERTIES TRUST
OPERATING DATA VARIANCE ANALYSIS
<Table>
<Caption>
(Dollars for this table are in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- -----------------------------------------
2001 2000 Variance % Change 2001 2000 Variance % Change
-------- -------- -------- -------- -------- ---------- --------- --------
Real Estate Operations:
Revenues
Rental revenue $ 25,960 $ 23,154 $ 2,806 12% $ 51,579 $ 45,060 $ 6,519 14%
Tenant recoveries and other revenue 2,951 3,263 (312) (10%) 7,033 7,218 (185) (3%)
-------- -------- -------- -------- -------- --------
Revenues from real estate operations 28,911 26,417 2,494 9% 58,612 52,278 6,334 12%
-------- -------- -------- -------- -------- --------
Expenses
Property operating 8,558 7,437 1,121 15% 17,024 15,045 1,979 13%
Interest and amortization of deferred
financing costs 8,308 7,715 593 8% 16,885 14,955 1,930 13%
Depreciation and other amortization 4,957 4,307 650 15% 9,857 8,180 1,677 21%
-------- -------- -------- -------- -------- --------
Expenses from real estate operations 21,823 19,459 2,364 12% 43,766 38,180 5,586 15%
-------- -------- -------- -------- -------- --------
Earnings from real estate operations before
equity in income of unconsolidated real
estate joint ventures 7,088 6,958 130 2% 14,846 14,098 748 5%
Equity in income of unconsolidated real estate
joint ventures 124 -- 124 N/A 154 -- 154 N/A
-------- -------- -------- -------- -------- --------
Earnings from real estate operations 7,212 6,958 254 4% 15,000 14,098 902 6%
Earnings (losses) from service operations 143 (48) 191 (398%) (186) (1) (185) 18,500%
General and administrative (1,329) (1,160) (169) 15% (2,775) (2,508) (267) 11%
Gain on sale of properties 1,596 57 1,539 2,700% 1,596 57 1,539 2,700%
-------- -------- -------- -------- -------- --------
Income before minority interests, income
taxes, extraordinary item and cumulative
effect of accounting change 7,622 5,807 1,815 31% 13,635 11,646 1,989 17%
Minority interests (2,446) (2,069) (377) 18% (4,570) (4,258) (312) 7%
Income tax (expense) benefit, net (29) -- (29) N/A 52 -- 52 N/A
Extraordinary item - loss on early retirement
of debt, net (66) (26) (40) 154% (136) (26) (110) 423%
Cumulative effect of accounting change, net -- -- -- N/A (174) -- (174) N/A
-------- -------- -------- -------- -------- --------
Net income 5,081 3,712 1,369 37% 8,807 7,362 1,445 20%
Preferred Share dividends (1,613) (1,119) (494) 44% (2,494) (2,239) (255) 11%
-------- -------- -------- -------- -------- --------
Net income available to Common Shareholders $ 3,468 $ 2,593 $ 875 34% $ 6,313 $ 5,123 $ 1,190 23%
======== ======== ======== ======== ======== ========
Basic earnings per Common Share
Income before extraordinary item and
cumulative effect of accounting change $ 0.18 $ 0.15 $ 0.03 20% $ 0.33 $ 0.29 $ 0.04 14%
Net income $ 0.17 $ 0.14 $ 0.03 21% $ 0.32 $ 0.29 $ 0.03 10%
Diluted earnings per Common Share
Income before extraordinary item and
cumulative effect of accounting change $ 0.17 $ 0.14 $ 0.03 21% $ 0.32 $ 0.28 $ 0.04 14%
Net income $ 0.17 $ 0.14 $ 0.03 21% $ 0.31 $ 0.28 $ 0.03 11%
</Table>
19
<Page>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Our revenues from real estate operations increased $2.5 million or 9%, of
which $2.8 million was generated by rental revenue, offset by a decrease in
tenant recoveries and other revenue of $312,000. Included in this change are the
following:
- $3.0 million increase attributable to four properties acquired and six
newly-constructed properties placed in service during 2000 and 2001;
- $210,000 increase attributable to fees earned for other real estate
services;
- $404,000 decrease attributable to 76 office properties owned
throughout both reporting periods due predominantly to a decrease
in tenant recoveries and other revenue resulting mostly from a
decrease in anticipated operating cost levels in 2001 compared to
2000 and a change in our tenant composition; and
- $326,000 decrease attributable to properties sold during 2000 and
2001.
Our expenses from real estate operations increased $2.4 million or 12% due
to the effects of the increases in property operating, interest expense and
amortization of deferred financing costs and depreciation and other amortization
described below.
