The Strength of
Our Relationships
A Decade of Leadership in Performance
Annual Report 2008 10 Year Anniversary
WEBSITE
For additional information on the
Company, visit our website at
www.copt.com.
FORWARD-LOOKING
INFORMATION
This report contains forward-looking
information based upon the Company’s
current best judgment and expecta-
tions. Actual results could vary from
those presented herein. The risks and
uncertainties associated with the for-
ward-looking information include the
strength of the commercial office real
estate market in which the Company
operates, competitive market condi-
tions, general economic growth, inter-
est rates and capital market conditions.
For further information, please refer
to the Company’s filings with the
Securities and Exchange Commission.
CORPORATE GOVERNANCE
CERTIFICATION
The Company submitted to the New
York Stock Exchange in 2008 the
Annual CEO Certification required by
Section 303A.12 of the New York Stock
Exchange corporate governance rules.
SARBANES-OXLEY ACT
SECTION 302 CERTIFICATION
The Company filed with the Securities
and Exchange Commission, as an
exhibit to its Form 10-K for the
year ended December 31, 2008, the
Sarbanes-Oxley Act Section 302 certi-
fication regarding the quality of the
Company’s public disclosure.
corporate information
EXECUTIVE OFFICERS
Randall M. Griffin
President and Chief Executive Officer
Roger A. Waesche, Jr.
Executive Vice President and
Chief Operating Officer
Stephen E. Riffee
Executive Vice President and
Chief Financial Officer
Karen M. Singer
Senior Vice President, General
Counsel and Secretary
SERVICE COMPANY
EXECUTIVE OFFICER
Wayne H. Lingafelter
President, COPT Development &
Construction Services, LLC
EXECUTIVE OFFICES
Corporate Office Properties Trust
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: (443) 285-5400
Facsimile: (443) 285-7650
REGISTRAR AND
TRANSFER AGENT
Shareholders with questions concerning
stock certificates, account information,
dividend payments or stock transfers
should contact our transfer agent:
Wells Fargo Bank, N.A.
Shareowner Services
161 North Concord Exchange
10yr
South St. Paul, Minnesota 55075
Toll-free: (800) 468-9716
www.wellsfargo.com/shareownerservices
LEGAL COUNSEL
Morgan, Lewis & Bockius
1701 Market Street
Philadelphia, Pennsylvania 19103
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 East Pratt Street, Suite 1900
Baltimore, Maryland 21202
board of trustees
DIVIDEND REINVESTMENT PLAN
Registered shareholders may reinvest
dividends through the Company’s
dividend reinvestment plan. For more
information, please contact Wells
Fargo Shareowner Services at (800)
468-9716.
ANNUAL MEETING
The annual meeting of the shareholders
will be held at 9:30 a.m. on Thursday,
May 14, 2009, at the corporate head-
quarters of Corporate Office Properties
Trust at 6711 Columbia Gateway Drive,
Suite 300, Columbia, Maryland 21046.
INVESTOR RELATIONS
For help with questions about the
Company, or for additional corporate
information, please contact:
Mary Ellen Fowler
Senior Vice President and Treasurer
Corporate Office Properties Trust
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: (443) 285-5450
Facsimile: (443) 285-7640
Email: ir@copt.com
SHAREHOLDER INFORMATION
As of March 16, 2009, the Company
had approximately 54,367,000
outstanding common shares owned
by approximately 670 shareholders of
record. The number of shareholders
does not include the number of persons
whose shares are held in nominee or
“street name” accounts through brokers
or clearing agencies.
COMMON AND
PREFERRED SHARES
The common and preferred shares
of Corporate Office Properties Trust
are traded on the New York Stock
Exchange. Common shares are traded
under the symbol OFC, and preferred
shares are traded under the symbols
OFCPrG, OFCPrH or OFCPrJ.
(top photo, l to r)
Jay H. Shidler
Chairman of the Board
Managing Partner,
The Shidler Group
Steven D. Kesler
Chief Financial Officer
CRP Operations, LLC
Kenneth D. Wethe
Principal
Wethe & Associates
Randall M. Griffin
President and
Chief Executive Officer
Corporate Office Properties Trust
(bottom photo, l to r)
Clay W. Hamlin, III
Vice Chairman of the Board
Kenneth S. Sweet, Jr.
Managing Partner
Gordon Stuart Associates
Douglas M. Firstenberg
Founding Principal
Stonebridge Associates, Inc.
Thomas F. Brady
Executive Vice President,
Corporate Strategy
Constellation Energy
Robert L. Denton
Managing Partner
The Shidler Group
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
FFO Growth Per Share
10yr
$2.64
10-year history of growth
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
Dividend Growth
FFO Growth Per Share
DIVIDEND GROWTH
FFO PER SHARE GROWTH*
3.0
2.5
2.0
1.5
1.0
0.5
0.0
$1.43
$2.64
.
c
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,
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&
n
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e
D
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
Dividend Growth
* A reconciliation of the components of FFO per share to
diluted earnings per share can be found on page 88.
3.0
2.5
2.0
1.5
1.0
0.5
0.0
$1.43
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
DOW JONES
S&P
RMS
COPT
TOTAL SHAREHOLDER RETURN*
700
600
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
700
600
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
700
600
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
700
600
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
700%
600
500
400
300
200
100
0
-100
COPT
RMS
Dow Jones
S&P
1 yr
3 yr
5 yr
10 yr
* Data as of December 31, 2008, compiled by NAREIT and MSCI
10 yr
A DECADE OF LEADERSHIP IN PERFORMANCE
The Strength of Our Relationships paid off
handsomely during solid real estate envi-
ronments and served our shareholders well
in challenging, recessionary times. In a
decade bounded by explosive industry
growth and a painful economic contrac-
tion, COPT produced a 648% total return
for shareholders—the highest among
all equity REITs and far higher than the
negative 13% total return for the S&P 500
stock index.
which we facilitate and participate in our
customers’ growth. Our leadership and
expertise in both environmentally sustain-
able and mission-critical building design
helps our customers realize their visions in
ways that few can duplicate.
