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 30-Apr-2013All Recent SEC Filings

Show all filings for CORPORATE OFFICE PROPERTIES TRUST | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CORPORATE OFFICE PROPERTIES TRUST


30-Apr-2013

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 United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region.

During the three months ended March 31, 2013, we:

completed a public offering of 4,485,000 common shares at a price of $26.34 per share for net proceeds of $118.1 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;

repaid a $53.7 million principal amount of our 4.25% Exchangeable Senior Notes for an aggregate repayment amount of $56.4 million, and recognized a $5.3 million loss of early extinguishment of debt, including unamortized loan issuance costs;

placed into service an aggregate of 236,000 square feet in three newly constructed properties proximate to defense installations and other knowledge-based demand drivers that were 100% leased as of March 31, 2013; and

finished the period with occupancy of our portfolio of operating office properties at 87.6%.

On April 22, 2013, we redeemed all of our outstanding Series J Preferred Shares at a price of $25 per share, or $84.8 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption, using proceeds from our March 2013 public offering of common shares. These shares accrued dividends equal to 7.625% of the liquidation preference. We recognized a $2.9 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series J Preferred Shares at the time of the redemption.

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;

our ability to achieve projected results; 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:

                                                        March 31, 2013      December 31, 2012
Occupancy rates at period end
Total                                                            87.6 %                 87.8 %
Baltimore/Washington Corridor                                    88.2 %                 89.4 %
Northern Virginia                                                89.6 %                 89.2 %
San Antonio                                                      96.3 %                 96.4 %
Washington, DC - Capitol Riverfront                              88.1 %                 89.0 %
St. Mary's and King George Counties                              87.2 %                 85.9 %
Greater Baltimore                                                78.9 %                 78.6 %
Suburban Maryland                                                94.1 %                 94.1 %
Colorado Springs                                                 81.3 %                 77.8 %
Greater Philadelphia                                             89.9 %                100.0 %
Other                                                            95.8 %                 94.6 %
Average contractual annual rental rate per square foot
at period end (1)                                      $        27.97      $           27.92

(1) Includes estimated expense reimbursements.


                                                             Rentable        Occupied
                                                            Square Feet    Square Feet
                                                                  (in thousands)
December 31, 2012                                               18,831         16,541
Square feet vacated upon lease expiration (1)                        -           (357 )
Occupancy of previously vacated space in connection with
new lease (2)                                                        -            354
Square feet constructed or redeveloped                             295            213
Other changes                                                        2             (2 )
March 31, 2013                                                  19,128         16,749

(1) Includes lease terminations and space reductions occurring in connection with lease renewals.

(2) Excludes occupancy of vacant square feet acquired or developed.

Occupancy of our Same Office Properties was 88.8% at March 31, 2013, down very slightly from 88.9% at December 31, 2012.

During the three months ended March 31, 2013, we completed 756,000 square feet of leasing and renewed 57.3% of the square footage of our lease expirations (including the effect of early renewals) for the period, which included the effect of an anticipated significant tenant move-out in one property.

Wholesale Data Center Property

Our wholesale data center property, which upon completion is expected to have a critical load of 18 megawatts, had nine megawatts in operations at March 31, 2013, of which 4.3 were leased to tenants with further expansion rights of up to a combined 5.2 megawatts.

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 disposed or 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 held for sale as of March 31, 2013;

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 income reported on our consolidated statement of operations:

                                                                   For the Three Months Ended
                                                                            March 31,
                                                                      2013              2012
                                                                        (in thousands)
NOI from real estate operations                                  $   78,011         $   78,758
NOI from service operations                                             785                927
NOI from discontinued operations                                     (3,851 )           (9,350 )
Depreciation and amortization associated with real estate
operations                                                          (28,252 )          (27,834 )
Impairment (losses) recoveries                                       (1,857 )            4,836
General, administrative and leasing expenses                         (7,820 )           (9,569 )
Business development expenses and land carry costs                   (1,359 )           (1,576 )
Operating income                                                 $   35,657         $   36,192

Comparison of the Three Months Ended March 31, 2013 to the Three Months Ended March 31, 2012

                                                        For the Three Months Ended March 31,
                                                       2013               2012           Variance
                                                                   (in thousands)
Revenues
Revenues from real estate operations             $     116,735       $     110,661     $     6,074
Construction contract and other service revenues        14,262              21,534          (7,272 )
Total revenues                                         130,997             132,195          (1,198 )
Expenses
Property operating expenses                             42,575              41,253           1,322
Depreciation and amortization associated with
real estate operations                                  28,252              27,834             418
Construction contract and other service expenses        13,477              20,607          (7,130 )
Impairment losses (recoveries)                           1,857              (4,836 )         6,693
General, administrative and leasing expenses             7,820               9,569          (1,749 )
Business development expenses and land carry
costs                                                    1,359               1,576            (217 )
Total operating expenses                                95,340              96,003            (663 )
Operating income                                        35,657              36,192            (535 )
Interest expense                                       (22,307 )           (24,431 )         2,124
Interest and other income                                  946               1,217            (271 )
Loss on early extinguishment of debt                    (5,184 )                 -          (5,184 )
Equity in income (loss) of unconsolidated
entities                                                    41                 (89 )           130
Income tax expense                                         (16 )              (204 )           188
Income from continuing operations                        9,137              12,685          (3,548 )
Discontinued operations                                  3,786              (2,450 )         6,236
Gain on sales of real estate                             2,354                   -           2,354
Net income                                              15,277              10,235           5,042
Net (income) loss attributable to noncontrolling
interests                                                 (257 )                60            (317 )
Preferred share dividends                               (6,106 )            (4,025 )        (2,081 )
Net income attributable to COPT common
shareholders                                     $       8,914       $       6,270     $     2,644


