Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
OFC > SEC Filings for OFC > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for CORPORATE OFFICE PROPERTIES TRUST

Form 10-Q for CORPORATE OFFICE PROPERTIES TRUST


26-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

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

(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

(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

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 )


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

(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
. . .
  Add OFC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for OFC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.