At the same time, our sound, balanced capi-
tal structure has given us a competitive
advantage and affords us the flexibility to
opportunistically augment our growth in
ways that mesh with our long-term strategy.
COPT’s performance is rooted in the
strong growth characteristics of our vibrant
customer base and our unwavering atten-
tion to customer relationships, supported
through award winning customer service.
The quality of our performance flows from
a customer-driven market strategy, through
In the office REIT industry, where the
“product” can become a commodity subject
to competitive pricing and market cycles,
the Strength of Our Relationships has earned
COPT rare name brand distinction and
generated outperformance for our
shareholders.
Page 1
A message to
our shareholders
Randall M. Griffin President and Chief Executive Officer
“
We owe our consistent outperformance to the
quality of our customer-driven business model
and our unique ability to serve a growing core
customer base.”
It is with great pride that we present this
year’s annual report, reflecting our 10th
anniversary as a specialty office REIT and
NYSE company. A decade ago, we began
laying the foundation for sustainable long-
term growth and consistent financial out-
performance. As we turn the corner on
our first decade as a NYSE company, we
are proud of what COPT has achieved for
its shareholders.
We have grown from a company with $523
million in market capitalization to a nearly
$4 billion company in just 10 years. Our
integrated customer, product and market
strategies have helped us generate a 648%
total shareholder return over the decade—
the highest among all equity REITs and
significantly higher than the 100% total
return for the RMS and the negative 13%
total return for the S&P 500 stock index.
Equally important for our shareholders,
we also have managed to produce consis-
tent returns. We achieved this despite the
decade’s volatile economic and real estate
market environments, punctuated by one of
the most severe global economic downturns
in history. COPT has raised its dividend
every year in this decade, for dividend
growth amounting to 111% for the 10-year
period since 1998.
COPT’s Strategy Paid Off in 2008. We
certainly did not foresee the magnitude
of the credit and financial market crises
that engulfed the global economy in 2008.
However, given our concerns about the
macroeconomic environment and excesses
in certain sectors of the real estate market,
in 2007 we began preparing for a potentially
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 2
severe recession. Accordingly, we exercised
tighter control over our discretionary spend-
ing, built up our lines of credit, secured
early the funds we would need to maintain
our business and support new growth, and
took advantage of COPT’s strong perfor-
mance to raise equity, adding additional
capacity to our balance sheet.
For 2008, we were number one in our
office REIT peer group for total shareholder
return, and the only office company that
generated positive shareholder return in
the peer group. Our 2% total shareholder
return for 2008 compared well with an
average 37% negative return for our office
REIT peer group. We also were able to
increase our dividend by 10%, for the 11th
year in a row, in an environment when 40%
of our industry peers were forced to cut or
suspend dividends since the fall of 2008.
Notable Departures and Transitions. March
2009 marked the retirement of Dwight
Taylor, CEO of COPT Development &
Construction Services and our second
longest tenured team member with over 24
years of service, and Peg Ohrt, Senior Vice
President of Human Resources, who had
over 10 years of service. Both individuals
were significant contributors to our success
and will be greatly missed.
Bringing new depth to the team, Wayne
Lingafelter has taken over the role of
President of COPT Development &
Construction Services, and Holly Edington
succeeds Peg as Vice President of Human
Resources. Wayne brings 20 years of devel-
opment and construction experience to
COPT, and Holly brings extensive real
estate and large company management
experience to her new role.
Positioned for Continued Industry-Leading
Growth. Since our inception, we have
worked to build a strong, sustainable com-
pany that could outperform its office REIT
peers in rising real estate markets, while
also outperforming in down markets. We
have implemented strategies designed to
protect and preserve our company and
serve our customers and shareholders in an
adverse environment. Our strong results in
the current environment have helped con-
firm the soundness of our approach.
This year will not be without its challenges,
but we believe we are well positioned to
continue our growth. The majority of our
properties are in the Greater Washington,
DC region, which tends to be less affected
by recessions. We earn over half of our
real estate revenue from assets primarily
leased to tenants in the U.S. Government,
Defense Information Technology (IT) and
Data sectors, which continue to expand.
And, we are positioned to absorb many of
the estimated 60,000 net new jobs coming
to Maryland as a result of BRAC (Base
Realignment and Closure) over the next
three years.
We believe COPT is well positioned to
continue to produce industry-leading
returns and stability for our shareholders
in the period ahead, as the quality behind
“The COPT Way” increasingly distin-
guishes our company within the REIT
office sector.
In this difficult environment, I truly appre-
ciate the professionalism, expertise and
pursuit of excellence consistently demon-
strated by our team during 2008. Thank
you to all of our employees for your dedi-
cation and hard work. Thanks also to our
Board of Trustees for your guidance during
2008. And thanks to you, our shareholders,
for your confidence and support. We look
forward to continued growth and excel-
lence in 2009.
