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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 September 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.
Yes |X| No |_|
On November 8, 2001, 20,779,981 shares of the Company's Common Shares of
Beneficial Interest, $0.01 par value, were issued.
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1
TABLE OF CONTENTS
FORM 10-Q
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 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 20
Item 3: Quantitative and Qualitative Disclosures About Market Risk 29
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 30
Item 2: Changes in Securities 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 30
Item 6: Exhibits and Reports on Form 8-K 30
SIGNATURES 36
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Investment in real estate:
Operating properties, net $ 793,902 $ 711,413
Projects under construction or development 57,367 36,558
--------- ---------
Total commercial real estate properties, net 851,269 747,971
Investments in and advances to unconsolidated real estate joint
ventures 8,005 3,616
--------- ---------
Investment in real estate, net 859,274 751,587
Cash and cash equivalents 7,881 4,981
Restricted cash 4,116 2,703
Accounts receivable, net 4,720 3,245
Investment in and advances to other unconsolidated entities 1,939 6,124
Deferred rent receivable 10,511 8,644
Deferred charges, net 16,561 12,905
Prepaid and other assets 8,145 4,501
Furniture, fixtures and equipment, net 1,699 147
--------- ---------
TOTAL ASSETS $ 914,846 $ 794,837
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage and other loans payable $ 508,715 $ 474,349
Accounts payable and accrued expenses 8,923 10,227
Rents received in advance and security deposits 4,319 3,883
Dividends and distributions payable 8,346 7,090
Fair value of derivatives 3,894 --
Other liabilities 11,082 --
--------- ---------
Total liabilities 545,279 495,549
--------- ---------
Minority interests:
Preferred Units in the Operating Partnership 24,367 24,367
Common Units in the Operating Partnership 80,720 81,069
Other consolidated partnerships 231 124
--------- ---------
Total minority interests 105,318 105,560
--------- ---------
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred Shares ($0.01 par value; 5,000,000 shares authorized);
40,693 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
September 30, 2001) 5 --
1,265,000 designated as Series E Cumulative Redeemable Preferred
Shares of beneficial interest (1,150,000 shares issued with an
aggregate liquidation preference of $28,750 at September 30, 2001) 11 --
1,425,000 designated as Series F Cumulative Redeemable Preferred
Shares of beneficial interest (1,425,000 shares issued with a
liquidation preference of $35,625 at September 30, 2001) 14 --
Common Shares of beneficial interest ($0.01 par value; 45,000,000
shares authorized, shares issued of 20,756,647 at September 30,
2001 and 20,575,936 at December 31, 2000) 208 206
Additional paid-in capital 284,834 209,388
Cumulative dividends in excess of net income (13,618) (11,064)
Value of unearned restricted Common Share grants (3,229) (3,399)
Treasury Shares, at cost (166,600 shares) (1,415) (1,415)
Accumulated other comprehensive loss (2,574) --
--------- ---------
Total shareholders' equity 264,249 193,728
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 914,846 $ 794,837
========= =========
See accompanying notes to financial statements.
3
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months ended, For the nine months ended,
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Real Estate Operations:
Revenues
Rental revenue $ 29,011 $ 23,980 $ 80,590 $ 69,040
Tenant recoveries and other revenue 3,754 4,059 10,787 11,277
-------- -------- -------- --------
Revenue from real estate operations 32,765 28,039 91,377 80,317
-------- -------- -------- --------
Expenses
Property operating 9,656 8,050 26,680 23,095
Interest 8,342 7,850 24,298 22,188
Amortization of deferred financing costs 397 349 1,326 966
Depreciation and other amortization 5,252 4,295 15,109 12,475
-------- -------- -------- --------
Expenses from real estate operations 23,647 20,544 67,413 58,724
-------- -------- -------- --------
Earnings from real estate operations before equity in income
of unconsolidated real estate joint ventures 9,118 7,495 23,964 21,593
Equity in income of unconsolidated real estate joint ventures 27 -- 181 --
-------- -------- -------- --------
Earnings from real estate operations 9,145 7,495 24,145 21,593
-------- -------- -------- --------
Service operations:
Revenues 862 -- 3,038 --
Expenses (1,138) -- (3,382) --
Equity in loss of unconsolidated Service Companies (102) (111) (220) (112)
-------- -------- -------- --------
Losses from service operations (378) (111) (564) (112)
-------- -------- -------- --------
General and administrative expense (1,347) (1,319) (4,122) (3,827)
-------- -------- -------- --------
Income before gain on sales of properties, minority interests,
income taxes, extraordinary item and cumulative effect of
accounting change 7,420 6,065 19,459 17,654
Gain on sales of properties -- -- 1,596 57
-------- -------- -------- --------
Income before minority interests, income taxes, extraordinary
item and cumulative effect of accounting change 7,420 6,065 21,055 17,711
Minority interests:
Common Units in the Operating Partnership (1,700) (1,732) (5,072) (4,867)
Preferred Units in the Operating Partnership (572) (572) (1,716) (1,668)
Other consolidated entities (7) (6) (61) (17)
-------- -------- -------- --------
Income before income taxes, extraordinary item and cumulative
effect of accounting change 5,141 3,755 14,206 11,159
Income tax benefit, net of minority interests 81 -- 133 --
-------- -------- -------- --------
Income before extraordinary item and cumulative effect
of accounting change 5,222 3,755 14,339 11,159
Extraordinary item-loss on early retirement of debt, net of
minority interests -- (70) (136) (112)
-------- -------- -------- --------
Income before cumulative effect of accounting change 5,222 3,685 14,203 11,047
Cumulative effect of accounting change, net of minority
interests -- -- (174) --
-------- -------- -------- --------
NET INCOME 5,222 3,685 14,029 11,047
Preferred Share dividends (1,830) (781) (4,324) (3,020)
-------- -------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,392 $ 2,904 $ 9,705 $ 8,027
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item and cumulative effect of
accounting change $ 0.17 $ 0.15 $ 0.50 $ 0.44
Extraordinary item -- -- (0.01) --
Cumulative effect of accounting change -- -- (0.01) --
-------- -------- -------- --------
Net income $ 0.17 $ 0.15 0.48 $ 0.44
-------- -------- -------- --------
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item and cumulative effect of
accounting change $ 0.16 $ 0.15 $ 0.48 $ 0.43
Extraordinary item -- (0.01) -- (0.01)
Cumulative effect of accounting change -- -- (0.01) --
-------- -------- -------- --------
Net income $ 0.16 $ 0.14 $ 0.47 $ 0.42
======== ======== ======== ========
See accompanying notes to financial statements.