Our property operating expenses increased $1.1 million or 15%. Included in
this change is the following:
- $700,000 increase attributable to four properties acquired and six
newly-constructed properties placed in service during 2000 and 2001;
- $522,000 increase attributable to 76 office properties owned
throughout both reporting periods, $185,000 of which is due to
increased expense associated with doubtful or uncollectible
receivables; and
- $97,000 decrease attributable to properties sold during 2000 and 2001.
Our interest expense and amortization of deferred financing costs increased
$593,000 or 8% due primarily to a 10% increase in our average outstanding debt
balance resulting predominantly from our 2000 and 2001 acquisitions and
construction activity. Our depreciation and other amortization expense increased
$650,000 or 15%, $507,000 of which is attributable to four properties acquired
and six newly-constructed properties placed in service during 2000 and 2001.
Our earnings from service operations increased $191,000 or 398% and our
general and administrative expenses increased $169,000 or 15%. We also had a
$1.5 million increase in our gain from sales of properties.
As a result of the above factors, income before minority interests, income
taxes, extraordinary items and cumulative effect of accounting change increased
by $1.8 million or 31%. 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 $377,000 or 18% due primarily to an increase in the
Operating Partnership's net income. Our income tax expense of $29,000 in the
three months ended June 30, 2001 was due to our income from the service
operations that reside in our taxable REIT subsidiary.
Our income available to Common Shareholders increased $875,000 or 34% due
to the factors discussed above combined with a $494,000 increase in Preferred
Share dividends resulting from our Series D and Series E Preferred Share
issuances, coupled with a $40,000 increase in extraordinary losses on early
retirement of debt. Our diluted earnings per share on net income of $0.17
increased by $0.03 or 21%.
20
<Page>
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Our revenues from real estate operations increased $6.3 million or 12%,
of which $6.5 million was generated by rental revenue, offset by a decrease
in tenant recoveries and other revenue of $185,000. Included in this change
are the following:
- $6.7 million increase attributable to four properties acquired and
seven newly-constructed properties placed in service during 2000 and
2001;
- $1.1 million increase attributable to fees earned for other real
estate services;
- $749,000 decrease attributable to 75 office properties owned
throughout both reporting periods that includes the following:
- $1.4 million decrease in tenant recoveries and other revenue
resulting mostly from a decrease in anticipated operating cost
levels in 2001 compared to 2000 and a change in our tenant
composition and
- $667,000 increase in rental revenue due primarily to additional
lease cancellation revenue, increased occupancy at certain of
our properties and increases in rental rates on renewed space;
and
- $539,000 decrease attributable to properties sold during 2000 and
2001.
Our expenses from real estate operations increased $5.6 million or 15%
due to the effects of the increases in property operating, interest expense
and amortization of deferred financing costs and depreciation and other
amortization described below.
Our property operating expenses increased $2.0 million or 13%. Included
in this change is the following:
- $1.6 million increase attributable to four properties acquired and
seven newly-constructed properties placed in service during 2000
and 2001;
- $553,000 increase attributable to 75 office properties owned
throughout both reporting periods, $169,000 of which is due to
increased expense associated with doubtful or uncollectible
receivables and $154,000 of which is due to increases in real
estate taxes; and
- $175,000 decrease attributable to properties sold during 2000
and 2001.
Our interest expense and amortization of deferred financing costs
increased $1.9 million or 13% due primarily to a 14% increase in our average
outstanding debt balance resulting from our 2000 and 2001 acquisitions and
construction activity. Our depreciation and other amortization expense
increased $1.7 million or 21%, $1.1 million of which is attributable to four
properties acquired and seven newly-constructed properties placed in service
during 2000 and 2001.
Our earnings from service operations decreased $185,000 and our general
and administrative expenses increased $267,000 or 11%. We also had a $1.5
million increase in our gain from sales of properties.
As a result of the above factors, income before minority interests,
income taxes, extraordinary items and cumulative effect of accounting change
increased by $2.0 million or 17%. Our income allocation to minority interests
increased $312,000 or 7% due primarily to an increase in our Operating
Partnership's net income. Our income tax benefit of $52,000 in 2001 was due
to our losses from the service operations that reside in our taxable REIT
subsidiary.
Our income available to Common Shareholders increased $1.2 million or
23% due to the factors discussed above combined with a $255,000 increase in
Preferred Share dividends resulting from our Series D and Series E Preferred
Share issuances, combined with a $110,000 increase in extraordinary losses on
early retirement of debt and a $174,000 loss due to the cumulative effect of
an accounting change resulting from our adoption of Statement of Financial
Accounting Standards No. 133 (discussed below). Our diluted earnings per
share on net income of $0.31 increased by $0.03 or 11%.