Sincerely yours,
Randall M. Griffin
President and Chief Executive Officer
Page 3
20
15
10
5
0
-5
-10
20
15
10
5
0
-5
-10
In 2008, we achieved:
• positive shareholder return
COPT
• a 10% dividend increase
18%
• record square footage of leasing
• record percentage of renewals
1yr
FFO Growth
20
15
10
5
0
-5
2008 Results
Office Peer
Group Average
All Equity
Average
#1 Office REIT for
2008 FFO Growth
18%
Office Peer
All Equity
COPT
Group Average
Average
2008 DIVIDEND GROWTH*
2008 FFO PER SHARE GROWTH*
Dividend Growth
FFO Growth
1yr
20
15
10
5
0
-5
20
2008 Mergent Dividend Achiever
(10 years of increasing dividends)
COPT
10%
15
10
5
0
-5
20
15
10
5
0
-5
COPT
18%
#1 Office REIT for
2008 FFO Growth
18%
2008 Mergent Dividend Achiever
(10 years of increasing dividends)
10%
Office Peer
Group Average
All Equity
Average
-10
Office Peer
Group Average
All Equity
Average
Office Peer
All Equity
COPT
Group Average
Average
Office Peer
All Equity
COPT
Group Average
Average
*Data compiled by Stifel Nicolaus
Dividend Growth
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 4
20
20
2008 Mergent Dividend Achiever
(10 years of increasing dividends)
COPT
10%
2008 Mergent Dividend Achiever
(10 years of increasing dividends)
10%
Office Peer
All Equity
Group Average
Average
Office Peer
All Equity
COPT
Group Average
Average
15
10
5
0
-5
-10
15
10
5
0
-5
1 yr
40
30
20
10
0
-10
-20
-30
-40
2008 TOTAL SHAREHOLDER RETURN*
10%
0
-10
-20
-30
-40
Office Peer
Group Average
RMS
S&P
Dow
Jones
* Data compiled by NAREIT, MSCI and Stifel Nicolaus
COPT
2%
#1 REIT in Office
Peer Group for 2008
Total Shareholder Return
At COPT, the resilience and growth
characteristics of our core customer base
have helped insulate the company from
the worst effects of the current recession
and provided the company with a strong
platform for continued expansion. As of
December 31, 2008, the company owned
256 properties totaling 19.2 million rent-
able square feet that were 93% occupied,
including 18 properties totaling 769,000
square feet held through joint ventures.
For 2008, we achieved:
• record FFO (funds from operations) and
AFFO (adjusted funds from operations),
• record leasing of 3.2 million square feet,
• record 78% renewal rate on leases expir-
ing, and
• strong capital activity to fund future
development activities, resulting in
healthy payout ratios and excellent
financial capacity to meet our limited debt
maturities over the next several years.
Operationally, during the year COPT
placed into service 524,000 square feet of
additional office space—with approximately
88% of the space leased by year-end.
In the future, we expect to earn an increas-
ing portion of our revenues from our core
customers in market segments that are
among the most stable and growth ori-
ented: government agencies, defense IT
contractors, and data facilities, as well as
from our assets in large business parks
located primarily adjacent to government
demand drivers. We are aiming for assets
primarily leased to tenants within these
four core segments to account for 85%
of company revenues by year-end 2010,
compared with 79% at year-end 2008.
Page 5
Integral Systems’ new
corporate headquarters at
6721 Columbia Gateway Drive,
Columbia, Maryland.
customer strategy
OUR TOP 20 TENANTS
U. S. Government
Northrop Grumman Corporation
Booz Allen Hamilton, Inc.
CSC
L-3 Communications Holdings, Inc.
Unisys Corporation
General Dynamics Corporation
The Aerospace Corporation
ITT Corporation
Wachovia Corporation
Comcast Corporation
AT&T Corporation
The Boeing Company
Ciena Corporation
BAE Systems PLC
The Johns Hopkins Institutions
Science Applications
International Corp.
Merck & Co., Inc.
Magellan Health Services, Inc.
AARP
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 6
INTEGRAL SYSTEMS
COPT and Integral Systems team members partnered
to create a win-win solution: (seated, l to r) Cathy Ward,
COPT SVP of Asset Management/Leasing, and Integral
Systems CFO Bill Bambarger; (standing, l to r) Integral
Systems executives R. Miller Adams, General Counsel,
and John Higginbotham, CEO; and Connie Epperlein,
COPT Corporate Designer & Programmer.
“Integral Systems’ partnership with COPT is a key
component of our ongoing growth strategy,” says
Integral Systems CFO Bill Bambarger.
A CUSTOMER-CENTRIC STRATEGY LEADS TO A 2008 SUCCESS STORY
A decade ago, we established a pattern of
ongoing collaboration with our customers.
Today, we continue to expand strategic
customer relationships, working with cli-
ents in multiple locations as an essential
component of our customers’ success.
We have strengthened our emphasis on our
core customers in the U.S. Government,
Defense IT and Data sectors, in line with
our objective of having assets primarily
leased to these core customer groups account
for 65% of our revenue by year-end 2010,
compared with 55% at year-end 2008. Our
Top 20 Tenants, the majority of whom are
in the U.S. Government, Defense IT and
Data sectors, continue to expand their busi-
ness with us, having 183 leases with us
totaling 8.9 million square feet.
Our increased emphasis on our core clients
has given us a unique understanding of our
customers and a keen appreciation of the
environments in which they operate. This
strategic customer focus is evidenced by
our relationship with Integral Systems, Inc.
(NASDAQ: ISYS), a leading provider of
satellite ground systems. Strategically,
COPT and Integral Systems fit very well
together. Already a COPT tenant with
49,000 square feet of space in our Colorado
Springs portfolio, Integral Systems was
seeking to relocate their Maryland head-
quarters. COPT had demonstrated cre-
ativity in solving their needs in Colorado,
which attracted Integral Systems to choose
COPT in Maryland.
In June 2008, Integral Systems and COPT
executed a full-building lease for 131,000
square feet at 6721 Columbia Gateway
Drive. Together we viewed this project as a
partnership, not just a transaction. COPT’s
ability to structure a creative solution to
meet Integral Systems’ needs and help them
grow in strategic locations, our commit-
ment to ‘green’ building, our emphasis on
community involvement, and our ability to
build and manage a technically sophisti-
cated, Class A office building all played a
role in the successful execution of this lease.
In short, our product, customer, market
and sustainability strategies came together
in perfect alignment to set us apart from
the competition.
Page 7
AWARD WINNING CUSTOMER SERVICE
We reinforce our customer relationships through consistently
exceptional customer service and have been rewarded with a
singular level of tenant loyalty. COPT has been recognized for
its exceptional customer service, winning the “Best in Industry”
rating in the large owner category in the CEL & Associates, Inc.
national survey of tenant satisfaction for the 5th consecutive year.