4
CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the nine months ended
September 30,
-------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,029 $ 11,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 6,760 6,513
Depreciation and other amortization 15,109 12,475
Amortization of deferred financing costs 1,326 966
Equity in loss of unconsolidated entities 39 112
Gain on sales of properties (1,596) (57)
Extraordinary item - loss on early retirement of debt 206 151
Cumulative effect of accounting change 263 --
Increase in deferred rent receivable (2,184) (3,311)
Increase in accounts receivable, restricted cash and
prepaid and other assets (1,822) (3,394)
Increase in accounts payable, accrued expenses, rents
received in advance and security deposits 1,098 2,532
Other 1,130 --
--------- ---------
Net cash provided by operating activities 34,358 27,034
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of and additions to commercial real estate
properties (66,604) (49,120)
Proceeds from sales of rental properties 3,797 602
Investments in and advances to unconsolidated real estate
joint ventures (15,043) (8,606)
Cash from acquisition of real estate joint venture 688 --
Cash from acquisition of Service Companies 568 --
Investments in and advances to other unconsolidated entities (564) (525)
Leasing commissions paid (2,767) (5,730)
Advances to certain real estate joint ventures (1,488) --
Other (473) (2,671)
--------- ---------
Net cash used in investing activities (81,886) (66,050)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgage and other loans payable 120,960 95,818
Repayments of mortgage and other loans payable (119,452) (33,496)
Deferred financing costs paid (3,439) (1,212)
Increase in other liabilities 1,472 --
Purchase of Treasury Shares -- (1,415)
Net proceeds from issuance of Preferred Shares 72,623 --
Net proceeds from issuance of Common Shares 424 265
Net proceeds from issuance of share options 601 171
Dividends paid (15,427) (13,493)
Distributions paid (7,334) (6,739)
--------- ---------
Net cash provided by financing activities 50,428 39,899
--------- ---------
Net increase in cash and cash equivalents 2,900 883
CASH AND CASH EQUIVALENTS
Beginning of period 4,981 2,376
--------- ---------
End of period $ 7,881 $ 3,259
========= =========
See accompanying notes to financial statements.
5
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 (collectively,
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 September 30, 2001, our portfolio included
97 office properties, including one owned through a joint venture.
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 owned only 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 September 30, 2001
follows:
% 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%
Series F Preferred Units 100%
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:
6
o COPT;
o the Operating Partnership and its subsidiaries; and
o 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).
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:
o our ownership interest in the entity's capital as an investment on our
Consolidated Balance Sheets and
o our percentage share of the earnings or losses from the entity in our
Consolidated Statements of Operations.
COST METHOD
We use the cost method of accounting when we own an interest in an entity
and cannot exert significant influence over the entity's operations. Under the
cost method, we report:
o the cost of our investment in the entity as an investment on our
Consolidated Balance Sheets and
o distributions to us of the entity's earnings in our Consolidated
Statements of Operations.
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:
o the reported amounts of assets and liabilities in our Consolidated Balance
Sheets at the dates of the financial statements;
o the disclosure of contingent assets and liabilities at the dates of the
financial statements; and
o the 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:
o 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;
o 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
7
o as construction of the buildings on these land parcels is completed and
operations commence, we report 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 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:
o 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;
o 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
o 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
September 30, 2001 and their respective fair values ("FV"):
Notional
Nature of Amount One-Month Effective Expiration FV at
Derivative (in millions) LIBOR base Date Date 9/30/01
---------- ------------- ---------- --------- ---------- -------
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 (3,894)
-------
Total $(3,894)
=======
We have designated each of these derivatives as cash flow hedges. At
September 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 nine months ended September 30, 2001, we reduced AOCL and
minority interests in total by an additional $3,645 to recognize the decrease in
the fair value of the interest rate swap during that period. We also recognized
an unrealized loss of $9 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.
8
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 $3.1
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:
o the denominator is increased to include the weighted average number of
potential additional Common Shares that would have been outstanding if
securities that are convertible into our Common Shares were converted and
o the numerator is adjusted to add back any convertible preferred dividends
and any other changes in income or loss that would result from the assumed
conversion into Common Shares.
9
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):
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income available to Common Shareholders $ 3,392 $ 2,904 $ 9,705 $ 8,027
Add: Cumulative effect of accounting change, net -- -- 174 --
Add: Extraordinary item, net -- 70 136 112
-------- -------- -------- --------
Numerator for basic earnings per share before
extraordinary item and cumulative effect of
accounting change 3,392 2,974 10,015 8,139
Add: Series D Preferred Share dividends 136 -- 372 --
Add: Expense on dilutive options 5 -- -- --
-------- -------- -------- --------
Numerator for diluted earnings per share before
extraordinary item and cumulative effect of
accounting change 3,533 2,974 10,387 8,139
Less: Extraordinary item, net -- (70) (136) (112)
-------- -------- -------- --------
Numerator for diluted earnings per share for net income
before cumulative effect of accounting change 3,533 2,904 10,251 8,027
Less: Cumulative effect of accounting change, net -- -- (174) --
-------- -------- -------- --------
Numerator for diluted earnings per share for net income $ 3,533 $ 2,904 $ 10,077 $ 8,027
======== ======== ======== ========
Denominator (all weighted averages):
Common Shares - basic 20,141 19,934 20,070 18,439
Assumed conversion of share options 481 239 343 146
Assumed conversion of Common Unit warrants -- -- -- 316
Conversion of Series D Preferred Shares 1,197 -- 1,091 --
-------- -------- -------- --------
Denominator for diluted earnings per share 21,819 20,173 21,504 18,901
======== ======== ======== ========
Basic earnings per Common Share:
Income before extraordinary item and cumulative
effect of accounting change $ 0.17 $ 0.15 $ 0.50 $ 0.44
Extraordinary item -- -- (0.01) --
Cumulative effect of accounting change -- -- (0.01) --
-------- -------- -------- --------
Net income $ 0.17 $ 0.15 $ 0.48 $ 0.44
======== ======== ======== ========
Diluted earnings per Common Share:
Income before extraordinary item and cumulative
effect of accounting change $ 0.16 $ 0.15 $ 0.48 $ 0.43
Extraordinary item -- (0.01) -- (0.01)
Cumulative affect of accounting change -- -- (0.01) --
-------- -------- -------- --------
Net income $ 0.16 $ 0.14 $ 0.47 $ 0.42
======== ======== ======== ========
Our diluted EPS computation for the three and nine months ended September
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 months ended September 30, 2000 only assumes
conversion of share options and our diluted EPS computation for the nine months
ended September 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.