21
<Page>
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. Amounts available under the Revolving
Credit Facility are generally computed based on 65% of the appraised value of
properties pledged as collateral. As of August 8, 2001, the maximum amount
available under our Revolving Credit Facility was $75.4 million, of which $21.0
million was unused. We had a $50.0 million line of credit with Prudential
Securities Credit Corporation that expired in June 2001.
As of June 30, 2001, we had $95.5 million in mortgage and other loans
payable maturing in 2001. Included in these 2001 loan maturities is a $91.0
million loan that may be extended for a one-year period, subject to certain
conditions. As of June 30, 2001, we were in compliance with the necessary
conditions for us to extend this loan. We expect to repay the remaining balance
of the 2001 loan maturities through a combination of borrowings from existing
credit facilities 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.
As discussed below, we acquired one office building on August 3, 2001. We
were also under contract to acquire four office buildings located in Columbia,
Maryland totaling 187,132 square feet for approximately $23.5 million. We have
no other material contractual obligations as of June 30, 2001 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.
22
<Page>
Mortgage and other loans payable at June 30, 2001 consisted of the
following (dollars in thousands):
<Table>
Deutsche Banc Alex. Brown, Term Credit Facility, LIBOR + 1.75%, maturing October 2001 (1) $90,954
Teachers Insurance and Annuity Association of America, 6.89%, maturing November 2008 81,410
Deutsche Banc Alex. Brown, Revolving Credit Facility, LIBOR + 1.75%, maturing March 2004 53,230
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 58,596
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 27,176
State Farm Life Insurance Company, 7.9%, maturing April 2008 25,916
Transamerica Occidental Life Insurance Company, 7.3%, maturing May 2008 21,150
Allstate Life Insurance Company, 6.93%, maturing July 2008 21,000
Transamerica Life Insurance and Annuity Company, 7.18%, maturing August 2009 18,738
Transamerica Life Insurance and Annuity Company, 8.3%, maturing October 2005 17,486
IDS Life Insurance Company, 7.9%, maturing March 2008 13,556
Teachers Insurance and Annuity Association of America, 8.35%, maturing October 2006 7,919
Summit Bank, LIBOR + 1.75%, maturing February 2003 6,785
Allfirst Bank, LIBOR + 1.75%, maturing July 2002 (2) 6,500
Provident Bank of Maryland, LIBOR + 1.75%, maturing July 2002 (3) 6,018
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 5,957
Bank of America, LIBOR + 1.75, maturing December 2002 (4) 5,081
Citibank Federal Savings Bank, 6.93%, maturing July 2008 5,000
Bank of America, LIBOR + 1.75%, maturing September 2001 2,000
Seller loan, 8.0%, maturing May 2007 1,527
---------
$ 475,999
=========
</Table>
(1) May be extended for a one-year period, subject to certain conditions.
(2) May be extended for a one-year period, subject to certain conditions.
(3) Construction loan with a total commitment of $11,855. Loan may be extended
for a one-year period subject to certain conditions.
(4) Construction loan with a total commitment of $15,750. Loan may be extended
for a one-year period, subject to certain conditions.
INVESTING AND FINANCING ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 2001:
During the six months ended June 30, 2001, we acquired for $15.5 million
two office buildings totaling 110,675 square feet and a 30,855 square foot
office building undergoing redevelopment. These acquisitions were financed by
using $15.1 million in borrowings from our Revolving Credit Facility and cash
reserves for the balance.
During the six months ended June 30, 2001, we completed the construction of
one office building totaling 78,460 square feet. Costs incurred on this building
through June 30, 2001 totaled $13.7 million. We borrowed $6.5 million under a
construction loan facility which was repaid on April 6, 2001. The balance of the
costs was funded primarily using proceeds from our Revolving Credit Facility and
cash from operations.
As of June 30, 2001, we had construction activities underway on 6 new
buildings totaling 532,000 square feet that were 47.2% pre-leased. Estimated
costs upon completion for these projects total approximately $89.1 million.
Costs incurred on these buildings through June 30, 2001 totaled $48.7 million.
We have construction loan facilities in place totaling $61.9 million to finance
the construction of four of these projects. Borrowings under these facilities
totaled $15.5 million at June 30, 2001. We also used borrowings from our
Revolving Credit Facility and proceeds from debt refinancings to fund these
activities. In addition, we used $9.6 million in contributions from joint
venture partners to finance the construction of two of these buildings.
During the six months ended June 30, 2001, our investments in
unconsolidated real estate joint ventures increased by $8.4 million primarily
due to our investment in five new joint ventures: Airport Square Partners, LLC,
MOR Montpelier LLC, Airport Square XXII, LLC, Gateway 70 LLC and MOR Forbes LLC.