At a time when providing exceptional service has become a luxury
for many peer firms, COPT continues to believe our award winning
customer service remains an essential component of our ongoing
success and is a clear differentiator among our office peers.
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 8
ITT
At left: Patriot Park VI, at 655 Space Center Drive in
Colorado Springs, Colorado, was fully leased to a
Defense IT sector tenant. The building achieved LEED
Gold certification.
Far left: COPT’s exceptional customer service is recognized
by our tenants, who have voted us “Best in Industry” for
the fifth consecutive year in the CEL & Associates, Inc.
national survey of tenant satisfaction.
market strategy
Our customer demand-driven market
strategy allows us to establish dominant
positions in strategic markets and support
the growth of our key customers in the
U.S. Government, Defense IT and Data
sectors. Accordingly, we have entered
strategic markets to support the needs
of our core customers when we have the
opportunity to build market or submarket
critical mass.
In that market, ITT Corporation (NYSE:
ITT) leased and occupied 104,000 square
feet for their Systems Division at 655 Space
Center Drive in Patriot Park. ITT Corpo-
ration, a world leader in systems support
and technical solutions for the military and
government partners, also leases space in
The National Business Park in Maryland,
and has nine leases with COPT totaling
over 290,000 square feet.
This was the case in Colorado Springs. We
entered the market in 2005 at the request
of a Defense IT tenant and quickly became
the leading Class A office developer, now
with over 1.2 million square feet of space
in 17 buildings.
COPT’s customer, product and market
strategies intersect to deliver superior
products in locations that provide our
tenants with proximity to their customers,
creating win-win solutions for COPT and
our Defense sector tenants.
Page 9
1
4
BRAC Demand Driver:
Aberdeen Proving Ground
Aberdeen, Maryland
Scheduled to gain an estimated 24,000
jobs both on and off-site by 2011
COPT owns:
2 buildings under development/165,000 sf
45 acres/600,000 developable sf
in North Gate Business Park
Demand Driver:
U.S. Government
Chantilly, Virginia
COPT owns:
9 operating properties/1.5 m sf
56 acres/1.1 m developable sf
in Westfields Corporate Center
BRAC Demand Driver:
Fort Detrick
Frederick, Maryland
Scheduled to gain an estimated 4,500
jobs both on and off-site by 2011
COPT owns:
1 operating property/118,000 sf
113 acres/1.2 m developable sf
Demand Driver:
Patuxent River Naval Air Station
Lexington Park, Maryland
COPT owns:
12 operating properties/620,000 sf
6 acres/60,000 developable sf
in Exploration and Expedition
Office Parks
2
5
BRAC Demand Driver:
Fort Meade, Maryland
Scheduled to gain an estimated 36,000
jobs both on and off-site by 2011
3
COPT owns:
21 operating properties/2.4 m sf
4 buildings under construction or
development/616,000 sf
276 acres/up to 3.7 m developable sf
in The National Business Park and
Arundel Preserve
Demand Driver:
Naval Surface Warfare Center
6
Dahlgren, Virginia
COPT owns:
6 operating properties/205,000 sf
39 acres/122,000 developable sf
in Dahlgren Technology Center
4
1
3
5
4
6
2
Demand Driver:
Peterson Air Force Base
Colorado Springs, Colorado
COPT owns:
10 operating properties/633,000 sf
1 building under construction/90,000 sf
77 acres/846,000 developable sf
in Colorado Springs East Submarket
Demand Driver:
U.S. Government
San Antonio, Texas
COPT owns:
5 operating properties/640,000 sf
2 buildings under development/50,000 sf
86 acres/1.3 m developable sf
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 10
Demand Driver:
Peterson Air Force Base
Colorado Springs, Colorado
COPT owns:
10 operating properties/633,000 sf
1 building under construction/90,000 sf
77 acres/846,000 developable sf
in Colorado Springs East Submarket
Demand Driver:
U.S. Government
San Antonio, Texas
COPT owns:
5 operating properties/640,000 sf
2 buildings under development/50,000 sf
86 acres/1.3 m developable sf
1
BRAC Demand Driver:
Aberdeen Proving Ground
Aberdeen, Maryland
Scheduled to gain an estimated 24,000
jobs both on and off-site by 2011
COPT owns:
2 buildings under development/165,000 sf
45 acres/600,000 developable sf
in North Gate Business Park
Demand Driver:
U.S. Government
Chantilly, Virginia
COPT owns:
9 operating properties/1.5 m sf
56 acres/1.1 m developable sf
in Westfields Corporate Center
4
BRAC Demand Driver:
Fort Detrick
Frederick, Maryland
Scheduled to gain an estimated 4,500
jobs both on and off-site by 2011
COPT owns:
1 operating property/118,000 sf
113 acres/1.2 m developable sf
Demand Driver:
Patuxent River Naval Air Station
Lexington Park, Maryland
COPT owns:
12 operating properties/620,000 sf
6 acres/60,000 developable sf
in Exploration and Expedition
Office Parks
2
5
3
BRAC Demand Driver:
Fort Meade, Maryland
Scheduled to gain an estimated 36,000
jobs both on and off-site by 2011
COPT owns:
21 operating properties/2.4 m sf
4 buildings under construction or
development/616,000 sf
276 acres/up to 3.7 m developable sf
in The National Business Park and
Arundel Preserve
6
Demand Driver:
Naval Surface Warfare Center
Dahlgren, Virginia
COPT owns:
6 operating properties/205,000 sf
39 acres/122,000 developable sf
in Dahlgren Technology Center
4
1
3
5
4
6
2
MARKET STRATEGY:
POSITIONED FOR GROWTH
Our market strategy is a natural extension
of our customer strategy. We concentrate
on regional markets and submarkets adja
cent to areas benefiting from growth in
government and military demand, as well
as growth corridors where COPT can
acquire critical mass ownership positions
and become the number one or number
two owner in the market. We have pursued
this growth strategy in the Northern
Virginia, Baltimore/Washington corridor,
San Antonio and Colorado Springs markets.