NOI from Real Estate Operations

                                                            For the Three Months Ended March 31,
                                                       2013                   2012                 Variance
                                                     (Dollars in thousands, except per square foot data)
Revenues
Same Office Properties                        $          108,413     $          106,209        $        2,204
Constructed office properties placed in
service                                                    2,821                    563                 2,258
Acquired office properties                                 1,606                      -                 1,606
Properties held for sale                                   5,308                  4,926                   382
Greater Philadelphia properties                            2,487                  2,172                   315
Dispositions                                                  35                  9,982                (9,947 )
Other                                                      1,407                  1,452                   (45 )
                                                         122,077                125,304                (3,227 )
Property operating expenses
Same Office Properties                                    38,887                 38,725                   162
Constructed office properties placed in
service                                                      851                    119                   732
Acquired office properties                                   432                      -                   432
Properties held for sale                                   1,749                  1,628                   121
Greater Philadelphia properties                              838                    513                   325
Dispositions                                                   -                  4,626                (4,626 )
Other                                                      1,309                    935                   374
                                                          44,066                 46,546                (2,480 )
NOI from real estate operations
Same Office Properties                                    69,526                 67,484                 2,042
Constructed office properties placed in
service                                                    1,970                    444                 1,526
Acquired office properties                                 1,174                      -                 1,174
Properties held for sale                                   3,559                  3,298                   261
Greater Philadelphia properties                            1,649                  1,659                   (10 )
Dispositions                                                  35                  5,356                (5,321 )
Other                                                         98                    517                  (419 )
                                              $           78,011     $           78,758        $         (747 )
Same Office Properties rent statistics
Average occupancy rate                                      88.9 %                 87.7 %                 1.2 %
Average straight-line rent per occupied
square foot (1)                               $             5.93     $             5.93        $            -

(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the three month periods set forth above.

The increase in revenues from our Same Office Properties was attributable to a $1.7 million increase in rental revenue (including $454,000 in connection with lease terminations) and a $478,000 increase in tenant recoveries and other real estate operations revenue. Our Same Office Properties pool consisted of 183 office properties, comprising 86.1% of our operating office square footage as of March 31, 2013.

Impairment Losses

During the current period, we recognized a non-cash impairment loss of $1.9 million in connection with our shortening of the holding period for a property that we expect to sell. During the prior period, in connection primarily with the Strategic Reallocation Plan to dispose of office properties and land that are no longer aligned with our strategy, we determined that the carrying amounts of certain properties identified for disposition (the "Impaired Properties") will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods; accordingly, we recognized aggregate impairment losses of $6.6 million in the prior period (including $11.4 million classified as discontinued operations and $1.1 million in exit costs).


General and Administrative Expenses

The decrease in general and administrative expenses was attributable in large part to additional expenses incurred in 2012 in connection with our executive transition during the period and certain staffing reductions made to adjust the size of the organization due in large part to our property dispositions.

Interest Expense

The decrease in interest expense was due primarily to a $433.3 million decrease in our average outstanding debt resulting from our repayments of debt using proceeds from property dispositions and equity issuances.

Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt in the current period was attributable primarily to a $5.3 million loss recognized on our repayment of a $53.7 million principal amount of our 4.25% Exchangeable Senior Notes.

Discontinued Operations

The increase in discontinued operations was due primarily to $11.4 million in impairment losses and $4.1 million in gain on sales in the prior period primarily in connection with the Strategic Reallocation Plan.

Gain on sales of real estate

The increase in gain on sales of real estate was attributable to the condemnation of a land parcel in the Greater Baltimore region in connection with an interstate widening project.

Preferred Share Dividends

The increase in preferred share dividends was due to dividends on the Series L Preferred Shares issued in June 2012, partially offset by the decrease in dividends attributable to the Series G Preferred Shares redeemed in August 2012.

Funds from Operations

Funds from operations ("FFO") is defined as net (loss) income computed using GAAP, excluding gains on sales of, and impairment losses on, previously depreciated operating properties, plus real estate-related depreciation and amortization. When multiple properties consisting of both operating and non-operating properties exist on a single tax parcel, we classify all of the gains on sales of, and impairment losses on, the tax parcel as all being for previously depreciated operating properties when most of the value of the parcel is associated with operating properties on the parcel. We believe that we use the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains related to sales of, and impairment losses on, previously depreciated operating properties, net of related tax benefit, and excluding real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income is the most directly comparable GAAP measure to FFO.

Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.

Basic FFO available to common share and common unit holders ("Basic FFO") is FFO adjusted to subtract (1) preferred share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us,
(4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and


common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.

Diluted FFO available to common share and common unit holders ("Diluted FFO") is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that the numerator for diluted EPS is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.

Diluted FFO, as adjusted for comparability is defined as Diluted FFO adjusted to exclude operating property acquisition costs, gains on sales of, and impairment losses on, properties other than previously depreciated operating properties, net of associated income tax, gain or loss on early extinguishment of debt, loss on interest rate swaps and issuance costs associated with redeemed preferred shares. We believe that the excluded items are not reflective of normal operations and, as a result, we believe that a measure that excludes these items is a useful supplemental measure in evaluating our operating performance. We believe that the numerator to diluted EPS is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same . . .

  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
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


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.