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| OFC > SEC Filings for OFC > Form 10-Q on 26-Oct-2012 | All Recent SEC Filings |
26-Oct-2012
Quarterly Report
Overview
We are an office real estate investment trust ("REIT") that focuses primarily on serving the specialized requirements of strategic customers in the United States Government and defense information technology sectors. We acquire, develop, manage and lease office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in office parks that we believe possess growth opportunities.
During the nine months ended September 30, 2012, we:
• completed dispositions of 35 operating properties totaling 2.3 million square feet and non-operating properties for aggregate transaction values totaling $313.6 million. The $291 million in net proceeds from these sales after secured debt repayment and other transaction costs were used primarily to pay down our Revolving Credit Facility;
• acquired a property in Herndon, Virginia totaling 202,000 square feet that was 100% leased for $48.3 million on July 11, 2012;
• issued 6.9 million Series L Cumulative Preferred Shares (the "Series L Preferred Shares") at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after June 27, 2017. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes;
• redeemed all of our Series G Preferred Shares of beneficial interest (the "Series G Preferred Shares") at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption;
• entered into unsecured term loan agreements, under which we borrowed $370 million in the aggregate. The net proceeds from these borrowings were used to pay down our Revolving Credit Facility;
• exercised our right to reduce the lenders' aggregate commitment under our unsecured revolving credit facility from $1.0 billion to $800 million, with the ability, subject to certain conditions, for us to increase the lenders' aggregate commitment to $1.3 billion;
• finished the period with occupancy of our portfolio of operating office properties at 88.1%;
• had an increase of $6.4 million as compared to the nine months ended September 30, 2011 in our net operating income ("NOI") from real estate operations (defined below) attributable to our Same Office Properties (also defined below); and
• had a decrease in net loss attributable to common shareholders of $28.6 million as compared to the nine months ended September 30, 2011, due in large part to an increase in gain on sales of properties and a decrease in impairment losses, as discussed further below.
On October 16, 2012, we completed a public offering of 8.6 million common shares at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes.
We discuss significant factors contributing to changes in our net income attributable to common shareholders and diluted earnings per share over the prior year period in the section below entitled "Results of Operations." In addition, the section below entitled "Liquidity and Capital Resources" includes discussions of, among other things:
• how we expect to generate cash for short and long-term capital needs; and
• our commitments and contingencies.
You should refer to our consolidated financial statements as you read this section.
This section contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on our current
expectations, estimates and projections about future events and financial trends
affecting the financial condition and operations of our business.
Forward-looking statements can be identified by the use of words such as "may,"
"will," "should," "could," "believe," "anticipate," "expect," "estimate," "plan"
or other comparable terminology. Forward-looking statements are inherently
subject to risks and uncertainties, many of which we cannot predict with
accuracy and some of which we might not even anticipate. Although we believe
that the expectations, estimates and projections reflected in such
forward-looking statements are based on reasonable assumptions at the time made,
we can give no assurance that these expectations, estimates and projections will
be achieved. Future events and actual results may differ materially from those
discussed in the forward-looking statements. Important factors that may affect
these expectations, estimates and projections include, but are not limited to:
• general economic and business conditions, which will, among other things, affect office property and data center demand
and rents, tenant creditworthiness, interest rates, financing availability and
property values;
• adverse changes in the real estate markets, including, among other things,
increased competition with other companies;
• governmental actions and initiatives, including risks associated with the impact of a government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers;
• our ability to borrow on favorable terms;
• risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated;
• our ability to sell properties included in our Strategic Reallocation Plan;
• risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives;
• changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses;
• our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships;
• the dilutive effects of issuing additional common shares; and
• environmental requirements.
We undertake no obligation to update or supplement forward-looking statements.
Occupancy and Leasing
Office Properties
The tables below set forth occupancy information pertaining to our portfolio of
operating office properties:
September 30, 2012 December 31, 2011
Occupancy rates at period end
Total 88.1 % 86.2 %
Baltimore/Washington Corridor 89.0 % 87.9 %
Northern Virginia 87.9 % 84.8 %
San Antonio 96.5 % 90.7 %
Washington, DC - Capitol Riverfront 89.0 % 91.6 %
St. Mary's and King George Counties 85.4 % 87.3 %
Greater Baltimore 84.3 % 84.5 %
Suburban Maryland 94.1 % 79.6 %
Colorado Springs 76.5 % 74.9 %
Greater Philadelphia 100.0 % 99.7 %
Other 100.0 % 100.0 %
Average contractual annual rental rate per square foot
at period end (1) $ 27.73 $ 26.59
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(1) Includes estimated expense reimbursements.
Rentable Occupied
Square Feet Square Feet
(in thousands)
December 31, 2011 20,514 17,685
Square feet vacated upon lease expiration (1) - (681 )
Square feet retenanted after lease expiration (2) - 552
Square feet constructed or redeveloped 184 450
Acquisition 202 202
Dispositions (2,302 ) (1,833 )
Other changes (7 ) 4
September 30, 2012 18,591 16,379
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(1) Includes lease terminations and space reductions occurring in connection with lease renewals.
