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, 1998
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.)
401 City Avenue, Suite 615, Bala Cynwyd, PA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 538-1800
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
On November 13, 1998, 16,471,640 shares of the Company's Common Shares of
Beneficial Interest, $0.01 par value, were outstanding.
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Table of Contents
Form 10-Q
PAGE
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 3
1997
Consolidated Statements of Operations for the three and nine months ended September 4
30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 5
and 1997 (unaudited)
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Changes in Securities 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust
Consolidated Balance Sheet
(Dollars in thousands, except share and per share data)
September 30, December 31,
1998 1997
-------------------- ---------------------
(unaudited)
Assets
Land $ 88,504 $ 38,764
Buildings and improvements 352,981 152,945
Furniture, fixtures and equipment 332 140
Less accumulated depreciation (6,984) (3,224)
- ---------------------------------------------------------------------- -------------------- ---------------------
Net investments in real estate 434,833 188,625
Cash and cash equivalents 1,906 3,395
Restricted cash 143 --
Tenant accounts receivable 629 78
Investment in and advances to Corporate Office
Management, Inc. 2,313 --
Deferred rent receivable 1,562 479
Deferred financing costs, net 1,185 857
Deferred costs and other assets, net 5,413 100
- ---------------------------------------------------------------------- -------------------- ---------------------
Total assets $ 447,984 $ 193,534
- ---------------------------------------------------------------------- -------------------- ---------------------
Liabilities and shareholders' equity
Liabilities:
Mortgage loans payable $ 205,338 $ 114,375
Accounts payable and accrued expenses 4,567 932
Rents received in advance and security deposits 2,005 425
Dividends/distributions payable 3,087 1,276
- ---------------------------------------------------------------------- -------------------- ---------------------
Total liabilities 214,997 117,008
- ---------------------------------------------------------------------- -------------------- ---------------------
Minority interests:
Preferred Units 52,500 52,500
Common Units 23,186 12,362
- ---------------------------------------------------------------------- -------------------- ---------------------
Total minority interests 75,686 64,862
- ---------------------------------------------------------------------- -------------------- ---------------------
Commitments and contingencies -- --
Shareholders' equity:
Preferred Shares ($0.01 par value; 5,000,000
authorized); 1,025,000 designated as Series A
Convertible Preferred Shares of beneficial interest ($0.01
par value, 865,566 Shares issued and outstanding at
September 30, 1998) 9 --
Common Shares of beneficial interest ($0.01 par value; 45,000,000
authorized, 15,953,717 and 2,266,083 Shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively) 160 23
Additional paid-in capital 163,918 16,620
Accumulated deficit (6,786) (4,979)
- ---------------------------------------------------------------------- -------------------- ---------------------
Total shareholders' equity 157,301 11,664
- ---------------------------------------------------------------------- -------------------- ---------------------
Total liabilities and shareholders' equity $ 447,984 $ 193,534
- ---------------------------------------------------------------------- -------------------- ---------------------
See accompanying notes to financial statements.
3
Corporate Office Properties Trust
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,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
Revenues
Rental income $ 8,562 $ 629 $ 20,539 $ 1,881
Tenant recoveries and other income 1,250 5 2,640 18
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Total revenues 9,812 634 23,179 1,899
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Expenses
Property operating 2,457 7 5,001 19
General and administrative 397 95 1,055 271
Interest expense 2,849 305 7,424 920
Amortization of deferred financing costs 119 3 266 9
Depreciation and other amortization 1,514 138 3,772 416
Reformation costs -- -- 637 --
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Total expenses 7,336 548 18,155 1,635
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Income from operations 2,476 86 5,024 264
Equity in net income from Corporate
Office Management, Inc. 17 -- 17 --
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Income before minority interests 2,493 86 5,041 264
Minority interests
Preferred Units (853) -- (2,559) --
Common Units (301) -- (713) --
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Net income 1,339 86 1,769 264
Preferred Share dividends (10) -- (10) --
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Net income available to Common Shareholders $ 1,329 $ 86 $ 1,759 $ 264
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Earnings per Share
Basic $ 0.13 $ 0.06 $ 0.26 $ 0.19
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
Diluted $ 0.12 $ 0.06 $ 0.26 $ 0.19
- --------------------------------------------------------------- -------------- -------------- -------------- -------------
See accompanying notes to financial statements.
4
Corporate Office Properties Trust
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
For the nine months ended
September 30,
----------------------------
1998 1997
------------- --------------
Cash flows from operating activities:
Net income $ 1,769 $ 264
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 3,272 --
Depreciation and amortization 3,772 416
Amortization of deferred financing costs 266 9
Amortization of marketable securities -- (8)
Equity in net income of Corporate Office Management, Inc. (17) --
Increase in deferred rent receivable (1,083) (50)
Increase in tenant accounts receivable and other assets (2,535) (104)
Increase (decrease) in accounts payable, accrued expenses, rents
received in advance and security deposits 2,173 (32)
- ---------------------------------------------------------------------- ------------- --------------
Net cash provided by operating activities 7,617 495
- ---------------------------------------------------------------------- ------------- --------------
Cash flows from investing activities:
Proceeds from maturity of marketable securities -- 487
Investment in and advances to Corporate Office
Management, Inc. 204 --
Increase in restricted cash (143) --
Purchases of and additions to investments in real estate (96,897) --
Leasing commissions paid (151) --
Deposits on real estate acquisitions (1,465) --
- ---------------------------------------------------------------------- ------------- --------------
Net cash (used in) provided by investing activities (98,452) 487
- ---------------------------------------------------------------------- ------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of Common Shares 72,742 --
Costs attributable to Common Shares issued (505) --
Dividends paid (2,089) (533)
Distributions paid (3,475) --
Proceeds from mortgage loans payable 26,700 --
Repayments of mortgage loans payable (1,762) (210)
Deferred financing costs (565) --
Deposit on financing (1,700) --
- ---------------------------------------------------------------------- ------------- --------------
Net cash provided by (used in) financing activities 89,346 (743)
- ---------------------------------------------------------------------- ------------- --------------
Net (decrease) increase in cash and cash equivalents (1,489) 239
Cash and cash equivalents
Beginning of period 3,395 258
- ---------------------------------------------------------------------- ------------- --------------
End of period $ 1,906 $ 497
- ---------------------------------------------------------------------- ------------- --------------
See accompanying notes to financial statements.
5
Corporate Office Properties Trust
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(unaudited)
1. Organization and Formation of Company
Corporate Office Properties Trust (formerly Royale Investments, Inc.)
(the "Company") is a fully-integrated, self-administered Real Estate Investment
Trust ("REIT") which focuses on the ownership, acquisition, management and
development of suburban office buildings. The Company was formed in 1988 as a
Minnesota corporation. The Company has qualified as a REIT as defined in the
Internal Revenue Code (the "Code"). As of September 30, 1998, the Company's
portfolio included 43 commercial real estate properties leased for office and
retail purposes.