10
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 ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS 133"). 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 of this
pronouncement.
In June 2001, the FASB issued 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
142 and assessing the impact of adoption.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 provides new guidance on recognition of
impairment losses on long-lived assets to be held and used and broadens the
definition of what constitutes a discontinued operation and how the results of
discontinued operations are to be measured. SFAS No. 144 is effective January 1,
2002. We are currently reviewing the provisions of this standard and assessing
the impact of adoption.
NOTE 4 COMMERCIAL REAL ESTATE PROPERTIES
Operating properties consisted of the following:
September 30, December 31,
2001 2000
------------- ------------
Land $ 157,789 $ 140,018
Buildings and improvements 682,474 604,666
--------- ---------
840,263 744,684
Less: accumulated depreciation (46,361) (33,271)
--------- ---------
$ 793,902 $ 711,413
========= =========
Projects under construction or development consisted of the following:
September 30, December 31,
2001 2000
------------- ------------
Land $23,507 $19,069
Construction in progress 33,860 17,489
------- -------
$57,367 $36,558
======= =======
11
2001 ACQUISITIONS
We acquired the following properties during the nine months ended September 30,
2001:
Number Total
Date of of Rentable Initial
Project Name Location Acquisition Buildings Square Feet Cost
------------ -------- ----------- --------- ----------- -------
State Farm Properties (1) Columbia, MD 5/14/01 3 141,530 $15,502
Airport Square Partners
Properties (2) Linthicum, MD 7/2/01 5 314,594 33,836
Airport Square I Linthicum, MD 8/3/01 1 97,161 11,465
Gateway 63 Properties Columbia, MD 8/30/01 4 187,132 23,827
(1) Includes a 30,855 square foot office building undergoing redevelopment.
(2) On March 7, 2001, we acquired a 40% interest in Airport Square Partners,
LLC. On March 21, 2001, this joint venture acquired five office buildings
for $33,617. We accounted for this investment using the equity method of
accounting until July 2, 2001, when we acquired the remaining 60% interest
in Airport Square Partners, LLC. The amount reported on the table above is
the recorded cost of the five office buildings upon completion of these
transactions.
We also acquired two parcels of land located in Oxon Hill, Maryland that
are contiguous to one of our existing operating properties for $469 on July 30,
2001 from an affiliate of Constellation Real Estate, Inc. ("Constellation").
Constellation owned 43% of our Common Shares and controlled two of the nine
positions on our Board of Trustees at September 30, 2001.
2001 CONSTRUCTION/DEVELOPMENT
During the nine months ended September 30, 2001, we completed the
construction of one office building totaling 78,460 square feet located in
Columbia, Maryland.
As of September 30, 2001, we had construction underway on six buildings in
the Baltimore/Washington Corridor, including one building which is 52% complete
that commenced operations in September 2001.
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:
o 80% interest in MOR Montpelier LLC, which completed the construction of a
43,785 square foot office building in Columbia, Maryland, on February 1,
2001;
o 40% interest in Airport Square Partners, LLC, which owns five office
buildings in Linthicum, Maryland, on March 7, 2001. We acquired the
remaining 60% interest in this joint venture on July 2, 2001, at which time
the entity became a consolidated subsidiary (see Note 4);
o 80% interest in Gateway 70 LLC, which is developing a parcel of land
located in Columbia, Maryland, on April 5, 2001;
o 40% interest in Airport Square XXII, LLC, which is developing a parcel of
land located in Linthicum, Maryland, on May 3, 2001; and
o 80% interest in MOR Forbes LLC, which is constructing a 55,000 square foot
office property in Lanham, Maryland, on May 18, 2001.
12
Our investment in and advances to unconsolidated real estate joint ventures
are accounted for using the equity method of accounting and included the
following:
September 30, December 31,
2001 2000
------------ ------------
Gateway 67, LLC $3,831 $3,616
Gateway 70 LLC 2,283 --
MOR Montpelier LLC 963 --
MOR Forbes LLC 920 --
Airport Square XXII, LLC 8 --
------ ------
$8,005 $3,616
====== ======
NOTE 6 ACCOUNTS RECEIVABLE
Our accounts receivable are reported net of an allowance for bad debts of
$201 at September 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 ("TRS") 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.
Our investment in and advances to other unconsolidated entities included
the following:
September 30, December 31,
2001 2000
------------- ------------
Investment in MediTract, LLC $1,621 $1,621
Investment in Paragon 318 --
Total investment in the Service Companies -- 4,503(1)
------ ------
$1,939 $6,124
====== ======
(1) Our total investment in the Service Companies at December 31, 2000 included
a $2,005 note receivable and $2,001 in advances receivable.
13
NOTE 8 DEFERRED CHARGES
Deferred charges consisted of the following:
September 30, December 31,
2001 2000
------------- ------------
Deferred leasing costs $ 12,524 $ 10,800
Deferred financing costs 9,051 6,108
Deferred other 1,975 --
-------- --------
23,550 16,908
Accumulated amortization (6,989) (4,003)
-------- --------
Deferred charges, net $ 16,561 $ 12,905
======== ========
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.
In September 2001, we completed the sale of 1,425,000 Series F Cumulative
Redeemable Preferred Shares of beneficial interest (the "Series F 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
October 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 $2.46875 per share, which is
equal to 9.875% of the $25.00 per share redemption price. We contributed the net
proceeds to our Operating Partnership in exchange for 1,425,000 Series F
Preferred Units. The Series F Preferred Units carry terms that are substantially
the same as the Series F 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 through September 30, 2001.