(2) Excludes retenanting of vacant square feet acquired or developed.
As the table above reflects, much of the increase in our total occupancy from December 31, 2011 to September 30, 2012 was attributable to our disposition of properties with lower occupancy rates. Occupancy of our Same Office Properties was 89.3% at September 30, 2012, down slightly from 89.5% at December 31, 2011.
During the nine months ended September 30, 2012, we completed 1.9 million square feet of leasing, including 614,000 of construction, redevelopment and other first generation (never before occupied) space, and renewed 58% of the square footage of our lease expirations (including the effect of early renewals) for the period. In addition, on October 5, 2012, we leased an aggregate of approximately 363,000 square feet in a newly constructed property and two properties to be constructed in Huntsville, Alabama.
The tepid economic recovery and continuing uncertainty regarding future defense spending cuts have contributed to a challenging lease environment in 2012. The Budget Control Act passed in 2011, which imposed caps on the Federal budget in order to achieve targeted spending levels over the 2013-2021 fiscal years, continues to cause uncertainty regarding future government spending reductions. The Budget Control Act currently requires that $110 billion be sequestered from the United States Government's funding levels for the 2013 fiscal year, approximately 50% of which could come from defense; this could feasibly begin to occur as early as January 2013, although we believe that such sequestrations, if they occur at all, will likely be deferred. Although future defense spending cuts could reduce demand for office space at our business parks, we do not believe that such spending decreases, were they to occur, would significantly affect existing defense information technology programs at the installations adjacent to our business parks. In addition, if military construction spending is cut, government demand to lease space in our business parks could possibly increase if the government decides to lease space instead of build it. We continue to believe that our customer and market strategies are competitive advantages in the current leasing environment because we expect the United States Government and defense information technology sectors to fuel economic growth in many of our regions.
Wholesale Data Center Property
Our shell-complete wholesale data center property, which upon completion and stabilization is expected to have a critical load of 18 megawatts, had three megawatts in operations at September 30, 2012 and December 31, 2011 that was leased to tenants with further expansion rights of up to a combined five megawatts. During the nine months ended September 30, 2012, we completed a new lease that provides for an initial commitment of one megawatt with further expansion rights for one additional megawatt.
Results of Operations
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure which is derived by subtracting property operating expenses from revenues from real estate operations. We view our NOI from real estate operations as comprising the following primary categories of operating properties:
• office properties owned and 100% operational throughout the current and prior year reporting periods, excluding properties held for future disposition. We define these as changes from "Same Office Properties";
• office properties acquired during the current and prior year reporting periods;
• constructed office properties placed into service that were not 100% operational throughout the current and prior year
reporting periods;
• office properties included in the Strategic Reallocation Plan that were not
sold as of September 30, 2012;
• office properties in the Greater Philadelphia region. In September 2012, we shortened the holding period for these properties because they no longer meet our strategic investment criteria; and
• property dispositions.
Refer to Note 14 of the consolidated financial statements for a summary of operating properties that were either disposed or classified as held for sale and therefore are included in discontinued operations.
The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations.
We believe that operating income, as reported on our consolidated statements of operations, is the most directly comparable generally accepted accounting principles ("GAAP") measure for both NOI from real estate operations and NOI from service operations. Since both of these measures exclude certain items includable in operating income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures.
The table below reconciles NOI from real estate operations and NOI from service
operations to operating (loss) income reported on our consolidated statement of
operations:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(in thousands)
NOI from real estate operations $ 76,248 $ 77,135 $ 231,974 $ 225,557
NOI from service operations 873 558 2,510 2,156
NOI from discontinued operations (4,186 ) (10,826 ) (21,626 ) (31,679 )
Depreciation and amortization associated
with real estate operations (28,698 ) (31,269 ) (84,920 ) (84,205 )
Impairment losses (46,096 ) - (41,260 ) (42,983 )
General and administrative expense (5,061 ) (6,154 ) (19,820 ) (19,251 )
Business development expenses and land
carry costs (1,632 ) (1,751 ) (4,506 ) (4,322 )
Operating (loss) income $ (8,552 ) $ 27,693 $ 62,352 $ 45,273
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Comparison of the Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011
For the Three Months Ended September 30,
2012 2011 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 114,861 $ 107,978 $ 6,883
Construction contract and other service revenues 15,283 18,729 (3,446 )
Total revenues 130,144 126,707 3,437
Expenses
Property operating expenses 42,799 41,669 1,130
Depreciation and amortization associated with