The Company's operations are conducted primarily through Corporate
Office Properties, L.P. (the "Operating Partnership"), a partnership formed to
own real estate both directly and through subsidiary partnerships and limited
liability companies ("LLCs"). The Company is the sole general partner in the
Operating Partnership and as of September 30, 1998, owned 84.7% of the Operating
Partnership's common partnership units ("Common Units"). The general partner of
several of the subsidiary partnerships is Corporate Office Properties Holdings,
Inc. ("COPH"), a wholly owned subsidiary of the Company.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a Maryland
REIT and changed its name to Corporate Office Properties Trust (the
"Reformation"). In connection with the Reformation, 45,000,000 common shares and
5,000,000 preferred shares were authorized and each share of common stock was
exchanged for one common share of beneficial interest, par $0.01 ("Common
Share") in Corporate Office Properties Trust. All common stock references in the
financial statements have been restated as Common Shares. This restatement had
no effect on net operations or the amounts presented as shareholders' equity.
The Operating Partnership also owns 95% of the capital stock, including
1% of the voting common stock, in Corporate Office Management, Inc. ("COMI"), an
entity formed in September 1998. COMI and its subsidiaries provide asset
management, property management, construction, development and related services
to the Company and to third-party clients (see Note 4).
On September 28, 1998, the Company, through affiliates of the Operating
Partnership, completed a number of transactions (collectively, the
"Constellation Transaction") pursuant to agreements (the "Constellation
Agreements") with affiliates of Constellation Real Estate Group (collectively,
"Constellation") to acquire real estate properties and service businesses (see
Note 3). In connection with the Constellation Transaction, the Company issued
6,182,634 Common Shares and 865,566 Series A Convertible Preferred Shares of
Beneficial Interest ("Preferred Shares") to Constellation, which became the
owner of approximately 39% of the Company's Common Shares. The Company
contributed the assets it received in the Constellation Transaction to the
Operating Partnership in exchange for 6,182,634 Common Units and 865,566
preferred units ("Series A Preferred Units"). The Series A Preferred Units carry
terms which are identical to the Preferred Shares issued to Constellation.
2. Summary of Significant Accounting Policies
The financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. In order to conform with
generally accepted accounting principles, management, in preparation of the
Company's financial statements, is required
6
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of
September 30, 1998 and December 31, 1997, and the reported amounts of
revenues and expenses for the three and nine months ended September 30, 1998
and 1997. Actual results could differ from those estimates.
In the opinion of the Company, all adjustments (consisting solely of
normal recurring matters, except for $637 of costs associated with the
Reformation) necessary to fairly present the financial position of the Company
as of September 30, 1998, the results of its operations for the three and nine
months ended September 30, 1998 and 1997 and the cash flows for the nine months
ended September 30, 1998 and 1997 have been included. The results of operations
for such interim periods are not necessarily indicative of the results for a
full year. For further information, refer to the Company's consolidated
financial statements and footnotes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1997.
Basis of Presentation
The consolidated financial statements of the Company at September 30,
1998 and December 31, 1997 include the accounts of the Company, the Operating
Partnership (and its subsidiary partnerships and LLCs), and COPH. All
intercompany transactions and balances have been eliminated in consolidation.
Certain amounts from prior periods have been reclassified to conform to current
year presentation. The reclassifications had no effect on net operations or
shareholders' equity.
The Company, as general partner, controls the Operating Partnership;
therefore consolidated financial reporting and accounting have been applied.
Minority interests represent the Common Units and Initial Preferred Units
("Initial Preferred Units") of the Operating Partnership not owned by the
Company, each of which include certain interests retained by the Chairman of the
Board of Trustees and the Chief Executive Officer of the Company ("Retained
Interests").
Earnings Per Share ("EPS")
Pursuant to SFAS No. 128, the Company has computed basic and diluted
EPS for the three and nine months ended September 30, 1998 and 1997. The
weighted average common shares outstanding for purposes of basic and diluted EPS
calculations are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average common shares-basic 9,973 1,420 6,652 1,420
Assumed conversion of stock options 10 -- 86 --
Conversion of Preferred Shares -- -- -- --
Conversion of Initial Preferred Units 7,500 -- -- --
Conversion of Common Units 2,582 -- -- --
------ ------ ------ ------
Weighted average common shares-diluted 20,065 1,420 6,738 1,420
------ ------ ------ ------
------ ------ ------ ------
The diluted EPS computation for the nine months ended September 30,
1998 does not assume conversion of Initial Preferred Units, Common Units or
Preferred Shares since such conversion would have an antidilutive effect on EPS.
The conversion of convertible Initial Preferred Units, convertible Common Units
and Preferred Shares into Common Shares would increase the diluted weighted
average common shares denominator by 7,500,000, 2,581,818 and 17,833 Common
Shares, respectively, for the nine months ended September 30, 1998. Such
conversions could potentially dilute EPS in the future.
7
The diluted EPS computation for the three months ended September 30,
1998 does not assume conversion of Preferred Shares since such conversion would
have an antidilutive effect on EPS. The conversion of Preferred Shares into
Common Shares would increase the diluted weighted average common shares
denominator by 52,916. Such conversions could potentially dilute EPS in the
future.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". This statement, effective for financial statements for
fiscal years beginning after December 15, 1997, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Generally, financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. While this statement affects
only financial statement disclosures, the Company currently does not expect
adoption of this Statement to have a material effect on the preparation of its
financial statement presentation or related footnote disclosures. SFAS 131 is
not effective for interim financial statements in the initial year of its
application.
In March 1998, the FASB's Emerging Issues Task Force (the "Task Force")
reached consensus on Emerging Issues Task Force Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions" ("EITF 97-11").
EITF 97-11, effective March 19, 1998, requires that internal costs of
preacquisition activities incurred in connection with the acquisition of an
operating property should be expensed as incurred. The Company does not incur
significant internal costs from preacquisition activities; therefore the
adoption of EITF 97-11 did not have a material effect on the Company's
consolidated statement of operations.
In May 1998, the Task Force reached consensus on Emerging Issues Task
Force Issue No. 98-9, "Accounting for Contingent Rent in Interim Periods" ("EITF
98-9"). EITF 98-9, effective May 22, 1998, states that lessors should not
recognize contingent rental revenue in interim periods until the lessee has met
the specified targets that trigger contingent rental income. The Company's
historical accounting for contingent rent is consistent with the Task Force's
consensus; therefore, the adoption of EITF 98-9 did not have a material effect
on the Company's consolidated statement of operations.
3. Acquisitions
On April 30, 1998, the Company, through affiliates of the Operating
Partnership, acquired nine multistory office buildings and three office/flex
buildings in the Baltimore/Washington Corridor in Linthicum, Anne Arundel
County, Maryland (the "Airport Square Properties"). The properties were acquired
for cash at an aggregate purchase price of $72,618, including $1,139 in
transaction costs.
On May 28, 1998, the Company, through affiliates of the Operating
Partnership, acquired two multistory office buildings located in Fairfield, New
Jersey (the "Fairfield Properties"). The properties were acquired at an
aggregate price of $29,405, including $605 in transaction costs, paid through
the assumption of debt of $6,465 and proceeds from the Credit Facility, as
defined below (Note 6).
On September 28, 1998, the Company, through affiliates of the Operating
Partnership, completed the Constellation Transaction. The Company acquired
interests in 10 office properties and 2 retail properties (collectively the
"Constellation Properties"). The Constellation Properties, located in the
Baltimore/Washington Corridor, were acquired at an aggregate price of $146,727,
including $3,136 in transaction costs.