In July 2001, we issued 23,000 Common Shares subject to forfeiture
restrictions to an officer. The forfeiture restrictions lapse annually through
2005 as the officer remains employed by us. These shares may not be sold,
transferred or encumbered while the forfeiture restrictions are in place.
Forfeiture restrictions lapsed on 4,600 of these shares in 2001.
We issued 77,192 Common Shares in connection with the exercise of share
options in 2001.
14
A summary of the activity in the accumulated other comprehensive loss
component of shareholders' equity for the nine months ended September 30, 2001
follows:
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 nine months
ended September 30, 2001, net of minority interests (2,411)
-------
Balance, September 30, 2001 $(2,574)
=======
NOTE 10 DIVIDENDS AND DISTRIBUTIONS
The following summarizes our dividends/distributions for the nine months
ended September 30, 2001:
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
Third Quarter 2001 September 28, 2001 October 15, 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
Third Quarter 2001 September 28, 2001 October 15, 2001 $ 0.2500 $ 136
Series E Preferred Shares:
Second Quarter 2001 June 29, 2001 July 16, 2001 $ 0.7047 $ 810
Third Quarter 2001 September 28, 2001 October 15, 2001 $ 0.6406 $ 737
Series F Preferred Shares:
Third Quarter 2001 September 28, 2001 October 15, 2001 $0.21944 $ 313
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
Third Quarter 2001 September 28, 2001 October 15, 2001 $ 0.21 $4,233
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
Third Quarter 2001 September 28, 2001 October 15, 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
Third Quarter 2001 September 28, 2001 October 15, 2001 $ 0.21 $1,977
15
NOTE 11 SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
-------------------------
2001 2000
--------- ---------
Supplemental schedule of non-cash investing and
financing activities:
Purchase of commercial real estate properties by acquiring
joint venture partner interest:
Operating properties $ 33,926 $ --
Investments in and advances to unconsolidated real
estate joint ventures (10,835) --
Restricted cash 86 --
Deferred costs 197 --
Prepaid and other assets 182 --
Mortgage and other loans payable (24,068) --
Rents received in advance and security deposits (176) --
--------- ---------
Cash from purchase $ (688) $ --
========= =========
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 $ 106,551 $ --
========= =========
Debt assumed in connection with acquisitions $ 15,750 $ 6,179
========= =========
Decrease in accrued capital improvements $ (4,466) $ (1,119)
========= =========
Reclassification of other liabilities from projects under
construction or development (see Note 3) $ 9,600 $ --
========= =========
Dividends/distributions payable $ 8,346 $ 7,090
========= =========
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 $ 3,890 $ --
========= =========
Adjustments to minority interests resulting from changes
in ownership of Operating Partnership by COPT $ (739) $ 2,408
========= =========
Decrease in minority interests and increase in
shareholders' equity in connection with conversion of
Common Units into Common Shares $ 808 $ 8,527
========= =========
Increase in minority interests resulting from issuance of
Common Units in connection with acquisitions $ 3,249 $ --
========= =========
16
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:
o REITs are now allowed to own up to 100% investments in the stock of a
TRS, subject to certain restrictions relating to the size of such
investments. TRSs can provide services to REIT tenants and others without
adversely impacting the income requirements to which REITs are subject;
o REITs are no longer able to enter into new arrangements to own more than
10% of the vote or value of the securities in a non-REIT C corporation
unless such C corporation elects to be treated as a TRS; and
o the percentage of REIT taxable income that REITs are required to distribute
to shareholders 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 nine months ended September 30, 2001 consisted of the following:
Current
Federal $ 89
State 12
----
101
----
Deferred
Federal 83
State 18
----
101
----
Total $202
====
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 nine months
ended September 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.
17
The table below reports segment financial information. Our retail and
service operations segments are not reported separately 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.
Baltimore/ Northern/
Washington Greater Central New Greater
Corridor Philadelphia Jersey Harrisburg
Office Office Office Office Other Total
-------------------------------------------------------------------------------
Three months ended September 30, 2001:
Revenues from real estate operations $ 22,558 $ 2,507 $ 4,758 $ 2,174 $ 768 $ 32,765
Property operating expenses 7,019 30 1,938 669 -- 9,656
-------- -------- -------- -------- -------- --------
Income from real estate operations $ 15,539 $ 2,477 $ 2,820 $ 1,505 $ 768 $ 23,109
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $ 75,512 $ 130 $ 257 $ 81 $ -- $ 75,980
======== ======== ======== ======== ======== ========
Three months ended September 30, 2000:
Revenues from real estate operations $ 17,197 $ 2,506 $ 5,326 $ 2,228 $ 782 $ 28,039
Property operating expenses 5,535 24 1,868 544 79 8,050
-------- -------- -------- -------- -------- --------
Income from real estate operations $ 11,662 $ 2,482 $ 3,458 $ 1,684 $ 703 $ 19,989
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $ 8,074 $ 140 $ 3,559 $ 134 $ (14) $ 11,893
======== ======== ======== ======== ======== ========
Nine months ended September 30, 2001:
Revenues $ 59,785 $ 7,519 $ 14,678 $ 7,446 $ 1,949 $ 91,377
Property operating expenses 18,927 88 5,655 2,010 -- 26,680
-------- -------- -------- -------- -------- --------
Income from operations $ 40,858 $ 7,431 $ 9,023 $ 5,436 $ 1,949 $ 64,697
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $121,219 $ 390 $ 2,203 $ 851 $ -- $124,663
======== ======== ======== ======== ======== ========
Segment assets at September 30, 2001 $592,136 $105,399 $109,803 $ 71,032 $ 36,476 $914,846
======== ======== ======== ======== ======== ========
Nine months ended September 30, 2000:
Revenues $ 49,324 $ 7,519 $ 15,000 $ 6,898 $ 1,576 $ 80,317
Property operating expenses 15,452 78 5,608 1,757 200 23,095
-------- -------- -------- -------- -------- --------
Income from operations $ 33,872 $ 7,441 $ 9,392 $ 5,141 $ 1,376 $ 57,222
======== ======== ======== ======== ======== ========
Commercial real estate property
expenditures $ 44,333 $ 217 $ 8,708 $ 860 $ 62 $ 54,180
======== ======== ======== ======== ======== ========
Segment assets at September 30, 2000 $455,611 $106,566 $120,838 $ 71,928 $ 29,922 $784,865
======== ======== ======== ======== ======== ========
18
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.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Income from operations for reportable segments $ 23,109 $ 19,989 $ 64,697 $ 57,222
Equity in income of unconsolidated real estate joint
ventures 27 -- 181 --
Losses from service operations (378) (111) (564) (112)
Add: Gain on sales of properties -- -- 1,596 57
Less:
General and administrative (1,347) (1,319) (4,122) (3,827)
Interest (8,342) (7,850) (24,298) (22,188)
Amortization of deferred financing costs (397) (349) (1,326) (966)
Depreciation and other amortization (5,252) (4,295) (15,109) (12,475)
Minority interests (2,279) (2,310) (6,849) (6,552)
-------- -------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change $ 5,141 $ 3,755 $ 14,206 $ 11,159
======== ======== ======== ========
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, 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.