To meet the needs of our core customers,
we have acquired an inventory of develop
able land to accommodate their growth.
In this context, we plan to develop land
adjacent to installations that are expected
to gain jobs as a result of the Base Realign
ment and Closure program (BRAC)related
changes, including Fort Meade, Fort Detrick
and Aberdeen Proving Ground.
Page 11
product & sustainability
COPT’s “Leed Portfolio” includes:
• 14 professionals who hold the LEED
Accredited Professional designation
• 4 buildings certified Gold
• 4 buildings certified Silver
• 33 others registered for LEED Silver or
Gold certification
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 12
302, 304 and 306 Sentinel Drive at The National Business
Park (far left) and 5825 University Research Court at M Square
all achieved LEED Silver certification.
strategies
At COPT, our business is designing,
developing, acquiring and operating
technically sophisticated buildings in aes-
thetically appealing settings that are envi-
ronmentally sensitive, sustainable and meet
the unique requirements of our customers.
Our expertise in mission-critical building
design and construction of buildings that
meet government force protection require-
ments creates significant opportunities
for growth. We are able to offer our cus-
tomers an integrated team of professionals
with leading-edge technical knowledge and
a dedicated service team with specialized
expertise and credentials to serve our gov-
ernment and defense sector tenants.
Similarly, since 2003, COPT has been a
leader in the development and design of envi-
ronmentally sensitive and sustainable build-
ings, with specific expertise in construction
of LEED-certified buildings. Our competitive
advantage positions the company to meet
green building standards we believe will be
required in the very near future.
As we go forward, we will be increasing the
percentage of LEED-certified buildings in
our real estate portfolio. We expect 50%
of our buildings to meet LEED certification
by 2015. We expect to:
• continue to construct all new buildings
at minimum LEED Silver certification,
• retrofit select existing buildings to meet
minimum LEED-EB certification goals,
• operate all buildings utilizing green
housekeeping standards and educate ten-
ants in green operating practices, and
• operate our company using green oper-
ating and purchasing practices.
Green environments increase productivity,
reduce operating costs, and help tenants
attract and retain employees. We believe
green building standards will become the
requirement for future government trans-
actions. We also expect companies with
major LEED portfolios to have greater
investor appeal, commanding higher price
earnings multiples and attracting more
cost-effective capital.
Page 13
capital strategy
In 2007 and 2008, we:
• increased our unsecured revolver from
$500 million to $600 million
• closed on a $225 million construction
revolver
• closed on a $221 million mortgage loan
• issued 3.7 million common shares, raising
$139 million before offering expenses
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 14
In an environment in which many in our industry
face unprecedented capital constraints, we believe
that COPT has adequate capital to meet our cus-
tomers’ building and development requirements.
300 Sentinel Drive (far left) at The National Business
Park in Maryland, and Epic One at InterQuest
office park in Colorado Springs, are both partially
leased to Defense IT contractors.
As we have done with our core tenants,
we have maintained and grown our lender
relationships over the past 10 years. These
relationships are very important to us, in
both strong and challenging economic
environments.
We have positioned the company well
financially, with low near-term debt maturi-
ties, loans in place to fund our development
and construction pipeline, and capacity to
take advantage of new opportunities which
we expect will become available later this
year and into 2010.
In preparation for a potentially severe
recession, in 2007 and through 2008 we
tapped our strong financial relationships to
secure additional lines of credit and raise
equity. Our capital guidelines have helped
us maintain our industry-leading growth
while strengthening our balance sheet to
weather more challenging environments.
Our capital strategy is driven by our
business model, where we:
• operate primarily as a secured borrower
to maintain maximum flexibility,
• utilize unsecured lines of credit and
secured debt,
• maintain strong fixed charge coverage
and dividend payout ratios and moderate
leverage levels, and
• have low near-term debt maturities.
Page 15
a decade of performance
LEADERSHIP AND PERFORMANCE, EMBEDDED IN OUR CULTURE
COPT owes its success to the exceptional
talent and dedication of its employees. Since
the merger of COPT and Constellation
Real Estate in September 1998, COPT
has benefited from the contributions of
uniquely devoted professionals in every
sphere of our business, from design and
development to property management,
finance and administration.
We offer special thanks and appreciation to
those who have been with us throughout
our 10-year history (pictured above), and
also to all those who have worked at COPT
over the years, whose unswerving commit-
ment to excellence has helped us realize
our vision.
Working collaboratively and creatively
together, we have built a company that has
distinguished itself within the industry. We
are confident that the quality of the employ-
ees we attract will take COPT to the next
level of achievement in financial perfor-
mance, mission-critical building construc-
tion and environmentally sensitive design.
Corporate Office Properties Trust 2008 ANNUAL REPORT Page 16
financials
selected financial data
The following table sets forth summary financial data
as of and for each of the years ended December 31,
2004 through 2008. The table illustrates the signi ficant
growth our Company experienced over the periods
reported. Most of this growth, particularly pertaining
to revenues, operating income and total assets, was
attributable to our addition of properties through
acquisition and development activities. We financed
most of the acquisition and development activities
by incurring debt and issuing preferred and common
equity, as indicated by the growth in our interest
expense, preferred share dividends and weighted
average common shares outstanding. The growth
in our general and administrative expenses reflects,
in large part, the growth in management resources
required to support the increased size of our portfolio.
Since this information is only a summary, you should
refer to our Consolidated Financial Statements and
notes thereto and the section of this report entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for
additional information.