The Company also acquired from Constellation a 75% interest in
Corporate Realty Management, LLC ("CRM"), a real estate management services
entity, and certain equipment, furniture and other assets related to
Constellation Real Estate, Inc. ("CRE") (collectively, the "Constellation
Service Companies"). The Constellation Service Companies were acquired at an
aggregate price of $2,500.
8
The Constellation Transaction was financed as follows: (i) the issuance
of 6,182,634 Common Shares in the Company, valued at $64,918 ($10.50 per share),
(ii) the issuance of 865,566 Preferred Shares in the Company, valued at $21,639
($25 per share) (iii) $58,085 in debt of the Constellation Properties assumed by
the Company (see Note 6), (iv) $2,100 in proceeds from the Company's Credit
Facility (see Note 6) and (v) $2,485 in cash from the Company's cash reserves.
With the Constellation Transaction, the Company was granted certain
options and rights of first refusal to purchase undeveloped land in three
locations adjacent to certain of the Constellation Properties. In addition, a
significant number of those persons previously employed by CRE engaged in the
operation of the Constellation Properties became employees of affiliates of the
Company.
In connection with the Constellation Transaction, the Company's Board
of Trustees was expanded from a composition of seven to nine Trustees.
Constellation designated Edward A. Crooke and Steven D. Kesler as the two new
Trustees. Jay H. Shidler remained Chairman. Clay W. Hamlin remained Chief
Executive Officer and resigned as President of the Company, with Randall M.
Griffin appointed as President and Chief Operating Officer. In addition, Roger
A. Waesche, Jr., formerly Senior Vice President of Finance of CRE, and John H.
Gurley, formerly Senior Vice President and general counsel of CRE, as well as
certain other officers of CRE, assumed positions with the Company and its
affiliates similar to those held by them with CRE.
4. Investment in Corporate Office Management, Inc.
On September 28, 1998, the Company, through affiliates of the Operating
Partnership, acquired from Constellation a 75% interest in CRM and certain
equipment, furniture and other assets related to CRE (see Note 3). Upon
completion of the Constellation Transaction, the Company contributed these
assets into Corporate Office Management, Inc. ("COMI"), an entity which provides
asset management, managerial, financial and legal support to the Company and its
affiliates. In exchange for this contribution of assets, the Company received
95% of the capital stock in COMI, including 1% of the voting common stock, and a
$2,005 note receivable from COMI carrying an interest rate of 10%.
COMI contributed certain equipment, furniture and other assets into
Corporate Development Services, LLC ("CDS"), an entity which provides
construction and development services predominantly to the Company and its
affiliates. In exchange for this contribution of assets, COMI received 100% of
the membership interests in CDS.
The Company accounts for its investment in COMI and its subsidiaries,
CRM and CDS, using the equity method of accounting. The Company's investment in
COMI at September 30, 1998 was comprised of the following:
Note receivable $ 2,005
Equity investment in COMI 487
Advance payable (179)
---------
Total $ 2,313
---------
---------
5. Issuance of Shares and Options
In January 1998, options to purchase 2,500 shares were exercised. In
March 1998, options to purchase an additional 2,500 shares were exercised.
In March 1998, options to purchase an aggregate of 45,000 shares were
granted to an officer and four independent Trustees at a grant price of $12.25
per share. Options relating to 20,000 Common Shares vest one year after the date
of grant and options relating to 25,000 Common Shares vest ratably over 3 years
following
9
the date of grant. The options expire ten years after the date of grant. On
September 28, 1998, options to purchase an aggregate of 709,175 shares were
granted to employees of the Company and its affiliates at a grant price of
$9.25. These options vest ratably over 3 years following the date of grant.
The options expire ten years after the date of grant.
On April 27, 1998, the Company completed the sale of 7,500,000 Common
Shares to the public at a price of $10.50 per share (the "Offering"). The net
proceeds were contributed to the Operating Partnership in exchange for 7,500,000
Common Units. The Operating Partnership used the proceeds to fund acquisitions.
On September, 28, 1998, in connection with the Constellation
Transaction, the Company issued 6,182,634 Common Shares and 865,566 Preferred
Shares. The Preferred Shares are nonvoting and are convertible after 2 years of
issuance, subject to certain conditions, into Common Shares on the basis of
1.8748 Common Shares for each Preferred Share. Holders of Preferred Shares are
entitled to cumulative dividends, payable quarterly (as and if declared by the
Board of Trustees), accruing from the date of issue at the annual rate of $1.375
per share, which is equal to 5.5% of the $25.00 per share liquidation preference
of the Preferred Shares.
6. Mortgage Loans Payable
On May 28, 1998, the Company obtained a $100,000 secured revolving
credit facility (the "Credit Facility") initially collateralized by the Airport
Square Properties and one of the Fairfield Properties. The Credit Facility is a
variable rate loan bearing interest at LIBOR plus 175 basis points and provides
for monthly payments of interest only. A fee of 25 basis points per annum on the
unused amount of the Credit Facility will be payable quarterly, in arrears. The
Credit Facility matures on May 28, 2001, including a one year optional extension
period. As of September 30, 1998, $26,700 was borrowed under the Credit
Facility.
On May 28, 1998, the Company assumed $6,465 in debt collateralized by
one of the Fairfield Properties. The debt bears interest at a fixed rate of
8.29% per annum and provides for monthly payments of principal and interest
totaling $56. The debt matures on May 1, 2007. The balance at September 30, 1998
totaled $6,406.
10
On September 28, 1998, the Company assumed $58,085 in debt
collateralized by certain of the Constellation Properties, net of $1,475 which
was repaid at settlement, material terms of which are as follows:
Amount
Lender Assumed Interest Rate Terms Maturity Date
- ------------------------------------- --------- -------------- ---------------------- --------------
First National Bank of Maryland $10,417 (1) LIBOR + 2% Monthly principal 4/01/99
of $83 plus interest
Security Life of Denver Insurance Co. 9,556 7.5% Monthly principal 10/31/05
and interest of $74
Bank of America 9,982 (2) LIBOR + 2% Monthly principal 1/15/99
of $37 plus interest
Mercantile-Safe Deposit and Trust Co. 8,438 Prime +1/2% Monthly principal 7/01/99
of $66 plus interest
First National Bank of Maryland 7,391 (1) LIBOR + 2% Monthly principal 3/22/03
of $16 plus interest
Provident Bank of Maryland 5,368 (1) LIBOR + 2.5% Monthly principal 11/14/01
of $11 plus interest
First National Bank of Maryland 4,005 (1) LIBOR + 2% Monthly principal 6/05/00
of $11 plus interest
Provident Bank of Maryland 2,928 (3) LIBOR + 1.75% Monthly principal 9/01/00
of $7 plus interest
-------
$58,085
-------
-------
(1) Debt was repaid with proceeds from the TIAA Loan (see Note 10).
(2) Net of $1,000 which was repaid upon assumption.
(3) Net of $475 which was repaid upon assumption.
7. Dividends and Distributions
The Company declared a dividend on March 16, 1998 of $0.15 per Common
Share, which was paid on April 15, 1998 to shareholders of record as of March
31, 1998. The Company declared a dividend on June 2, 1998 of $0.15 per Common
Share which was paid on July 15, 1998 to shareholders of record as of June 30,
1998. The Company also declared a dividend on September 10, 1998 of $0.18 per
share which was paid on October 15, 1998 to shareholders of record as of
September 18, 1998.