23
<Page>
During the six months ended June 30, 2001, we sold an office building for
$11.5 million. The net proceeds from this sale after property level debt
repayment and transaction costs totaled $3.8 million, all of which was applied
to our cash reserves.
During the six months ended June 30, 2001, we borrowed $119.5 million under
mortgages and other loans payable other than our Revolving Credit Facility, the
proceeds of which were used as follows:
- - $94.8 million to repay other loans and
- - the balance to finance construction activities and fund cash reserves.
In January 2001, we issued 544,000 Series D Preferred Shares to a foreign
trust at a price of $22.00 per share for proceeds totaling approximately $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 by the holder 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.
In April 2001, we completed the sale of 1,150,000 Series E Preferred Shares
to the public at a price of $25.00 per share. These shares are nonvoting and are
redeemable for cash at $25 per share at our option on or after July 15, 2006.
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 $2.5625 per share, which is equal to 10.25% of the
$25.00 per share redemption price. We contributed the net proceeds to our
Operating Partnership in exchange for 1,150,000 Series E Preferred Units. The
Series E Preferred Units carry terms that are substantially the same as the
Series E Preferred Shares. The Operating Partnership used most of the proceeds
to pay down our Revolving Credit Facility.
INVESTING AND FINANCING ACTIVITIES SUBSEQUENT TO THE SIX MONTHS ENDED JUNE 30,
2001:
In August 2001, we acquired one office building for a purchase price of
$11.3 million. This acquisition was financed by:
- using $7.0 million in proceeds under our Revolving Credit Facility and
- using cash reserves for the balance most of which were derived from
the sale of an office building in June 2001.
Also in August 2001, we obtained a $16.0 million mortgage loan payable with
Allstate Life Insurance Company. The loan has a six-year term and carries a
fixed interest rate of 7.14%. The proceeds from this loan were used to pay down
our Revolving Credit Facility.
STATEMENT OF CASH FLOWS
We generated net cash flow from operating activities of $22.6 million for
the six months ended June 30, 2001, an increase of $2.2 million from the six
months ended June 30, 2000. Our increase in cash flows from operating activities
is due primarily to income generated from our newly acquired and newly
constructed properties. Our net cash flow used in investing activities for the
six months ended June 30, 2001 increased $13.2 million from the six months ended
June 30, 2000 due primarily to $8.2 million invested in unconsolidated real
estate joint ventures and $6.2 million in real estate loans made during the six
months ended June 30, 2001. Our net cash flow provided by financing activities
for the six months ended June 30, 2001 increased $10.8 million from the six
months ended June 30, 2000 due primarily to a $41.9 million increase in proceeds
from mortgage and other loans payable and $38.8 million in proceeds from the
issuance of our Series D and Series E Preferred Shares in 2001 offset by a $69.7
million increase in repayments of mortgage and other loans payable.
24
<Page>
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, although we have included gains from the sales of properties to the
extent such gains related to redevelopment services provided. 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 the three and six months ended
June 30, 2001 and 2000 are summarized in the following table:
25
<Page>
(Dollar and shares for this table are in thousands)
<Table>
<Caption>
For the three months For the six months
ended June 30, ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------- ------------ ------------ -----------
Income before minority interests, income taxes,
extraordinary item and cumulative effect of
accounting change ................................ $ 7,622 $ 5,807 $13,635 $11,646
Add: Real estate related depreciation and
amortization...................................... 4,933 4,284 9,738 8,134
Less: Preferred Unit distributions.................. (572) (548) (1,144) (1,096)
Less: Preferred Share dividends..................... (1,613) (1,119) (2,494) (2,239)
Less: Minority interests in other consolidated
entities.......................................... (58) (4) (54) (11)
Less: Gain on sales of properties excluding
redevelopment portion (1)......................... (416) (57) (416) (57)
Income tax (expense) benefit, gross................. (44) -- 78 --
------- ------- ------- -------
Funds from operations............................... 9,852 8,363 19,343 16,377
Add: Preferred Unit distributions................... 572 548 1,144 1,096
Add: Convertible Preferred Share dividends.......... 136 339 236 677
Funds from operations assuming conversion of share
options, Common Unit warrants, Preferred Units
and Preferred Shares.............................. 10,560 9,250 20,723 18,150
Less: Straight line rent adjustments................ (816) (693) (1,506) (1,435)
Less: Recurring capital improvements................ (1,153) (923) (2,269) (1,652)
------- ------- ------- -------
Adjusted funds from operations assuming conversion of
share options, Common Unit warrants, Preferred Units
and Preferred Shares ............................. $ 8,591 $ 7,634 $16,948 $15,063
======= ======= ======= =======
Weighted average Common Shares...................... 20,077 18,014 20,034 17,684
Conversion of weighted average Common Units......... 9,335 9,556 9,361 9,918
------- ------- ------- -------
Weighted average Common Shares/Units................ 29,412 27,570 29,395 27,602
Assumed conversion of share options................. 334 181 287 119
Assumed conversion of Common Unit warrants.......... -- 476 -- 476
Conversion of weighted average convertible
Preferred Shares.................................. 1,197 1,845 1,038 1,845
Conversion of weighted average Preferred Units...... 2,421 2,321 2,421 2,321
------- ------- ------- -------
Weighted average Common Shares/Units assuming
conversion of share options, Common Unit warrants,
Preferred Units and Preferred Shares.............. 33,364 32,393 33,141 32,363
======= ======= ======= =======
</Table>
(1) A portion of the gain from the sale of an office building in June 2001 is
included in FFO since it related to redevelopment services performed on the
property.