(in thousands, except per share data and number of properties)
2008
2007
2006
2005
2004
Revenues
Revenues from real estate operations(1)
Construction contract and other service operations revenues
Total revenues
Expenses
Property operating expenses(1)
Depreciation and other amortization associated with
real estate operations(1)
Construction contract and other service operations expenses
General and administrative expenses
Total operating expenses
Operating income
Interest expense
Interest and other income
Gain on early extinguishment of debt
Income from continuing operations before equity in loss of
unconsolidated entities, income taxes and minority interests
Equity in loss of unconsolidated entities
Income tax expense
Income from continuing operations before minority interests
Minority interests in income from continuing operations(1)
Income from continuing operations
Discontinued operations, net of minority interests(1)(2)
Gain (loss) on sales of real estate, net(1)(3)
Net income
Preferred share dividends
Issuance costs associated with redeemed preferred shares(4)
$ 399,633
188,385
$ 365,914
41,225
$ 291,444
60,084
$ 235,956
79,234
$ 198,672
28,903
588,018
407,139
351,528
315,190
227,575
141,139
123,258
93,088
70,202
57,745
102,720
184,142
25,329
104,700
39,793
21,704
76,344
57,345
18,048
60,342
77,287
13,533
48,623
26,996
10,938
453,330
289,455
244,825
221,364
144,302
134,688
(83,646)
2,070
10,376
117,684
(85,576)
3,030
—
106,703
(72,984)
1,077
—
63,488
(147)
(201)
63,140
(7,488)
55,652
2,179
837
58,668
(16,102)
—
35,138
(224)
(569)
34,345
(3,331)
31,014
2,210
1,560
34,784
(16,068)
—
34,796
(92)
(887)
33,817
(3,742)
30,075
18,420
732
49,227
(15,404)
(3,896)
93,826
(55,979)
304
—
38,151
(88)
(668)
37,395
(4,867)
32,528
6,235
268
39,031
(14,615)
—
83,273
(43,663)
269
—
39,879
(88)
(795)
38,996
(4,997)
33,999
3,146
(113)
37,032
(16,329)
(1,813)
Net income available to common shareholders
$ 42,566
$ 18,716
$ 29,927
$ 24,416
$ 18,890
Basic earnings per common share
Income from continuing operations
Net income available to common shareholders
Diluted earnings per common share
Income from continuing operations
Net income available to common shareholders
Weighted average common shares outstanding—basic
Weighted average common shares outstanding—diluted
$
$
$
$
0.84
0.88
0.83
0.87
48,132
48,865
$
$
$
$
0.35
0.40
0.35
0.39
46,527
47,630
$
$
$
$
0.28
0.72
0.27
0.69
41,463
43,262
$
$
$
$
0.49
0.65
0.47
0.63
37,371
38,997
$
$
$
$
0.47
0.57
0.45
0.54
33,173
34,982
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 18
Page 19
(in thousands, except per share data and number of properties)
2008
2007
2006
2005
2004
Balance Sheet Data (as of year end):
Investment in real estate
Total assets
Debt
Total liabilities
Minority interests
Shareholders’ equity
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Numerator for diluted EPS
Diluted funds from operations(5)
Diluted funds from operations per share(5)
Cash dividends declared per common share
Property Data (as of year end):
Number of properties owned(1)(6)
Total rentable square feet owned(1)(6)
$ 2,776,889
$ 3,112,867
$ 1,866,623
$ 2,041,688
$ 137,865
$ 933,314
$ 2,603,939
$ 2,931,853
$ 1,825,842
$ 1,979,116
$ 130,095
$ 822,642
$ 2,111,310
$ 2,419,601
$ 1,498,537
$ 1,629,111
$ 116,187
$ 674,303
$ 1,888,106
$ 2,129,759
$ 1,348,351
$ 1,442,036
$ 105,210
$ 582,513
$ 1,544,501
$ 1,732,026
$ 1,022,688
$ 1,111,224
98,878
$
$ 521,924
$ 181,864
$ (290,142)
90,415
$
$
42,566
$ 150,401
2.64
$
1.43
$
$ 137,701
$ (327,714)
$ 206,728
$
18,716
$ 125,309
2.24
$
1.30
$
$ 113,151
$ (253,834)
$ 137,822
29,927
$
98,937
$
1.91
$
1.18
$
$
95,944
$ (420,301)
$ 321,320
24,416
$
88,801
$
1.86
$
1.07
$
$
84,494
$ (268,720)
$ 188,566
18,911
$
76,248
$
1.74
$
0.98
$
238
18,462
228
17,832
170
15,050
165
13,708
143
11,765
(1) Certain prior period amounts pertaining to properties included in discontinued operations have been reclassified to conform with the current presentation.
These reclassifications did not affect consolidated net income or shareholders’ equity.
(2) Reflects income derived from three operating properties we sold in 2005, seven operating real estate properties we sold in 2006, four operating real estate properties
we sold in 2007 and three operating real estate properties we sold in 2008 (see Note 17 to our Consolidated Financial Statements).
(3) Reflects gain (loss) from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(4) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized upon the redemption of the Series E and Series F
Preferred Shares of beneficial interest in 2006 and the Series B Preferred Shares of beneficial interest in 2004.
(5) For definitions of diluted funds from operations per share and diluted funds from operations and reconciliations of these measures to their comparable measures under
generally accepted accounting principles, you should refer to the section entitled “Funds from Operations” within the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
(6) Amounts reported reflect only wholly owned properties.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 18
Page 19
md&a Management’s Discussion & Analysis of Financial Condition and Results of Operations
You should refer to our Consolidated Financial
Statements and the notes thereto and our Selected
Financial Data table 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,” “expect,” “estimate” or other comparable
terminology. Forward-looking statements are inher-
ently 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:
• our ability to borrow on favorable terms;
• general economic and business conditions, which
will, among other things, affect office property
demand and rents, tenant creditworthiness,
interest rates and financing availability;
• adverse changes in the real estate markets,
including, among other things, increased
competition with other companies;
• 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 and operating
costs may be greater than anticipated;
• 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;
• our ability to satisfy and operate effectively
under Federal income tax rules relating to real
estate investment trusts and partnerships;
• governmental actions and initiatives; and
• environmental requirements.