The Company declared distributions to minority interests holding
Partnership Units and Initial Preferred Units of $388 and $853, respectively,
which were paid on April 15, 1998. The Company declared distributions to
minority interests holding Partnership Units and Initial Preferred Units of $387
and $853, respectively, which were paid on July 15, 1998. The Company also
declared distributions to minority interests holding Partnership Units and
Initial Preferred Units of $465 and $853, respectively, which were paid on
October 15, 1998.
The Company also accrued dividends of $10 to holders of Preferred
Shares as of September 30, 1998.
11
8. Supplemental Information to Statements of Cash Flows
Nine months ended
September 30,
---------------------------
1998 1997
--------------- -----------
Supplemental schedule of non-cash investing and financing activities:
In conjunction with certain acquisitions, the following
assets and liabilities were assumed and equity issued:
Purchase of real estate $150,029 $ --
Purchase of Constellation Service Companies 2,500 --
Deferred financing costs 29 --
Other assets 25 --
Mortgage loans (66,025) --
Minority interest (11,351) --
Common Shares (62) --
Preferred Shares (9) --
Additional paid-in capital (75,136) --
---------- ------
Net cash from acquisitions of properties $ -- $ --
---------- ------
---------- ------
9. Commitments and Contingencies
On May 14, 1998, the Company entered into a series of agreements
through affiliates of the Operating Partnership with Constellation to acquire
real estate properties and service businesses. The following property
acquisitions covered under these agreements were not completed on September 28,
1998 with the Constellation Transaction: (i) acquisition of two
newly-constructed office buildings, (ii) acquisition of a retail building on
which construction is nearing completion and (iii) acquisition of two office
buildings currently under construction. One of the office buildings included in
Item (i) above was acquired on October 22, 1998 (see Note 10).
10. Subsequent Events
On October 13, 1998, the Company, through an affiliate of the Operating
Partnership, acquired an office building located in Columbia, Maryland
("Riverwood"). The purchase price of Riverwood totaled approximately $20.4
million, including approximately $400 in transaction costs. The Company paid
$18.8 million of the purchase price and acquisition costs using borrowings under
the Credit Facility. The balance of the purchase price and acquisition costs was
paid in the form of 148,381 Common Units (valued at $10.50 per unit).
On October 22, 1998, the Company, through affiliates of the Operating
Partnership, and pursuant to the Constellation Agreements, completed the
acquisition of a newly-constructed office building located in Columbia, Maryland
("Woodlands One"). Woodlands One was acquired at an aggregate price of $17,928,
including $328 in transaction costs, which was financed as follows: (i) the
issuance of 517,923 Common Shares, valued at $5,438 ($10.50 per share), (ii) the
issuance of 72,509 Preferred Shares, valued at $1,813 ($25 per share) (iii)
$9,815 using proceeds from the TIAA Loan (see below) and (iv) $862 using the
Company's cash reserves.
On October 22, 1998, the Company obtained a nonrecourse loan from
Teachers Insurance and Annuity Association of America (the "TIAA Loan"). The
total commitment under the TIAA Loan is $85,000, of which $76,200 was advanced
on October 22, 1998 (the "First Disbursement"). The proceeds of the First
Disbursement
12
were used as follows: (i) $27,181 was used to pay off certain of the assumed
debt associated with the Constellation Transaction, (ii) $9,815 was used to
pay off debt and closing costs associated with the acquisition of Woodlands
One, (iii) $38,500 was used to pay down the Credit Facility (iv) $441 was
used to pay closing costs associated with the TIAA Loan and Woodlands One
acquisition and (v) $263 was applied to the Company's cash reserves. The
remaining $8,800 of the loan commitment (the "Second Disbursement") will be
advanced upon the Company's acquisition of an additional office building from
Constellation. The TIAA Loan bears interest at a fixed rate of 6.89% per
annum and provides for monthly payments of principal and interest of $533
prior to the Second Disbursement and $595 thereafter. The TIAA Loan matures
on November 1, 2008 and may not be prepaid prior to November 30, 2003.
On October 30, 1998, the Company, through affiliates of the Operating
Partnership, acquired 8 office buildings located in Middlesex County, New Jersey
(the "Centerpoint Office Properties"). The purchase price of the Centerpoint
Office Properties totaled approximately $31.7 million, including approximately
$400 in costs. The Company paid $31.0 million of the purchase price and
acquisition costs using borrowings under the Credit Facility and the balance
using the Company's cash reserves.
11. Pro Forma Financial Information (Unaudited)
The acquisitions by the Company during 1998 and 1997 were accounted for
by the purchase method. The results of operations for the acquisitions have been
included in the accompanying consolidated statements of operations from their
respective purchase dates through September 30, 1998.
The following pro forma condensed consolidated financial information of
the Company has been prepared as if all acquisitions occurring during 1998 and
1997 had occurred as of the beginning of the period, and therefore include pro
forma adjustments as deemed necessary by management. The pro forma financial
information is unaudited and is not necessarily indicative of the results which
actually would have occurred if the acquisitions had occurred on January 1, 1998
and 1997, nor does it purport to represent the results of operations for future
periods.
For the nine months ended September 30,
--------------------------------------------
1998 1997
--------------------- ----------------------
Pro forma total revenue $ 41,775 $ 37,108
Pro forma net income available to Common Shareholders $ 5,346 $ 2,224
Pro forma earnings per share - Basic and Diluted $ 0.34 $ 0.14
13
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except share and per share data)
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1993 and Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: real estate investment
considerations, such as the effect of economic and other conditions in the
market area on cash flows and values; the need to renew leases or release space
upon the expiration of current leases, and the ability of a property to generate
revenues sufficient to meet debt service payments and other operating expenses;
and risks associated with borrowings, such as the possibility that the Company
will not have sufficient funds available to make principal payments on
outstanding debt or outstanding debt may be refinanced at higher interest rates
or otherwise on terms less favorable to the Company.
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the accompanying
financial statements and notes thereto. Certain capitalized terms are defined in
the notes to consolidated financial statements set forth in response to Item 1.
Overview
The Company's results of operations reflect its growth resulting from
the acquisitions of 10 office properties in October 1997, 12 office properties
in April 1998, 2 office properties in May 1998 and 10 office properties and 2
retail properties in September 1998. The 1998 acquisitions were financed with
the proceeds from the Offering in April 1998, the proceeds of the Credit
Facility, the assumption of debt in connection with the acquisitions of the
Fairfield Properties and the Constellation Transaction and the issuance of
Common Shares and Preferred Shares in connection with the Constellation
Transaction.
Results of Operations
Comparison of the Nine Months Ended September 30, 1998 and 1997: Total
revenues, which include rental income, recoveries from tenants and other income,
increased by $21,280 for the nine months ended September 30, 1998 as compared to
the corresponding prior year period. Of this increase, $18,658 results from an
increase in base rents, the majority of which is attributable to the effects of
the property acquisitions. Tenant recoveries and other income increased $2,622
due predominantly to tenant recoveries from newly acquired properties.
Property operating expenses and depreciation and amortization increased
by $8,338 primarily as a result of the effects of the property acquisitions.