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.
26
<Page>
ITEM 3. 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 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 June 30, 2001, 64.2%
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, weighted average interest rates and estimated
fair value ("FV") at June 30, 2001 (dollars in thousands):
<Table>
<Caption>
For the Period Ended December 31,
------------------------------------------------------------
2001 (1) 2002 (2) 2003 2004 2005 Thereafter Total FV
- ----------------------------------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate $ 2,400 $ 5,191 $ 5,591 $ 31,564 $ 22,191 $238,494 $305,431 $308,623
Average interest rate 7.44% 7.43% 7.43% 7.45% 7.46% 7.24% 7.37%
Variable rate $ 93,092 $ 17,875 $ 6,371 $ 53,230 $ -- $ -- $170,568 $170,568
Average interest rate 6.03% 6.02% 6.18% 6.33% -- -- 6.05%
</Table>
(1) Includes $90.9 million maturity in October that may be extended for a
one-year period, subject to certain conditions.
(2) Includes $12.2 million in maturities in July that may be extended for
one-year terms, subject to certain conditions. Also includes a $5.1 million
maturity in December that may be extended for a one-year period, subject to
certain conditions.
The following table sets forth derivative contracts we had in place as of
June 30, 2001 and their respective fair values ("FV"):
<Table>
<Caption>
Notional
Nature of Amount One-Month Effective Expiration FV at 6/30/01
Derivative (in millions) LIBOR base Date Date (in thousands)
- -------------------- ------------- ------------- ----------- ---------- -----------------
Interest rate cap $ 50.0 7.70% 5/25/00 5/31/02 $ --
Interest rate cap 50.0 7.00% 9/13/00 10/13/01 --
Interest rate cap 25.0 7.00% 10/17/00 10/13/01 --
Interest rate swap 100.0 5.76% 1/2/01 1/2/03 (2,232)
--------
Total $(2,232)
========
</Table>
Based on our variable rate debt balances, during the six months ended June
30, 2001, our interest expense would have increased $639,000 if interests rates
were 1% higher.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material litigation nor, to the best
of our knowledge, is any material litigation currently threatened against us
(other than routine litigation arising in the ordinary course of business,
substantially all of which is expected to be covered by liability insurance).
27
<Page>
ITEM 2. CHANGES IN SECURITIES
a. N/A
b. N/A
c.
On April 20, 2001, 50,000 of our Common Units were converted to 50,000 Common
Shares. The issuance of these Common Shares was exempt from registration under
Section 4 (2) of the Securities Act of 1933, as amended.
On May 23, 2001, 30,519 of our Common Units were converted to 30,519 Common
Shares. The issuance of these Common Shares was exempt from registration under
Section 4 (2) of the Securities Act of 1933, as amended.
d. N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
<Table>
(a) Meeting type and date Annual Meeting of Shareholders held on May 17, 2001
(b) N/A
(c) Description of each matter voted
on at meeting
Resolution to amend our 1998 Long Term Results of votes:
Incentive Plan to increase the number of For 13,471,858
issuable shares under the plan. Against or withheld 1,851,176
Abstentions and broker non-votes 67,808
</Table>
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
2.1.1 Contribution Agreement between the Company and the Operating
Partnership and certain Constellation affiliates (filed as
Exhibit A of the Company's Schedule 14A Information on June
26, 1998 and incorporated herein by reference).
28
<Page>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
2.1.2 First Amendment to Contribution Agreement, dated July 16,
1998, between Constellation Properties, Inc. and certain
entities controlled by Constellation Properties, Inc. (filed
with the Company's Current Report on Form 8-K on October 13,
1998 and incorporated herein by reference).