We undertake no obligation to update or supplement
forward-looking statements.
overview
We are a specialty office real estate investment trust
(“REIT”) that focuses primarily on strategic customer
relationships and specialized tenant requirements in
the United States Government, defense information
technology and data sectors. We acquire, develop,
manage and lease properties that are typically con-
centrated in large office parks primarily located
adjacent to government demand drivers and/or in
demographically strong markets possessing growth
opportunities. As of December 31, 2008, our invest-
ments in real estate included the following:
• 238 wholly owned operating properties totaling
18.5 million square feet;
• 14 wholly owned properties under construction
or development that we estimate will total
approximately 1.6 million square feet upon
completion;
• wholly owned land parcels totaling 1,611 acres
that we believe are potentially developable into
approximately 14.0 million square feet; and
• partial ownership interests in a number of other
real estate projects in operations, under con-
struction or redevelopment or held for future
development.
Most of our revenues relating to real estate operations
are derived from rents and property operating expense
reimbursements earned from tenants leasing space in
our properties. Most of our expenses relating to our
real estate operations take the form of: (1) property
operating costs, such as real estate taxes, utilities
and repairs and maintenance; (2) interest costs; and
(3) depreciation and amortization associated with our
operating properties. Much of our profitability from
real estate operations depends on our ability to main-
tain high levels of occupancy and increasing rents,
which is affected by a number of factors, including,
among other things, our tenants’ ability to fulfill their
leases obligations and their continuing space needs
based on employment levels, business confidence and
competition and general economic conditions in the
markets in which we operate.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 20
Page 21
md&a continued
At December 31, 2008, our wholly owned properties were located in the following geographic regions, which are
also our reportable segments:
Region
Baltimore/Washington Corridor (generally the Maryland counties of
Howard and Anne Arundel)
Northern Virginia
Suburban Baltimore, Maryland (generally the Maryland counties of
Baltimore and Harford) (“Suburban Baltimore”)
Colorado Springs, Colorado (“Colorado Springs”)
Greater Philadelphia, Pennsylvania (“Greater Philadelphia”)
St. Mary’s and King George Counties (located in Maryland and Virginia)
Suburban Maryland (defined as the Maryland counties of Montgomery,
Prince George’s and Frederick)
San Antonio, Texas (“San Antonio”)
Central New Jersey
Other
As of December 31, 2008
Operational
Square Feet
Number of
Properties
Occupancy
Rate
7,834
2,609
3,207
1,189
961
824
691
640
201
306
104
15
63
17
4
18
5
5
2
5
93.4%
97.4%
83.1%
94.3%
100.0%
95.2%
97.7%
100.0%
100.0%
100.0%
93.2%
Total
18,462
238
During 2008, we grew our portfolio by acquiring
three office properties totaling 247,000 square feet
(one located in Colorado Springs and two in San
Antonio) for $40.6 million and having seven newly
constructed properties totaling 528,000 square feet
become fully operational (89,000 of these square
feet were placed into service in 2007). We also
had 85,000 square feet placed into service in two
partially operational properties.
A key part of our strategy for operations and growth
focuses on establishing and nurturing long-term relation-
ships with quality tenants and accommodating their
multi-locational needs, particularly tenants in the
United States Government, defense information tech-
nology and data sectors. As a result of this strategy,
a large concentration of our revenue is derived from
several large tenants. At December 31, 2008, 55.0% of
our annualized rental revenue (as defined in the section
entitled “Concentration of Operations”) from wholly
owned properties was from our 20 largest tenants,
35.5% from our five largest tenants, 17.3% from our
largest tenant, the United States Government and
54.8% from properties with tenants in the United
States Government, defense information technology
and data sectors.
In addition to owning real estate properties, we provide
real estate-related services that include: (1) construction
and development management; (2) property manage-
ment; and (3) heating and air conditioning services
and controls. The revenues and costs associated with
these services include subcontracted costs that are
reimbursed to us by the customer at no mark up.
As a result, the operating margins from these opera-
tions are small relative to the revenue. We use the
net of such revenues and expenses to evaluate the
performance of our service operations.
Since the latter part of 2007, the United States and
world economies have been in the midst of a significant
recession, with most key economic indicators on the
decline, including gross domestic product, consumer
sales, housing starts and employment. This slowdown
has had devastating effects on the capital markets, with
declining stock prices and tightening credit availability.
The commercial real estate industry was affected by
these events in 2007 and 2008 and will likely be affected
for a significant period of time. As a capital-intensive
industry, the most uniform and immediate effect was
the increasing difficulty in obtaining capital to fund
growth activities, such as acquisitions and development
costs, and debt repayments. From an operations per-
spective, we believe that the magnitude and timing of
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 20
Page 21
these effects has and will vary significantly between
individual sectors within the industry and individual
companies within such sectors. Real estate sectors hit
the hardest through 2008 were primarily those that
operate with short term revenue streams (such as
hotels, residential rental and healthcare rental), have
rental revenues that are highly dependent on the reve-
nue of their tenants (such as retail) or have operating
models that are highly dependent on fees for services.
For much of the office real estate sector, we believe
that, since the core operations tend to be structured as
long-term leases, the changes in the overall economy
were not fully felt in 2008 operations since revenue
streams generally remain in place until leases expire or
tenants fail to satisfy lease terms. Due in large part to
this reason, we do not believe that the economic down-
turn significantly affected the operations of our real
estate properties in 2008. We experienced significant
growth in our revenues from real estate operations in
total by amounts that exceeded the growth in our
property operating expenses from 2007 to 2008. While
much of this increase is attributable to the growth of
our portfolio from acquisitions and construction activ-
ities, we also experienced growth in our revenues from
real estate operations by amounts that exceeded the
growth in our property operating expenses for proper-
ties that were owned and 100% operational from 2007
to 2008 (properties that we refer to collectively as
“Same-Office Properties”). Our ability to increase
rental rates and maintain high levels of occupancy and
renewal rates in our portfolio contributed strongly
towards this growth. The events in the economy did
lead to significant reductions in interest rates, which
contributed towards our being able to decrease interest
expense in 2008 compared to 2007 despite having
higher debt in place on average in 2008.