Interest expense and amortization of deferred financing costs increased by
$6,761 as a result of debt obtained or assumed in connection with certain of the
Company's acquisitions. General and administrative expenses increased by $784
due to the addition of certain management and other staffing functions resulting
from the Company's property acquisitions and its conversion from an
externally-advised REIT to a self-administered REIT. The operations for the nine
months ended September 30, 1998 also included $637 in costs associated with the
Reformation on March 16, 1998.
The operations for the nine months ended September 30, 1998 include the
equity in net income from Corporate Office Management, Inc. which originated in
September 1998.
As a result of the above factors, income before minority interests
increased by $4,777. Minority interests represent the portion of the Operating
Partnership which is not owned by the Company. The Company did not have minority
interests in the corresponding prior year period. Diluted earnings per share
increased by $0.07 per share due to the factors discussed above partially offset
by the effects of the issuance of Common
14
Shares in October 1997, the Offering of April, 1998 and the issuance of
Common Shares and Preferred Shares to Constellation.
Comparison of the Three Months Ended September 30, 1998 and 1997: Total
revenues, which include rental income, recoveries from tenants and other income,
increased by $9,178 for the three months ended September 30, 1998 as compared to
the corresponding prior year period. Of this increase, $7,933 results from an
increase in base rents, substantially all of which is attributable to the
effects of the property acquisitions. Tenant recoveries and other income
increased $1,245 due predominantly to tenant recoveries from newly acquired
properties.
Property operating expenses and depreciation and amortization increased
by $3,826 primarily as a result of the effects of the property acquisitions.
Interest expense and amortization of deferred financing costs increased by
$2,660 as a result of debt obtained or assumed in connection with certain of the
Company's acquisitions. General and administrative expenses increased by $302
due to the addition of certain management and other staffing functions resulting
from the Company's property acquisitions and its conversion from an
externally-advised REIT to a self-administered REIT.
The operations for the three months ended September 30, 1998 include
the equity in net income from Corporate Office Management, Inc. which originated
in September 1998.
As a result of the above factors, income before minority interests
increased by $2,407. Minority interests represent the portion of the Operating
Partnership which is not owned by the Company. The Company did not have minority
interests in the corresponding period in 1997. Diluted earnings per share
increased by $0.06 per share due to the factors discussed above partially offset
by the effects of the issuance of Common Shares in October, 1997, the Offering
of April 1998 and the issuance of Common Shares and Preferred Shares to
Constellation.
Liquidity and Capital Resources
Historically, cash provided from operations represented the primary
source of liquidity to fund distributions, pay debt service and fund working
capital requirements. The Company expects to continue to meet its short-term
capital needs from property cash flow, including all property expenses, general
and administrative expenses, dividend and distribution requirements and
recurring capital improvements and leasing commissions. The Company does not
anticipate borrowing to meet these requirements.
In January 1998, the Company paid dividends of $0.125 per Common Share,
amounting to $282, and distributions to minority interests holding Common Units
and Initial Preferred Units totaling $274 and $720, respectively. In April 1998,
the Company paid dividends of $0.15 per Common Share, amounting to $341, and
distributions to minority interests holding Common Units and Initial Preferred
Units totaling $388 and $853, respectively. In July 1998, the Company paid
dividends totaling $0.15 per Common Share, amounting to $1,466, and
distributions to minority interests holding Common Units and Initial Preferred
Units amounted to $387 and $853, respectively. In October 1998, the Company paid
dividends totaling $0.18 per Common Share, amounting to $1,759, and
distributions to minority interests holding Common Units and Initial Preferred
Units totaling $465 and $853, respectively. In September 1998, the Company also
accrued dividends on Preferred Shares which are expected to be paid in January
1999.
On April 27, 1998, the Company completed the sale of 7,500,000 Common
Shares to the public at a price of $10.50 per share. The Company used the
proceeds to acquire 7,500,000 Partnership Units and increase its percentage
interest in the Operating Partnership to approximately 75.8%. Net proceeds from
the Offering were $72,742, which were used principally by the Operating
Partnership on April 30, 1998, to acquire the Airport Square Properties,
consisting of twelve office properties in the Baltimore/Washington corridor
totaling approximately 815,000 net rentable square feet. In connection with the
Offering, the Company's Shares were listed on the New York Stock exchange under
the symbol "OFC".
15
On May 28, 1998, the Company, through the Operating Partnership,
acquired the Fairfield Properties, two multistory office buildings located in
Fairfield, New Jersey totaling approximately 262,000 net rentable square feet.
On May 28, 1998, the Company obtained a $100,000 senior secured
revolving Credit Facility. The Credit Facility is a variable rate loan bearing
interest at LIBOR plus 175 basis points and provides for monthly payments of
interest only. A fee of 25 basis points per annum on the unused amount of the
Credit Facility is payable quarterly, in arrears. On May 28, 1998, the Company
borrowed $23,750 under the Credit Facility to fund a portion of the Fairfield
Properties' acquisition. The Company intends to utilize the remaining balance of
the Credit Facility for acquisitions, renovations, tenant improvements and
leasing commissions. The Credit Facility is collateralized by the Airport Square
Properties and one of the Fairfield Properties.
On May 28, 1998, also in connection with the Fairfield Properties
acquisition, the Company assumed $6,465 in mortgage debt collateralized by one
of the Fairfield Properties. The loan bears interest at a fixed rate of 8.29%
per annum and provides for monthly payments of principal and interest totaling
$56.
On September 28, 1998, the Company, through affiliates of the Operating
Partnership, completed the acquisition of the Constellation Properties, which
include ten office properties totaling approximately 1,000,000 square feet and
two retail properties totaling approximately 250,000 square feet. The
Constellation Properties, located in the Baltimore/Washington corridor, were
acquired at an aggregate price of $146,727, including $3,136 in transaction
costs.
On September 28, 1998, the Company, through affiliates of the Operating
Partnership, also acquired the Constellation Service Companies at an aggregate
price of $2,500.
The total cost of the Constellation Transaction was financed as
follows: (i) the issuance of 6,182,634 Common Shares in the Company, valued at
$64,918, (ii) the issuance of 865,566 Preferred Shares in the Company, valued at
$21,639 (iii) $58,085 in debt of the Constellation Properties assumed by the
Company (net of $1,475 in debt paydowns), (iv) $2,100 in proceeds from the
Company's Credit Facility and (v) $2,485 using the Company's cash reserves. The
Series A Preferred Units carry terms which are identical to the Preferred Shares
issued to Constellation.
On October 13, 1998, the Company, through an affiliate of the Operating
Partnership, acquired Riverwood, an office building located in Columbia,
Maryland totaling approximately 160,000 square feet. The purchase price of
Riverwood totaled approximately $20.4 million, including approximately $400 in
transaction costs. The Company paid $18.8 million of the purchase price and
acquisition costs using borrowings under the Credit Facility. The balance of the
purchase price and acquisition costs was paid in the form of 148,381 Common
Units (valued at $10.50 per unit).
On October 22, 1998, the Company, through affiliates of the Operating
Partnership, acquired Woodlands One, a newly-constructed office building located
in Columbia, Maryland totaling approximately 108,000 square feet. The purchase
price of Woodlands One totaled $17,928, including $328 in transaction costs,
which was financed as follows: (i) the issuance of 517,923 Common Shares in the
Company, valued at $5,438 ($10.50 per share), (ii) the issuance of 72,509
Preferred Shares in the Company, valued at $1,813 ($25.00 per share) (iii)
$9,815 using proceeds from the TIAA Loan and (iv) $862 using the Company's cash
reserves.