2.1.3 Second Amendment to Contribution Agreement, dated September
28, 1998, between Constellation Properties, Inc. and certain
entities controlled by Constellation Properties, Inc. (filed
with the Company's Current Report on Form 8-K on October 13,
1998 and incorporated herein by reference).
2.2 Service Company Asset Contribution Agreement between the Company
and the Operating Partnership and certain Constellation affiliates
(filed as Exhibit B of the Company's Schedule 14A Information
on June 26, 1998 and incorporated herein by reference).
2.3 Contribution Agreement, dated February 24, 1999, between the
Operating Partnership and John Parsinen, John D. Parsinen,
Jr., Enterprise Nautical, Inc. and Vernon Beck (filed with the
Company's Quarterly Report on Form 10-Q on May 14, 1999 and
incorporated herein by reference).
2.4 Agreement to Sell Partnership Interests, dated August 12,
1999, between Gateway Shannon Development Corporation, Clay W.
Hamlin, III and COPT Acquisitions, Inc. (filed with the
Company's Quarterly Report on Form 10-Q on November 8, 1999
and incorporated herein by reference).
2.5 Agreement of Purchase and Sale, dated July 21, 1999, between
First Industrial Financing Partnership, L.P. and COPT
Acquisitions, Inc. (filed with the Company's Quarterly Report
on Form 10-Q on November 8, 1999 and incorporated herein by
reference).
2.6.1 Contract of Sale, dated August 9, 1999, between Jolly Acres
Limited Partnership and the Operating Partnership (filed with
the Company's Annual Report on Form 10-K on March 22, 2001 and
incorporated herein by reference).
2.6.2 Amendment to Contract of Sale, dated April 28, 2000, between
Jolly Acres Limited Partnership and the Operating Partnership
(filed with the Company's Annual Report on Form 10-K on March
22, 2001 and incorporated herein by reference).
2.7 Contract of Sale, dated March 14, 2000, between Arbitrage Land
Limited Partnership, Jolly Acres Limited Partnership and the
Operating Partnership (filed with the Company's Annual Report
on Form 10-K on March 22, 2001 and incorporated herein by
reference).
3.1 Amended and Restated Declaration of Trust of Registrant (filed
with the Registrant's Registration Statement on Form S-4
(Commission File No. 333-45649) and incorporated herein by
reference).
3.2 Bylaws of Registrant (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
4.1 Form of certificate for the Registrant's Common Shares of
Beneficial Interest, $0.01 par value per share (filed with the
Registrant's Registration Statement on Form S-4 (Commission
File No. 333-45649) and incorporated herein by reference).
29
<Page>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
4.2 Amended and Restated Registration Rights Agreement, dated
March 16, 1998, for the benefit of certain shareholders of the
Company (filed with the Company's Quarterly Report on Form
10-Q on August 12, 1998 and incorporated herein by reference).
4.3 Articles Supplementary of Corporate Office Properties Trust
Series A Convertible Preferred Shares, dated September 28,
1998 (filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
4.4.1 Second Amended and Restated Limited Partnership Agreement of
the Operating Partnership, dated December 7, 1999 (filed with
the Company's Annual Report on Form 10-K on March 16, 2000 and
incorporated herein by reference).
4.4.2 First Amendment to Second Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
December 21, 1999 (filed with the Company's Annual Report on
Form 10-K on March 16, 2000 and incorporated herein by
reference).
4.4.3 Second Amendment to Second Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
December 21, 1999 (filed with the Company's Post Effective
Amendment No. 2 to Form S-3 dated November 1, 2000
(Registration Statement No. 333-71807) and incorporated herein
by reference).
4.4.4 Third Amendment to Second Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
September 29, 2000 (filed with the Company's Post Effective
Amendment No. 2 to Form S-3 dated November 1, 2000
(Registration Statement No. 333-71807) and incorporated herein
by reference).
4.4.5 Sixth Amendment to Second Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
April 3, 2001 (filed with the Company's Current Report on Form
8-K dated March 30, 2001and incorporated herein by reference).
4.5 Articles Supplementary of Corporate Office Properties Trust
Series B Convertible Preferred Shares, dated July 2, 1999
(filed with the Company's Current Report on Form 8-K on July
7, 1999 and incorporated herein by reference).
4.6.1 Contribution Rights Agreement, dated June 23, 1999, between
the Operating Partnership and United Properties Group,
Incorporated (filed with the Company's Quarterly Report on
Form 10-Q on August 13, 1999 and incorporated herein by
reference).
4.6.2 Contribution Agreement, dated December 21, 1999, between
United Properties Group, Incorporated and COPT Acquisitions,
Inc. (filed with the Company's Annual Report on Form 10-K on
March 16, 2000 and incorporated herein by reference).