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 September 30, 2001.
We prepared the pro forma condensed consolidated financial information
presented below as if all of our 2000 and 2001 acquisitions and dispositions 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.
Nine months ended
September 30,
---------------------
2001 2000
-------- -------
Pro forma total revenues $100,061 $87,560
======== =======
Pro forma net income available to Common Shareholders 9,321 7,416
======== =======
Pro forma earnings per Common Share
Basic 0.46 0.40
======== =======
Diluted 0.45 0.39
======== =======
19
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 nine months ended September 30, 2001. This section
includes discussions on:
o why various components of our Consolidated Statements of Operations changed
for the three and nine months ended September 30, 2001 compared to the same
periods in 2000;
o what our primary sources and uses of cash were in the nine months ended
September 30, 2001;
o how we raised cash for acquisitions and other capital expenditures during
the nine months ended September 30, 2001;
o how we intend to generate cash for future capital expenditures; and
o 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 report 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. Such statements address,
among other things, the availability of cash provided from operations to meet
short-term capital needs and sources of funds to meet long-term capital needs.
When used in this report, the words "anticipate," "believe," "estimate" and
similar expressions are generally intended to identify forward looking
statements, but are not exclusive expressions of 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 factors that 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."
20
CORPORATE OFFICE PROPERTIES TRUST
OPERATING DATA VARIANCE ANALYSIS
(DOLLARS FOR THIS TABLE ARE IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
2001 2000 Variance % Change 2001 2000 Variance % Change
---- ---- -------- -------- ---- ---- -------- --------
Real Estate Operations:
Revenues
Rental revenue $ 29,011 $ 23,980 $ 5,031 21% $ 80,590 $ 69,040 $ 11,550 17%
Tenant recoveries and other revenue 3,754 4,059 (305) (8%) 10,787 11,277 (490) (4%)
-------- -------- -------- -------- -------- --------
Revenues from real estate operations 32,765 28,039 4,726 17% 91,377 80,317 11,060 14%
-------- -------- -------- -------- -------- --------
Expenses
Property operating 9,656 8,050 1,606 20% 26,680 23,095 3,585 16%
Interest and amortization of deferred 8,739 8,199 540 7% 25,624 23,154 2,470 11%
financing costs
Depreciation and other amortization 5,252 4,295 957 22% 15,109 12,475 2,634 21%
-------- -------- -------- -------- -------- --------
Expenses from real estate operations 23,647 20,544 3,103 15% 67,413 58,724 8,689 15%
-------- -------- -------- -------- -------- --------
Earnings from real estate operations before
equity in income of unconsolidated real
estate joint ventures 9,118 7,495 1,623 22% 23,964 21,593 2,371 11%
Equity in income of unconsolidated real estate
joint ventures 27 -- 27 N/A 181 -- 181 N/A
-------- -------- -------- -------- -------- --------
Earnings from real estate operations 9,145 7,495 1,650 22% 24,145 21,593 2,552 12%
Losses from service operations (378) (111) (267) 241% (564) (112) (452) 404%
General and administrative (1,347) (1,319) (28) 2% (4,122) (3,827) (295) 8%
Gain on sales of properties -- -- -- N/A 1,596 57 1,539 2,700%
-------- -------- -------- -------- -------- --------
Income before minority interests, income
taxes, extraordinary item and cumulative
effect of accounting change 7,420 6,065 1,355 22% 21,055 17,711 3,344 19%
Minority interests (2,279) (2,310) 31 (1%) (6,849) (6,552) (297) 5%
Income tax benefit, net 81 -- 81 N/A 133 -- 133 N/A
Extraordinary item - loss on early retirement
of debt, net -- (70) 70 (100%) (136) (112) (24) 21%
Cumulative effect of accounting change, net -- -- -- N/A (174) -- (174) N/A
-------- -------- -------- -------- -------- --------
Net income 5,222 3,685 1,537 42% 14,029 11,047 2,982 27%
Preferred Share dividends (1,830) (781) (1,049) 134% (4,324) (3,020) (1,304) 43%
-------- -------- -------- -------- -------- --------
Net income available to Common Shareholders $ 3,392 $ 2,904 $ 488 17% $ 9,705 $ 8,027 $ 1,678 21%
======== ======== ======== ======== ======== ========
Basic earnings per Common Share
Income before extraordinary item and
cumulative effect of accounting change $ 0.17 $ 0.15 $ 0.02 13% $ 0.50 $ 0.44 $ 0.06 14%
Net income $ 0.17 $ 0.15 $ 0.02 13% $ 0.48 $ 0.44 $ 0.04 9%
Diluted earnings per Common Share
Income before extraordinary item and
cumulative effect of accounting change $ 0.16 $ 0.15 $ 0.01 7% $ 0.48 $ 0.43 $ 0.05 12%
Net income $ 0.16 $ 0.14 $ 0.02 14% $ 0.47 $ 0.42 $ 0.05 12%
21
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Our revenues from real estate operations increased $4.7 million or 17%, of
which $5.0 million was generated by rental revenue, offset by a decrease in
tenant recoveries and other revenue of $305,000. Included in this change are the
following:
o $5.3 million increase attributable to 13 properties acquired and five
newly-constructed properties placed in service since June 30, 2000;
o $337,000 increase attributable to fees earned for other real estate
services;
o $15,000 decrease attributable to 79 office properties owned throughout both
reporting periods that includes the following:
o $818,000 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
o $803,000 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 and re-tenanted space; and
o $771,000 decrease attributable to properties sold during 2000 and 2001.