On October 22, 1998, the Company obtained the TIAA Loan. The total
commitment under the TIAA Loan is $85,000, of which $76,200 was advanced on
October 22, 1998. The proceeds of the First Disbursement were used as follows:
(i) $27,181 was used to pay off certain of the assumed debt associated with the
Constellation Transaction, (ii) $9,533 was used to pay off debt associated with
the acquisition of Woodlands One, (iii) $38,500 was used to pay down the Credit
Facility (iv) $723 was used to pay closing costs associated with the TIAA Loan
and Woodlands One acquisition and (v) $263 was applied to the Company's cash
reserves. The remaining $8,800 of the loan commitment will be advanced upon the
Company's acquisition of a
16
commercial office building from Constellation. The TIAA Loan bears interest
at a fixed rate of 6.89% per annum and provides for monthly payments of
principal and interest of $533 prior to the Second Disbursement and $595
thereafter. The TIAA Loan matures on November 1, 2008 and may not be prepaid
prior to November 30, 2003.
On October 30, 1998, the Company, through affiliates of the Operating
Partnership, acquired the Centerpoint Office Properties, 8 office buildings
located in Middlesex County, New Jersey totaling approximately 270,000 square
feet. The purchase price of the Centerpoint Office Properties totaled
approximately $31.7 million, including approximately $400 in costs. The Company
paid $31.0 million of the purchase price and acquisition costs using borrowings
under the Credit Facility and the balance using the Company's cash reserves.
The Company expects to meet its long term liquidity requirements, such
as property acquisitions and development, scheduled debt maturities, major
renovations, expansions, and other non-recurring capital improvements through
long-term collateralized indebtedness and the issuance of additional equity
securities.
Statement of Cash Flows
During the nine months ended September 30, 1998, the Company generated
$7,617 in cash flow from operating activities (net of nonrecurring Reformation
costs of $637), an increase of $7,122 compared to the corresponding prior year
period. This increase is due primarily to the effects of the Company's
acquisition of operating properties. Other sources of cash flow consisted of (i)
$72,742 in net proceeds from the Offering and (ii) $26,700 in additional
borrowings under the Company's Credit Facility. During the nine months ended
September 30, 1998, the Company's major uses of cash included (i) $97,048 to
fund property acquisitions, tenant improvements, and leasing commissions, (ii)
$5,564 to pay dividends to shareholders and distributions to minority interests
holding Partnership Units and Initial Preferred Units and (iii) $1,762 to pay
principal payments on mortgages loan payable.
Funds From Operations
The Company considers Funds From Operation ("FFO") to be helpful to
investors as a measure of the financial performance of an equity REIT. In
accordance with NAREIT's definition, FFO is defined as net income (loss)
computed in accordance with 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 and extraordinary and nonrecurring items. FFO does not represent cash
generated from operating activities determined in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
Other REITs may not define FFO in accordance with the current NAREIT definition
or may interpret the current NAREIT definition differently from the Company. FFO
for the nine months ended September 30, 1998 and 1997, as calculated in
accordance with the NAREIT definition published in March 1995, are summarized in
the following table (in thousands).
17
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Income before minority interests....... $ 2,493 $ 86 $ 5,041 $ 264
Add: Nonrecurring charge
Reformation costs................... -- -- 637 --
Add: Real estate related depreciation and
amortization.......................... 1,502 138 3,743 415
Less: Initial Preferred Unit
distributions............................ (853) -- (2,559) --
Less: Preferred Share dividends......... (10) -- (10) --
------- ----- -------- ------
Funds from operations.................... 3,132 224 6,852 679
Add: Initial Preferred Unit distributions 853 -- 2,559 --
Add: Preferred Share dividends ......... 10 -- 10 --
------- ----- -------- ------
Funds from operations assuming
conversion of Preferred Units
And Preferred Shares $ 3,995 $ 224 $ 9,421 $ 679
------- ----- -------- ------
------- ----- -------- ------
Weighted average Common Shares/Units
outstanding (1)....................... 12,555 1,420 9,233 1,420
------- ----- -------- ------
------- ----- -------- ------
Weighted average Common Shares/Units
outstanding diluted (2)............... 20,118 1,420 16,837 1,420
------- ----- -------- ------
------- ----- -------- ------
- ---------------
(1) Assumes redemption of all Common Units, calculated on a weighted
average basis for Common Shares. Includes 282,508 Common Shares
issuable upon redemption of Common Units issuable upon the conversion
of the Retained Interests. Excludes the weighted average effect of the
conversion of 186,455 Retained Interests into 186,455 Initial Preferred
Units and 1,913,545 Initial Preferred Units, both convertible into an
aggregate of 7,499,940 Common Units which are, in turn, redeemable for
7,499,940 Common Shares. Excludes the weighted average effect of the
conversion of 865,566 Preferred Shares convertible into an aggregate of
1,622,763 Common Shares.
(2) Assumes redemption of all Common Units, calculated on a weighted
average basis for Common Shares. Includes 282,508 Common Shares
issuable upon redemption of Common Units issuable upon the conversion
of the Retained Interests. Includes the weighted average effect of the
conversion of 186,455 Retained Interests into 186,455 Initial Preferred
Units and 1,913,545 Initial Preferred Units, both convertible into an
aggregate of 7,499,940 Common Units which are, in turn, redeemable for
7,499,940 Common Shares. Includes the weighted average effect of
824,175 Common Shares for the assumed conversion of stock options
(using the Treasury stock method). Conversion of convertible Initial
Preferred Units and Common Units is assumed in computing the diluted
weighted average Common Shares denominator since such conversion has a
dilutive effect on FFO. Includes the weighted average effect of the
conversion of 865,566 Preferred Shares convertible into an aggregate of
1,622,763 Common Shares.
18
Impact of the Year 2000 Issue
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, this could result in a system failure or
miscalculations causing disruption of operations, including a temporary
inability to process transactions, prepare financial statements, send invoices
or engage in similar normal business activity.
The Company's accounting software package is certified as Year 2000
compliant. Accordingly, the Company does not anticipate adverse consequences in
processing the billing and collection of revenue, the payment of expenditures,
the recording of financial transactions, the preparation of financial statements
and maintaining and generating system driven managerial information. The
Company's information technology and accounting groups are conducting internal
tests to ensure compliance. This testing process is estimated to be completed by
the first quarter of 1999.
The Company's property management team has been continually evaluating
the impact of the Year 2000 Issue on the various facets of property operating
systems since the beginning of 1998. This evaluation process will continue
through the first quarter of 1999. Based on the current status of this
evaluation process, the Company does not anticipate any material consequences on
property operations.
The Company relies on third party suppliers for a number of key
services. Interruption of supplier operations due to the Year 2000 Issue could
affect Company operations. The Company also is dependent upon its tenants for
revenue and cash flow. Interruptions in tenant operations due to the Year 2000
Issue could result in reduced revenue, increased receivable levels and cash flow
reductions. The Company's property management team is in the process of
contacting significant tenants and suppliers to discuss Year 2000 readiness.
Management is being continually updated on the status of this process, which is
estimated to be completed by the first quarter of 1999.