4.7 Articles Supplementary of Corporate Office Properties Trust
Series D Cumulative Convertible Redeemable Preferred Shares,
dated January 25, 2001 (filed with the Company's Annual Report
on Form 10-K on March 22, 2001 and incorporated herein by
reference).
4.8 Registration Rights Agreement, dated January 25, 2001, for the
benefit of Barony Trust Limited (filed with the Company's
Annual Report on Form 10-K on March 22, 2001 and incorporated
herein by reference).
30
<Page>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
4.9 Articles Supplementary of Corporate Office Properties Trust
Series E Cumulative Redeemable Preferred Shares, dated April
3, 2001 (filed with the Registrant's Current Report on Form
8-K on April 4, 2001 and incorporated herein by reference).
10.1 Employment Agreement, dated December 16, 1999, between
Corporate Office Management, Inc., COPT and Clay W. Hamlin,
III (filed with the Company's Annual Report on Form 10-K on
March 16, 2000 and incorporated herein by reference).
10.2 Employment Agreement, dated December 16, 1999, between
Corporate Office Management, Inc., COPT and Randall M. Griffin
(filed with the Company's Annual Report on Form 10-K on March
16, 2000 and incorporated herein by reference).
10.3 Employment Agreement, dated December 16, 1999, between
Corporate Office Management, Inc., COPT and Roger A. Waesche,
Jr. (filed with the Company's Annual Report on Form 10-K on
March 16, 2000 and incorporated herein by reference).
10.4 Employment Agreement, dated December 16, 1999, between
Corporate Development Services, LLC, COPT and Dwight Taylor
(filed with the Company's Annual Report on Form 10-K on March
16, 2000 and incorporated herein by reference).
10.5 Employment Agreement, dated December 16, 1999, between
Corporate Realty Management, LLC, COPT and Michael D. Kaiser
(filed with the Company's Annual Report on Form 10-K on March
16, 2000 and incorporated herein by reference).
10.6 Restricted Share Agreement, dated December 16, 1999, between
Corporate Office Properties Trust and Randall M. Griffin
(filed with the Company's Annual Report on Form 10-K on March
16, 2000 and incorporated herein by reference).
10.7 Restricted Share Agreement, dated December 16, 1999, between
Corporate Office Properties Trust and Roger A. Waesche, Jr.
(filed with the Company's Annual Report on Form 10-K on March
16, 2000 and incorporated herein by reference).
10.8 Restricted Share Agreement, dated December 16, 1999, between
Corporate Office Properties Trust and Dwight Taylor (filed
with the Company's Annual Report on Form 10-K on March 16,
2000 and incorporated herein by reference).
10.9 Restricted Share Agreement, dated December 16, 1999, between
Corporate Office Properties Trust and Michael D. Kaiser (filed
with the Company's Annual Report on Form 10-K on March 16,
2000 and incorporated herein by reference).
10.10.1 Corporate Office Properties Trust 1998 Long Term Incentive
Plan (filed with the Registrant's Registration Statement on
Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
10.10.2 Amendment No. 1 to Corporate Office Properties Trust 1998 Long
Term Incentive Plan (filed with the Company's Quarterly Report
on Form 10-Q on August 13, 1999 and incorporated herein by
reference).
10.11 Stock Option Plan for Directors (filed with Royale
Investments, Inc.'s Form 10-KSB for the year ended December
31, 1993 (Commission File No. 0-20047) and incorporated herein
by reference).
31
<Page>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
10.12 Senior Secured Credit Agreement, dated
October 13, 1997, (filed with the Company's Current Report on
Form 8-K on October 29, 1997, and incorporated herein by
reference).
10.13 Senior Secured Revolving Credit Agreement, dated May 28, 1998,
between the Company, the Operating Partnership, Any Mortgaged
Property Subsidiary and Bankers Trust Company (filed with the
Company's Current Report on Form 8-K on June 10, 1998 and
incorporated herein by reference).
10.14 Promissory Note, dated October 22, 1998, between Teachers
Insurance and Annuity Association of America and the Operating
Partnership (filed with the Company's Quarterly Report on Form
10-Q on November 13, 1998 and incorporated herein by
reference).
10.15 Indemnity Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated October 22, 1998, by affiliates of
the Operating Partnership for the benefit of Teachers
Insurance and Annuity Association of America (filed with the
Company's Quarterly Report on Form 10-Q on November 13, 1998
and incorporated herein by reference).