Our expenses from real estate operations increased $3.1 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 $1.6 million or 20%. Included in
this change are the following:
o $1.1 million increase attributable to 13 properties acquired and five
newly-constructed properties placed in service since June 30, 2000;
o $730,000 increase attributable to 79 office properties owned throughout
both reporting periods that includes the following:
o $415,000 due to increased repair and maintenance costs related
primarily to building exterior and ground improvement projects
occurring in the three months ended September 30, 2001;
o $134,000 due to increases in real estate taxes resulting from
increased assessments of property value; and
o $96,000 due to increased expense associated with doubtful or
uncollectible receivables; and
o $195,000 decrease attributable to properties sold during 2000 and 2001.
We expect to incur increased losses from uncollectible receivables relative to
what we have incurred in recent years due to poorer general economic conditions
in the United States and the regions we operate.
Our interest expense and amortization of deferred financing costs increased
$540,000 or 7% due primarily to a 14% increase in our average outstanding debt
balance resulting predominantly from our 2000 and 2001 acquisitions and
construction activity, offset somewhat by a decrease in our weighted average
interest rates. Our depreciation and other amortization expense increased
$957,000 or 22%, $617,000 of which is attributable to 13 properties acquired and
five newly-constructed properties placed in service during 2000 and 2001.
Our losses from service operations increased $267,000 and our general and
administrative expenses increased $28,000 or 2%.
As a result of the above factors, income before minority interests, income
taxes, extraordinary items and cumulative effect of accounting change increased
by $1.4 million or 22%. 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 before giving effect to income tax benefit, extraordinary
item and cumulative effect of accounting change decreased $31,000 or 1%.
22
Our income tax benefit of $81,000 in the three months ended September 30,
2001 was due to our losses from the service operations that reside in our
taxable REIT subsidiary.
Our net income available to Common Shareholders increased $488,000 or 17%
due to the factors discussed above coupled with a $70,000 decrease in
extraordinary losses on early retirement of debt, offset by a $1.0 million
increase in Preferred Share dividends resulting from our Series D, Series E and
Series F Preferred Share issuances. Our diluted earnings per share on net income
of $0.16 increased by $0.02 or 14%.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Our revenues from real estate operations increased $11.1 million or 14%, of
which $11.6 million was generated by rental revenue, offset by a decrease in
tenant recoveries and other revenue of $490,000. Included in this change are the
following:
o $12.0 million increase attributable to 14 properties acquired and eight
newly-constructed properties placed in service during 2000 and 2001;
o $1.4 million increase attributable to fees earned for other real estate
services;
o $850,000 decrease attributable to 75 office properties owned throughout
both reporting periods that includes the following:
o $2.2 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
o $1.3 million increase in rental revenue due primarily to increased
occupancy at certain of our properties and increases in rental rates
on renewed and re-tenanted space; and
o $1.3 million decrease attributable to properties sold during 2000 and 2001.
Our expenses from real estate operations increased $8.7 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 $3.6 million or 16%. Included in
this change are the following:
o $2.7 million increase attributable to 14 properties acquired and eight
newly-constructed properties placed in service during 2000 and 2001;
o $1.3 million increase attributable to 75 office properties owned throughout
both reporting periods that includes the following:
o $370,000 due to increased repair and maintenance costs related
primarily to building exterior and ground improvement projects and
heating and ventilation units;
o $308,000 due to increases in real estate taxes resulting from
increased assessments of property value; and
o $265,000 due to increased expense associated with doubtful or
uncollectible receivables; and
o $371,000 decrease attributable to properties sold during 2000 and 2001.
Our interest expense and amortization of deferred financing costs increased
$2.5 million or 11% due primarily to a 14% increase in our average outstanding
debt balance resulting from our 2000 and 2001 acquisitions and construction
activity, offset somewhat by a decrease in our weighted average interest rates.
Our depreciation and other amortization expense increased $2.6 million or 21%,
$1.7 million of which is attributable to 14 properties acquired and eight
newly-constructed properties placed in service during 2000 and 2001.
Our losses from service operations increased $452,000 and our general and
administrative expenses increased $295,000 or 8%. 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 $3.3 million or 19%. Our income allocation to minority
23
interests before giving effect to income tax benefit, extraordinary item
and cumulative effect of accounting change increased $297,000 or 5% due
primarily to an increase in our Operating Partnership's net income. Our income
tax benefit of $133,000 in 2001 was due to our losses from the service
operations that reside in our taxable REIT subsidiary.
Our net income available to Common Shareholders increased $1.7 million or
21% due to the factors discussed above, offset by a $1.3 million increase in
Preferred Share dividends resulting from our Series D, Series E and Series F
Preferred Share issuances, combined with a $24,000 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 in Note 3 to our Consolidated
Financial Statements). Our diluted earnings per share on net income of $0.47
increased by $0.05 or 12%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations represents 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 November 9, 2001, the maximum amount
available under our Revolving Credit Facility was $125.0 million, of which $49.2
million was unused. We had a $50.0 million line of credit with Prudential
Securities Credit Corporation that expired in June 2001.
As of September 30, 2001, we had $91.0 million in mortgage and other loans
payable maturing in 2001, representing our Term Credit Facility with Deutsche
Banc Alex. Brown. We repaid this loan in October 2001 using borrowings from our
Revolving Credit Facility.
We expect to meet our long-term capital needs through a combination of cash
from operations, additional borrowings from existing credit facilities and new
loans and additional equity issuances of Common Shares, Preferred Shares, Common
Units and/or Preferred Units.
We have no material contractual obligations as of September 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.