Based on information currently available from the Company's internal
assessment, management does not expect there to be significant incremental costs
associated with its Year 2000 activities over the next 15 months. The Company
will also consider Year 2000 issues for all future property acquisitions and
development.
19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not currently involved in any material litigation nor,
to the Company's knowledge, is any material litigation currently threatened
against the Company (other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance).
ITEM 2. Changes In Securities
a. None
b. None
c. On September 28, 1998, the Company, through affiliates of the Operating
Partnership, completed the Constellation Transaction pursuant to
agreements with affiliates of Constellation Real Estate Group to
acquire real estate properties and service businesses (see Note 3 to
the Consolidated Financial Statements). In connection with the
Constellation Transaction, the Company issued 6,182,634 Common Shares
and 865,566 Series A Convertible Preferred Shares of Beneficial
Interest to Constellation. These shares were issued in a private
placement reliant upon the exemption from registration provided by
Section 4 (2) of the Securities Act of 1933, as amended. The Preferred
Shares are nonvoting and are convertible after 2 years of issuance,
subject to certain conditions, into Common Shares on the basis of
1.8748 Common Shares for each Preferred Share.
d. None
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
The following matters were submitted to a vote of security holders
during the Company's third quarter.
(a) Meeting type and date Special Meeting of
Shareholders held on
August 21, 1998
(b) Directors elected at meeting Not applicable
(c) Description of each matter voted
on at meeting
Resolution to approve the proposal for Results of votes
the Company to enter into and perform For 5,571,814.002
the Constellation Transaction to Against or withheld 44,000.661
acquire interests in up to 18 Abstentions and broker non-votes 37,259.887
properties, various entity interests,
assume certain debt, and issue Common
Shares and Preferred Shares
ITEM 5. Other Information
None.
20
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION
------------ ------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of
January 31, 1998, among the Registrant, the Maryland
Company and the Company (filed with the Trust's
Registration Statement on Form S-4 (Commission File
No. 333-45649) and incorporated herein by reference).
2.2 Formation/Contribution Agreement dated September 7, 1997,
as amended, by and among the Company and certain
subsidiary corporations and partnerships regarding the
Transactions (filed with the Company's Current Report on
Form 8-K on October 29, 1997 and incorporated herein by
reference).
2.3 Agreement and Plan of Reorganization between the Company
and Crown Advisors, Inc. (filed with the Company's
Current Report on Form 8-K on October 29, 1997 and
incorporated herein by reference).
2.4 Assignment of Partnership Interests dated as of April 30,
1998 between Airport Square Limited Partnership, Airport
Square Corporation, Camp Meade Corporation and COPT
Airport Square One LLC and COPT Airport Square Two LLC.
(filed with the Company's Current Report on Form 8-K on
May 14, 1998 and incorporated herein by reference).
2.5 Assignment of Purchase and Sale Agreement dated as of
April 30, 1998 between Aetna Life Insurance Company and
the Operating Partnership. (filed with the Company's
Current Report on Form 8-K on May 14, 1998 and
incorporated herein by reference).
2.6 Assignment of Loan Purchase and Sale Agreement dated as of
April 30, 1998 between Constellation Real Estate, Inc. and
the Operating Partnership. (filed with the Company's
Current Report on Form 8-K on May 14, 1998 and
incorporated herein by reference).
2.7 Purchase and Sale Agreement dated as of April 1, 1998
between Aetna Life Insurance Company and Airport Square
Limited Partnership (filed with the Company's Current
Report on Form 8-K on May 14, 1998 and incorporated
herein by reference).
2.8.1 Loan Purchase and Sale Agreement dated as of March 13,
1998 between Aetna Life Insurance Company and
Constellation Real Estate, Inc. (filed with the Company's
Current Report on Form 8-K on May 14, 1998 and
incorporated herein by reference).
2.8.2 Amendment to Loan Purchase and Sale Agreement dated as of
April 16, 1998 between Aetna Life Insurance Company and
Constellation Real Estate, Inc. (filed with the Company's
Current Report on Form 8-K on May 14, 1998 and
incorporated herein by reference).
2.9.1 Purchase and Sale Agreement dated as of March 4, 1998
between 695 Rt. 46 Realty, LLC, 710 Rt. 46 Realty, LLC and
COPT Acquisitions, Inc. (filed with the Company's Current
Report on Form 8-K on June 10, 1998 and incorporated
herein by reference).
2.9.2 Letter Amendment to Purchase and Sale Agreement dated as
of March 26, 1998 between 695 Rt. 46 Realty, LLC, 710 Rt.
46 Realty, LLC and COPT Acquisitions, Inc. (filed with the
Company's Current Report on Form 8-K on June 10, 1998 and
incorporated herein by reference).
21
2.10.1 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).
2.10.2 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).
2.10.3 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).
2.11 Service Company Asset Contribution Agreement between the
Company and the Operating Partnership and certain
Constellation affiliates (filed as Exhibit B of the
Company's Schedule 14A Information on June 26, 1998 and
incorporated herein by reference).
2.12.1 Option Agreement, dated May 14, 1998, between the
Operating Partnership and NBP-III, LLC (a Constellation
affiliate) (filed as Exhibit C of the Company's Schedule
14A Information on June 26, 1998 and incorporated herein
by reference).
2.12.2 First Amendment to Option Agreement, dated June 22, 1998,
between the Operating Partnership and NBP-III, LLC (a
Constellation affiliate) (filed as Exhibit E of the
Company's Schedule 14A Information on June 26, 1998 and
incorporated herein by reference).
2.13.1 Option Agreement, dated May 14, 1998, between the
Operating Partnership and Constellation Gatespring II, LLC
(a Constellation affiliate) (filed as Exhibit D of the
Company's Schedule 14A Information on June 26, 1998 and
incorporated herein by reference).
2.13.2 First Amendment to Option Agreement, dated June 22, 1998,
between the Operating Partnership and Constellation
Gatespring II, LLC (a Constellation affiliate) (filed as
Exhibit F of the Company's Schedule 14A Information on
June 26, 1998 and incorporated herein by reference).
2.14 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).
2.15 Right of First Refusal Agreement, dated September 28,
1998, between Constellation Properties, Inc. and the
Operating Partnership (filed with the Company's Current
Report on Form 8-K on October 13, 1998 and incorporated
herein by reference).
2.16 Right of First Refusal Agreement, dated September 28,
1998, between 257 Oxon, LLC and the Operating Partnership
(filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
22
2.17 Development Property Acquisition Agreement, dated May 14,
1998, between the Operating Partnership and CPI Piney
Orchard Village Center, Inc. (a Constellation affiliate)
(filed as Exhibit H of the Company's Schedule 14A
Information on June 26, 1998 and incorporated herein by
reference).
2.18 Contribution Agreement, dated as of September 30, 1998,
between COPT Acquisitions, Inc. and M.O.R. XXIX Associates
Limited Partnership (filed with the Company's Current
Report on Form 8-K on October 28, 1998 and incorporated
herein by reference).
2.19 Purchase and Sale Agreement, dated as of September 30,
1998, between New England Life Pension Properties II: A
Real Estate Limited Partnership and COPT Acquisitions,
Inc. (filed with the Company's Current Report on Form 8-K
on October 28, 1998 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).
4.2.1 Registration Rights Agreement dated October 14, 1997, as
amended, for the benefit of certain shareholders of the
Registrant (filed with the Company's Current Report on
Form 8-K on October 29, 1997, and incorporated herein by
reference).