10.16 Promissory Note, dated September 30, 1999, between Teachers
Insurance and Annuity Association of America and the Operating
Partnership (filed with the Company's Quarterly Report on Form
10-Q on November 8, 1999 and incorporated herein by
reference).
10.17 Indemnity Deed of Trust, Assignment of Leases and Rents and
Security Agreement, dated September 30, 1999, by affiliates of
the Operating Partnership for the benefit of Teachers
Insurance and Annuity Association of America (filed with the
Company's Quarterly Report on Form 10-Q on November 8, 1999
and incorporated herein by reference).
10.18 Revolving Credit Agreement, dated December 29, 1999, between
Corporate Office Properties, L.P. and Prudential Securities
Credit Corp. (filed with the Company's Annual Report on Form
10-K on March 16, 2000 and incorporated herein by reference).
10.19 Letter Agreement for Interest Rate Swap Transaction, dated
December 26, 2000, between Corporate Office Properties, L.P.
and Deutsche Bank AG (filed with the Company's Annual Report
on Form 10-K on March 22, 2001 and incorporated herein by
reference).
10.20 Lease Agreement between Blue Bell Investment Company, L.P. and
Unisys Corporation dated March 12, 1997 with respect to lot A
(filed with the Registrant's Registration Statement on Form
S-4 (Commission File No. 333-45649) and incorporated herein by
reference).
10.21 Lease Agreement between Blue Bell Investment Company, L.P. and
Unisys Corporation, dated March 12, 1997, with respect to lot
B (filed with the Registrant's Registration Statement on Form
S-4 (Commission File No. 333-45649) and incorporated herein by
reference).
10.22 Lease Agreement between Blue Bell Investment Company, L.P. and
Unisys Corporation, dated March 12, 1997, with respect to lot
C (filed with the Registrant's Registration Statement on Form
S-4 (Commission File No. 333-45649) and incorporated herein by
reference).
32
<Page>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------------
10.23 Project Consulting and Management Agreement, dated September
28, 1998, between Constellation Properties, Inc. and COMI
(filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
10.24 Agreement for Services, dated September 28, 1998, between the
Company and Corporate Office Management, Inc. (filed with the
Company's Annual Report on Form 10-K on March 30, 1999 and
incorporated herein by reference).
10.25.1 Lease Agreement, dated September 28,1998, between St. Barnabas
Limited Partnership and Constellation Properties, Inc. (filed
with the Company's Annual Report on Form 10-K on March 30,
1999 and incorporated herein by reference).
10.25.2 Fourth Amendment to Agreement of Lease, dated June 12, 2000,
between St. Barnabas, LLC and Constellation Real Estate, Inc.
(filed with the Company's Annual Report on Form 10-K on March
22, 2001 and incorporated herein by reference).
10.26.1 Lease Agreement, dated August 3, 1998, between Constellation
Real Estate, Inc. and Constellation Properties, Inc. (filed
with the Company's Annual Report on Form 10-K on March 30,
1999 and incorporated herein by reference).
10.26.2 First Amendment to Lease, dated December 30, 1998, between
Three Centre Park, LLC and Constellation Properties, Inc.
(filed with the Company's Annual Report on Form 10-K on March
30, 1999 and incorporated herein by reference).
10.27 Option agreement, dated March 1998, between Corporate Office
Properties, L.P. and Blue Bell Land, L.P. (filed with the
Company's Annual Report on Form 10-K on March 16, 2000 and
incorporated herein by reference).
10.28 Option agreement, dated March 1998, between Corporate Office
Properties, L.P. and Comcourt Land, L.P. (filed with the
Company's Annual Report on Form 10-K on March 16, 2000 and
incorporated herein by reference).
10.29 Option Agreement, dated September 28, 1998, between Jolly
Acres Limited Partnership, Arbitrage Land Limited Partnership
and the Operating Partnership (filed with the Company's
Current Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
</Table>
c. We filed the following Current Reports on Form 8-K in the second quarter of
the year ended December 31, 2001:
Item 5 and dated April 4, 2001 that was filed in connection with our entry into
an underwriting agreement with several firms for the public offering of our
Series E Preferred Shares.
Item 7 and Item 9 dated April 25, 2001 that was filed in connection with our
release of earnings on April 25, 2001. We also through this filing made
available certain additional information pertaining to our properties and
operations as of and for the period ended March 31, 2001.
33
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CORPORATE OFFICE PROPERTIES TRUST
Date: August 10, 2001 By: /s/ Randall M. Griffin
-----------------------------------------
Randall M. Griffin
President and Chief Operating Officer
Date: August 10, 2001 By: /s/ Roger A. Waesche, Jr.
-----------------------------------------
Roger A. Waesche, Jr.
Senior Vice President and Chief Financial
Officer
34