24
Mortgage and other loans payable at September 30, 2001 consisted of the
following (dollars in thousands):
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 81,025
Teachers Insurance and Annuity Association of America, 7.72%, maturing October 2006 58,369
Mutual of New York Life Insurance Company, 7.79%, maturing August 2004 27,073
Transamerica Life Insurance and Annuity Company, 7.18%, maturing August 2009 26,504
State Farm Life Insurance Company, 7.9%, maturing April 2008 25,831
Transamerica Occidental Life Insurance Company, 7.3%, maturing May 2008 21,074
Allstate Life Insurance Company, 6.93%, maturing July 2008 20,921
Deutsche Banc Alex. Brown, Revolving Credit Facility, LIBOR + 1.75%, maturing March 2004 17,700
Transamerica Life Insurance and Annuity Company, 8.3%, maturing October 2005 17,430
Keybank National Association, LIBOR + 1.75%, maturing March 2002 (2) 16,215
Allstate Life Insurance Company, 7.14%, maturing September 2007 15,980
Mercantile-Safe Deposit and Trust Company, Prime rate, maturing February 2003 15,750
IDS Life Insurance Company, 7.9%, maturing March 2008 13,511
Allfirst Bank, LIBOR + 1.75%, maturing April 1, 2003 (3) 11,000
Bank of America, LIBOR + 1.75, maturing December 2002 (4) 8,952
Teachers Insurance and Annuity Association of America, 8.35%, maturing October 2006 7,891
Provident Bank of Maryland, LIBOR + 1.75%, maturing July 2002 (5) 6,900
Fleet Bank, LIBOR + 1.75%, maturing February 2003 (6) 6,716
Allfirst Bank, LIBOR + 1.75%, maturing July 2002 (7) 6,500
Aegon USA Realty Advisors, Inc., 8.29%, maturing May 2007 5,911
Citibank Federal Savings Bank, 6.93%, maturing July 2008 4,981
Seller loan, 8.0%, maturing May 2007 1,527
--------
$508,715
========
(1) Loan was repaid in October 2001 using proceeds from our Revolving Credit
Facility.
(2) May be extended for a six-month period, subject to certain conditions. An
additional $8,785 was borrowed under this loan in October 2001.
(3) Loan with a total commitment of $12,000. 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.
(5) Construction loan with a total commitment of $11,855. Loan may be extended
for a one-year period subject to certain conditions.
(6) Loan was repaid in November 2001.
(7) May be extended for a one-year period, subject to certain conditions.
INVESTING AND FINANCING ACTIVITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001:
During the nine months ended September 30, 2001, we acquired for $84.6
million 12 office buildings totaling 709,562 square feet and a 30,855 square
foot office building undergoing redevelopment. These acquisitions were financed
by:
o using $33.1 million in borrowings from our Revolving Credit Facility;
o using $24.1 million in borrowings from mortgage loans payable;
o assuming $15.8 million in mortgage loans payable;
o issuing 310,342 Common Units in our Operating Partnership valued at
$3.3 million; and
o using cash reserves for the balance.
During the nine months ended September 30, 2001, we completed the
construction of one office building totaling 78,460 square feet. Costs incurred
on this building through September 30, 2001 totaled $13.5 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.
25
As of September 30, 2001, we had construction activities underway on six
buildings totaling 532,000 square feet that were 47.2% pre-leased, including one
building which is 52% complete that commenced operations in September 2001.
Estimated costs upon completion for these projects total approximately $89.1
million. Costs incurred on these buildings through September 30, 2001 totaled
$62.0 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 $31.4 million at September 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. We have experienced a slower rate of leasing in our
construction projects than in recent years due in part to additional competing
space being available in the markets where these projects are located and slower
economic growth in these markets than in previous years.
During the nine months ended September 30, 2001, our investments in
unconsolidated real estate joint ventures increased by $4.4 million primarily
due to our investment in four new joint ventures: MOR Montpelier LLC, Airport
Square XXII, LLC, Gateway 70 LLC and MOR Forbes LLC.
During the nine months ended September 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 nine months ended September 30, 2001, we borrowed $191.1 million
under mortgages and other loans payable other than our Revolving Credit
Facility, the proceeds of which were used as follows:
o $94.8 million to repay other loans;
o $39.8 million to finance acquisitions;
o $25.5 million to pay down our Revolving Credit Facility;
o $16.8 million to finance construction activities; and
o the balance to 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.
In September 2001, we completed the sale of 1,425,000 Series F 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 October
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 $2.46875 per share, which is equal to
9.875% of the $25.00 per share redemption price. We contributed the net proceeds
to our Operating Partnership in exchange for 1,425,000 Series F Preferred Units.
The Series F Preferred Units
26
carry terms that are substantially the same as the Series F Preferred
Shares. The Operating Partnership used most of the proceeds to pay down our
Revolving Credit Facility.
INVESTING AND FINANCING ACTIVITY SUBSEQUENT TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
In November 2001, we obtained a $36.0 million mortgage loan payable with
Keybank National Association. The loan has a two-year term with an option to
renew for one additional year and carries interest at LIBOR plus 1.75%. The
proceeds from this loan were used to pay down our Revolving Credit Facility
by $29.0 million and to repay our $6.7 million loan with Fleet Bank.
STATEMENT OF CASH FLOWS
We generated net cash flow from operating activities of $34.4 million for
the nine months ended September 30, 2001, an increase of $7.3 million from the
nine months ended September 30, 2000. Our increase in cash flow 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 nine months ended September 30, 2001 increased $15.8 million from the nine
months ended September 30, 2000 due primarily to a $17.5 million increase in
cash outlays associated with purchases of and additions to commercial real
estate properties. Our net cash flow provided by financing activities for the
nine months ended September 30, 2001 increased $10.5 million from the nine
months ended September 30, 2000 due primarily to $72.6 million in proceeds from
the issuance of our Series D, Series E and Series F Preferred Shares in 2001 and
a $25.1 million increase in proceeds from mortgage and other loans payable,
offset by a $86.0 million increase in repayments of mortgage and other loans
payable.