4.2.2 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 Limited Partnership Agreement of the Operating Partnership
dated October 14, 1997 (filed with the Company's Current
Report on Form 8-K on October 29, 1997 and incorporated
herein by reference).
4.4.2 Amended and Restated Limited Partnership Agreement of the
Operating Partnership dated March 16, 1998 (filed with the
Company's Quarterly Report on Form 10-Q on August 12, 1998
and incorporated herein by reference).
4.4.3 First Amendment to Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
September 28, 1998 (filed with the Company's Current
Report on Form 8-K on October 13, 1998 and incorporated
herein by reference).
4.4.4 Second Amendment to Amended and Restated Limited
Partnership Agreement of the Operating Partnership, dated
as of October 13, 1998 (filed with the Company's Current
Report on Form 8-K on October 28, 1998 and incorporated
herein by reference).
23
10.1 Amended and Restated Partnership Agreement of Blue Bell
Investment Company, L.P. (filed with the Company's Current
Report on Form 8-K on October 29, 1997 and incorporated
herein by reference).
10.2 Amended and Restated Partnership Agreement of South
Brunswick Investors, L.P. (filed with the Company's
Current Report on Form 8-K on October 29, 1997 and
incorporated herein by reference).
10.3 Amended and Restated Partnership Agreement of Comcourt
Investors, L.P. (filed with the Company's Current Report
on Form 8-K on October 29, 1997 and incorporated herein by
reference).
10.4 Amended and Restated Partnership Agreement of 6385 Flank,
L.P. (filed with the Company's Current Report on Form 8-K
on October 29, 1997 and incorporated herein by reference).
10.5 Clay W. Hamlin III Employment Agreement dated October 14,
1997 with the Operating Partnership (filed with the
Company's Current Report on Form 8-K on October 29, 1997,
and incorporated herein by reference).
10.6 Management Agreement between Registrant and Glacier
Realty, LLC (filed with the Company's Current Report on
Form 8-K on October 29, 1997, and incorporated herein by
reference).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 Lease Agreement between Blue Bell Investment Company, L.P.
and Unisys Corporation dated March 12, 1997 with respect
to lot B (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
10.12 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).
10.13 Amended and Restated Lease between South Brunswick
Investors L.P. and International Business Machines
Corporation dated August 11, 1995, as amended
(filed with the Registrant's Registration Statement
on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
24
10.14 Agreement of Lease between South Brunswick Investors
L.P. and Teleport Communications Group, Inc. dated
February 20, 1996, as amended (filed with the
Registrant's Registration Statement on Form S-4
(Commission File No. 333-45649) and incorporated
herein by reference).
10.15 Agreement of Lease between South Brunswick Investors
L.P. and Teleport Communications Group, Inc. dated
August 19, 1996 (filed with the Registrant's
Registration Statement on Form S-4 (Commission File
No. 333-45649) and incorporated herein by reference).
10.16 Thomas D. Cassel Employment Agreement dated as of
October 20, 1997 with the Operating Partnership (filed
with the Company's Annual Report on Form 10-K on March 25,
1998 and incorporated herein by reference).
10.17 Senior Secured Revolving Credit Agreement dated as of 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).
10.18 Secured Promissory Note dated as of April 29, 1997 between
710 Rt. 46 Realty, LLC and Life Investors Insurance
Company of America (filed with the Company's Current
Report on Form 8-K on June 10, 1998 and incorporated
herein by reference).
10.19 Mortgage and Security Agreement dated as of April 29, 1997
between 710 Rt. 46 Realty, LLC and Life Investors
Insurance Company of America (filed with the Company's
Current Report on Form 8-K on June 10, 1998 and
incorporated herein by reference).
10.20 Amended and Restated Deed of Trust Note, dated October 6,
1995, between Cranberry-140 Limited Partnership and
Security Life of Denver Insurance Company (filed with the
Company's Current Report on Form 8-K on October 13, 1998
and incorporated herein by reference).
10.21.1 Promissory Note, dated September 15, 1995, between Tred
Lightly Limited Liability Company and Provident Bank of
Maryland (filed with the Company's Current Report on Form
8-K on October 13, 1998 and incorporated herein by
reference).
10.21.2 Allonge to Promissory Note, dated September 28, 1998,
between Tred Lightly Limited Liability Company and
Provident Bank of Maryland (filed with the Company's
Current Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
10.22.1 Third Loan Modification and Extension Agreeement, dated
November 12, 1997, between St. Barnabus Limited
Partnership, Constellation Properties, Inc. and
NationsBank, N.A. (filed with the Company's Current
Report on Form 8-K on October 13, 1998 and incorporated
herein by reference).
10.22.2 Fourth Loan Modification Agreement dated
September 28, 1998 between St. Barnabus Limited
Partnership, Constellation Properties, Inc. and
NationsBank, N.A. (filed with the Company's Current
Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
10.23.1 Deed of Trust Note, dated September 20, 1988, between
Brown's Wharf Limited Partnership and Mercantile-Safe
Deposit and Trust Company (filed with the Company's
Current Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
25
10.23.2 Extension Agreement and Allonge to Deed of Trust Note,
dated July 1, 1994, between Brown's Wharf Limited
Partnership and Mercantile-Safe Deposit and Trust Company
(filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
10.24 Employment Agreement, dated September 28, 1998 between
Corporate Office Management, Inc. and Randall M. Griffin
(filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
10.25 Employment Agreement, dated September 28, 1998 between
Corporate Office Management, Inc. and Roger A. Waesche,
Jr. (filed with the Company's Current Report on Form 8-K
on October 13, 1998 and incorporated herein by reference).
10.26 Employment Agreement, dated September 28, 1998 between
Corporate Realty Management, LLC and Michael D. Kaiser
(filed with the Company's Current Report on Form 8-K on
October 13, 1998 and incorporated herein by reference).
10.27 Consulting Services Agreement, dated April 28, 1998
between the Company and Net Lease Finance Corp., doing
business as Corporate Office Services (filed with the
Company's Current Report on Form 8-K on October 13, 1998
and incorporated herein by reference).
10.28 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).
10.29 Promissory Note, dated October 22, 1998, between Teachers
Insurance and Annuity Association of America and the
Operating Partnership.
10.30 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.
27. Financial Data Schedule.
(b) Reports on Form 8-K
During the three months ended September 30, 1998 and through November 13, 1998
the Company filed the following:
i. a Current Report of Form 8-K filed October 13, 1998 (Reporting under
Items 1, 2, 5 and 7) regarding the Company's completion of the
Constellation Transaction, resulting in the acquisition, through
affiliates of the Operating Partnership, of real estate properties and
service businesses.
ii.a Current Report of Form 8-K filed October 28, 1998 (Reporting under
Items 2 and 7) regarding the Company's acquisition through affiliates of
the Operating Partnership of an office building located in Columbia,
Maryland.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORPORATE OFFICE PROPERTIES TRUST
Date November 13, 1998 By: /s/ Clay W. Hamlin, III
-----------------------
Clay W. Hamlin, III
Chief Executive Officer
Date November 13, 1998 By: /s/ Roger A. Waesche, Jr.
-------------------------
Roger A. Waesche, Jr.
Senior Vice President
of Finance
27