real estate operations 28,698 31,269 (2,571 )
Construction contract and other service expenses 14,410 18,171 (3,761 )
Impairment losses 46,096 - 46,096
General and administrative expense 5,061 6,154 (1,093 )
Business development expenses and land carry
costs 1,632 1,751 (119 )
Total operating expenses 138,696 99,014 39,682
Operating (loss) income (8,552 ) 27,693 (36,245 )
Interest expense (23,239 ) (24,176 ) 937
Interest and other income (loss) 1,095 (242 ) 1,337
Loss on early extinguishment of debt (768 ) (1,611 ) 843
Equity in loss of unconsolidated entities (246 ) (159 ) (87 )
Income tax (expense) benefit (106 ) 457 (563 )
(Loss) income from continuing operations (31,816 ) 1,962 (33,778 )
Discontinued operations 11,051 5,508 5,543
Net (loss) income (20,765 ) 7,470 (28,235 )
Net loss (income) attributable to noncontrolling
interests 993 (904 ) 1,897
Preferred share dividends (6,546 ) (4,025 ) (2,521 )
Issuance costs associated with redeemed
preferred shares (1,827 ) - (1,827 )
Net (loss) income attributable to COPT common
shareholders $ (28,145 ) $ 2,541 $ (30,686 )
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NOI from Real Estate Operations
For the Three Months Ended September 30,
2012 2011 Variance
(Dollars in thousands, except per square foot data)
Revenues
Same Office Properties $ 102,088 $ 99,798 $ 2,290
Constructed office properties placed in service 3,925 2,338 1,587
Acquired office properties 2,233 502 1,731
Strategic Reallocation Plan Properties Held 7,028 6,741 287
Greater Philadelphia properties 2,541 1,701 840
Dispositions 1,588 12,765 (11,177 )
Other 1,861 1,284 577
121,264 125,129 (3,865 )
Property operating expenses
Same Office Properties 37,929 37,195 734
Constructed office properties placed in service 1,008 533 475
Acquired office properties 341 56 285
Strategic Reallocation Plan Properties Held 2,537 2,640 (103 )
Greater Philadelphia properties 736 417 319
Dispositions 909 5,961 (5,052 )
Other 1,556 1,192 364
45,016 47,994 (2,978 )
NOI from real estate operations
Same Office Properties 64,159 62,603 1,556
Constructed office properties placed in service 2,917 1,805 1,112
Acquired office properties 1,892 446 1,446
Strategic Reallocation Plan Properties Held 4,491 4,101 390
Greater Philadelphia properties 1,805 1,284 521
Dispositions 679 6,804 (6,125 )
Other 305 92 213
$ 76,248 $ 77,135 $ (887 )
Same Office Properties rent statistics
Average occupancy rate 89.4 % 90.7 % -1.3 %
Average straight-line rent per occupied square
foot (1) $ 5.97 $ 5.89 $ 0.08
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(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the three month periods set forth above.
Impairment Losses
We recognized the impairment losses described below in the current period:
• in September 2012, our Board of Trustees approved a plan by Management to shorten the holding period for all of our office properties and developable land in Greater Philadelphia, Pennsylvania because the properties no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, during the three months ended September 30, 2012, we recognized aggregate non-cash impairment losses of $46.1 million for the amounts by which the carrying values of the properties exceeded their respective estimated fair values; and
• in connection primarily with the Strategic Reallocation Plan, we recognized aggregate impairment losses of $9.7 million in the current period, including $6.9 million pertaining to properties in Colorado Springs classified as held for sale and included in discontinued operations.
General and Administrative Expenses
The decrease in general and administrative expenses was attributable in large part to share based compensation
arrangements in place during the prior period that were not applicable to the current period.
Discontinued Operations
The change in discontinued operations was due primarily to an additional $15.6 million in gain on sales of real estate in the current period, offset in part by $9.7 million in impairment losses in the current period in connection with the Strategic Reallocation Plan.
Preferred Share Dividends
The increase in preferred share dividends was due to dividends on the newly issued Series L Preferred Shares, partially offset by the decrease in dividends attributable to the Series G Preferred Shares redeemed on August 6, 2012.
Issuance Costs Associated With Redeemed Preferred Shares
During the current period, we recognized a $1.8 million decrease to net income
available to common shareholders pertaining to the original issuance costs
incurred on the Series G Preferred Shares that were redeemed.
Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended
September 30, 2011
For the Nine Months Ended September 30,
2012 2011 Variance
(in thousands)
Revenues
Revenues from real estate operations $ 336,687 $ 317,013 $ 19,674
Construction contract and other service revenues 53,812 67,854 (14,042 )
Total revenues 390,499 384,867 5,632
Expenses
Property operating expenses 126,339 123,135 3,204
Depreciation and amortization associated with
real estate operations 84,920 84,205 715
Construction contract and other service expenses 51,302 65,698 (14,396 )
Impairment losses 41,260 42,983 (1,723 )
General and administrative expense 19,820 19,251 569
Business development expenses and land carry
costs 4,506 4,322 184
Total operating expenses 328,147 339,594 (11,447 )
Operating income 62,352 45,273 17,079
Interest expense (71,909 ) (74,861 ) 2,952
Interest and other income 3,152 3,682 (530 )
Loss on early extinguishment of debt (937 ) (1,636 ) 699
Equity in loss of unconsolidated entities (522 ) (223 ) (299 )
Income tax (expense) benefit (4,296 ) 6,043 (10,339 )
Loss from continuing operations (12,160 ) (21,722 ) 9,562
Discontinued operations 10,212 (18,109 ) 28,321
Gain on sales of real estate, net of income taxes 21 2,728 (2,707 )
Net loss (1,927 ) (37,103 ) 35,176
. . .
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