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 GAAP,
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. 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 nine months ended
September 30, 2001 and 2000 are summarized in the following table:
27
(Dollar and shares for this table are in thousands)
For the three months For the nine months
ended September 30, ended September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Income before minority interests, income taxes,
extraordinary item and cumulative effect of
accounting change .................................. $ 7,420 $ 6,065 $ 21,055 $ 17,711
Add: Real estate-related depreciation and
amortization ....................................... 5,186 4,272 14,924 12,406
Less: Preferred Unit distributions ................... (572) (572) (1,716) (1,668)
Less: Preferred Share dividends ...................... (1,830) (781) (4,324) (3,020)
Less: Minority interests in other consolidated
entities ........................................... (7) (6) (61) (17)
Less: Gain on sales of properties excluding
redevelopment portion (1) .......................... -- -- (416) (57)
Income tax benefit, gross ............................ 124 -- 202 --
-------- -------- -------- --------
Funds from operations ................................ 10,321 8,978 29,664 25,355
Add: Preferred Unit distributions .................... 572 572 1,716 1,668
Add: Convertible Preferred Share dividends ........... 136 -- 372 677
Add: Expense on dilutive share options ............... 5 -- -- --
-------- -------- -------- --------
Funds from operations assuming conversion of share
options, Common Unit warrants, Preferred Units
and Preferred Shares ............................... 11,034 9,550 31,752 27,700
Less: Preferred Unit distributions ................... -- (572) -- (1,668)
Less: Straight line rent adjustments ................. (717) (1,872) (2,223) (3,307)
Less: Recurring capital improvements ................. (1,211) (415) (3,480) (2,067)
-------- -------- -------- --------
Adjusted funds from operations assuming conversion of
share options, Common Unit warrants, Preferred Units
and Preferred Shares ............................... $ 9,106 $ 6,691 $ 26,049 $ 20,658
======== ======== ======== ========
Weighted average Common Shares ....................... 20,141 19,934 20,070 18,439
Weighted average Common Units ........................ 9,415 9,388 9,379 9,740
-------- -------- -------- --------
Weighted average Common Shares/Units ................. 29,556 29,322 29,449 28,179
Assumed conversion of share options .................. 481 239 343 146
Assumed conversion of Common Unit warrants ........... -- -- -- 316
Conversion of weighted average convertible
Preferred Shares ................................... 1,197 -- 1,091 1,226
Conversion of weighted average Preferred Units ....... 2,421 2,421 2,421 2,355
-------- -------- -------- --------
Weighted average Common Shares/Units for funds from
operations assuming conversion of share options,
Common Unit warrants, Preferred Units and Preferred
Shares ............................................. 33,655 31,982 33,304 32,222
-------- -------- -------- --------
Weighted average Common Shares/Units for adjusted
funds from operations assuming conversion of share
options, Common Unit warrants, Preferred Units and
Preferred Shares (2) ............................... 33,655 29,561 33,304 29,867
======== ======== ======== ========
(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.
(2) Preferred Units are not included in our computation of AFFO for the periods
ending September 30, 2000.
28
INFLATION
We have not been significantly impacted by inflation during the periods
presented in this report due mostly to the relatively low inflation rates in our
markets. Most of our tenants are obligated to pay their share of a building's
operating expenses to the extent such expenses exceed amounts established in
their leases, based on historical expense levels. In addition, some of our
tenants are obligated to pay their share of all of a building's operating
expenses. These arrangements reduce our exposure to increases in such costs
resulting from inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, the most predominant of which is
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 September 30, 2001,
64.5% 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 September 30, 2001 (dollars in thousands):
For the Period Ended December 31,
--------------------------------------------------------------
2001 (1) 2002 (2) 2003 (3) 2004 2005 Thereafter Total FV
-----------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate $ 1,328 $ 5,562 $ 5,989 $31,992 $ 22,649 $260,508 $328,028 $346,952
Average interest rate 7.41% 7.41% 7.41% 7.43% 7.45% 7.34% 7.41%
Variable rate $91,023 $38,891 $33,073 $17,700 $ -- $ -- $180,687 $160,687
Average interest rate 5.33% 5.20% 5.12% 5.08% -- -- 5.20%
(1) Includes $90.9 million that was repaid in October 2001.
(2) Includes 13.4 million in maturities in July that may be extended for
one-year terms, subject to certain conditions. Also includes a $9.0 million
maturity in December that may be extended for a one-year period, subject to
certain conditions.
(3) Includes an $11.0 million maturity in April that may be extended for a
one-year term, subject to certain conditions.
The following table sets forth derivative contracts we had in place as of
September 30, 2001 and their respective fair values ("FV"):
Notional
Nature of Amount One-Month Effective Expiration FV at 9/30/01
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 (3,894)
-------
Total $(3,894)
=======
Based on our variable rate debt balances, during the nine months ended
September 30, 2001, our interest expense would have increased $842,000 if
interests rates were 1% higher.
29
PART II
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
a. N/A
b. N/A
c. On August 30, 2001, we issued 310,342 Common Units in our Operating
Partnership in connection with the acquisition of the Gateway 63 Properties. The
issuance of these Common Units was made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
These Common Units are exchangeable into our Common Shares, subject to certain
conditions.
d. N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
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).
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
30
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
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).
31
EXHIBIT
NO. DESCRIPTION
------- -----------
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, 2001 and 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).
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).
4.10 Articles Supplementary of Corporate Office Properties Trust
Series F Cumulative Redeemable Preferred Shares, dated September
13, 2001 (filed with the Registrant's Current Report on Form 8-K
on September 14, 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).
32
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
10.12.1 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).
10.12.2 Amended and Restated Senior Secured Credit Agreement, dated as
of August 31, 1998 (filed with the Company's Current Report on
Form 8-K on September 7, 2001, and incorporated herein by
reference).
33
EXHIBIT
NO. DESCRIPTION
------- -----------
10.13.1 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).
10.13.2 First Amended and Restated Senior Secured Revolving Credit
Agreement, dated as of March 28, 2001, 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 September 7, 2001 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).
34
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
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).
35
b. We filed the following Current Reports on Form 8-K in the third quarter of
the year ended December 31, 2001:
Item 7 and Item 9 dated July 26, 2001 that was filed in connection with our
release of earnings on July 26, 2001. Through this filing, we also made
available certain additional information pertaining to our properties and
operations as of and for the period ended June 30, 2001.
Item 5 dated September 5, 2001 in connection with the acquisition of the Airport
Square Properties and the probable acquisition of the Gateway 63 Properties.
Item 5 dated September 13, 2001 that was filed in connection with our entry
into an underwriting agreement with several firms for the public offering of our
Series F Preferred Shares.
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: November 13, 2001 By: /s/ RANDALL M. GRIFFIN
---------------------------------------
Randall M. Griffin
President and Chief Operating Officer
Date: November 13, 2001 By: /s/ ROGER A. WAESCHE, JR.
---------------------------------------
Roger A. Waesche, Jr.
Senior Vice President and Chief
Financial Officer
36