We expect that the effects of the global downturn
on our real estate operations will become increasingly
evident in 2009 and 2010, and perhaps beyond. In
the latter portion of 2008, we were observing signs of
increased competition for tenants and downward pres-
sure on rental rates in most of our regions, which we
expect, along with an increased intention by certain
tenants to reduce costs through job cuts and associated
space reductions, could adversely affect our occupancy
and renewal rates. However, we believe that our future
real estate operations may be affected to a lesser degree
than many of our peers for the following reasons:
• our expectation of continued strength in
demand from our customers in the United States
Government, defense information technology
and data sectors; and
• our tenant base being comprised of a high
concentration of large, high-quality tenants
with a small concentration of revenue from
the finance sector.
Despite the challenges faced by us in the broader
capital markets, we were able to accomplish the
following in 2008:
• we entered into a construction loan agreement
with a group of lenders that provides for an
aggregate commitment by the lenders of $225.0
million, with a right for us to further increase the
aggregate commitment during the term to a
maximum of $325.0 million, subject to certain
conditions. We refer to this loan herein as the
Revolving Construction Facility;
• we borrowed $221.4 million under a mortgage
loan requiring interest only payments for the
term at a variable rate of LIBOR plus 225 basis
points (subject to a floor of 4.25%) that matures
in 2012, and may be extended by one year at our
option, subject to certain conditions;
• we repaid $279.6 million in debt, excluding
scheduled principal amortization payments and
repayments of our Revolving Credit Facility
(defined below) and Revolving Construction
Facility, but including a repayment of a $37.5
million aggregate principal amount of our 3.5%
Exchangeable Senior Notes for $26.7 million from
which we recognized a gain of $10.4 million;
• we issued 3.7 million common shares at a public
offering price of $39 per share, for net proceeds
of $139.2 million after underwriting discount but
before offering expenses; and
• we had fixed interest rates in place on 74.0% of
our debt as of December 31, 2008, including the
effect of interest rate swaps.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 22
Page 23
md&a continued
We discuss significant factors contributing to changes
in our net income available to common shareholders
and diluted earnings per share over the last three years
in the section below entitled “Results of Operations.”
We discuss our 2008 investing and financing activities
further in the section below entitled “Liquidity and
Capital Resources,” along with discussions of, among
other things, the following:
• our cash flows;
• how we expect to generate cash for short and
long-term capital needs;
• our off-balance sheet arrangements in place that
are reasonably likely to affect our financial
condition;
• our commitments and contingencies; and
• the computation of our Funds from Operations.
CritiCal aCCounting PoliCies
and estimates
Our Consolidated Financial Statements are prepared
in accordance with generally accepted accounting
principles in the United States of America (“GAAP”),
which require us to make certain estimates and
assumptions. A summary of our significant accounting
policies is provided in Note 2 to our Consolidated
Financial Statements. The following section is a sum-
mary of certain aspects of those accounting policies
involving estimates and assumptions that (1) require
our most difficult, subjective or complex judgments in
accounting for highly uncertain matters or matters
that are susceptible to change and (2) materially affect
our reported operating performance or financial condi-
tion. It is possible that the use of different reasonable
estimates or assumptions in making these judgments
could result in materially different amounts being
reported in our Consolidated Financial Statements.
While reviewing this section, you should refer to
Note 2 to our Consolidated Financial Statements,
including terms defined therein.
Acquisitions of Real Estate
When we acquire real estate properties, we allocate
the acquisition to numerous tangible and intangible
components. Most of the terms in this bullet section
are discussed in further detail in Note 2 to the
Consolidated Financial Statements entitled “Acquisitions
of Real Estate.” Our process for determining the alloca-
tion to these components is very complex and requires
many estimates and assumptions. Included among
these estimates and assumptions are the following:
(1) determination of market rental rates; (2) estimation
of leasing and tenant improvement costs associated
with the remaining term of acquired leases; (3) leasing
assumptions used in determining the in-place lease
value, if-vacant value and tenant relationship value,
including the rental rates, period of time that it will take
to lease vacant space and estimated tenant improvement
and leasing costs; (4) estimation of the property’s future
value in determining the if-vacant value; (5) estimation
of value attributable to assets such as tenant relation-
ship values; and (6) allocation of the if-vacant value
between land and building. A change in any of the
above key assumptions, most of which are extremely
subjective, can materially change not only the presen-
tation of acquired properties in our Consolidated
Financial Statements but also reported results of
operations. The allocation to different components
affects the following:
• the amount of the purchase price allocated among
different categories of assets and liabilities on
our balance sheet; the amount of costs assigned
to individual properties in multiple property
acquisitions; and the amount of costs assigned
to individual tenants at the time of acquisition;
• where the amortization of the components appear
over time in our Consolidated Statements of
Operations. Allocations to the above-market or
below-market lease component are amortized
into rental revenue, whereas allocations to most
of the other components (the one exception being
the land component of the if-vacant value) are
amortized into depreciation and amortization
expense. As a REIT, this is important to us since
much of the investment community evaluates our
operating performance using non-GAAP measures
such as funds from operations, the computation of
which includes rental revenue but does not include
depreciation and amortization expense; and
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 22
Page 23
• the timing over which the items are recognized
as revenue or expense in our Consolidated
Statements of Operations. For example, for
allocations to the if-vacant value, the land
portion is not depreciated and the building
portion is depreciated over a longer period
of time than the other components (generally
40 years). Allocations to above-market or
below-market leases, in-place lease value and
tenant relationship value are amortized over sig-
nificantly shorter timeframes, and if individual
tenants’ leases are terminated early, any unamor-
tized amounts remaining associated with those
tenants are generally expensed upon termination.
These differences in timing can materially affect
our reported results of operations. In addition,
we establish lives for tenant relationship values
based on our estimates of how long we expect
the respective tenants to remain in the proper-
ties; establishing these lives requires estimates
and assumptions that are very subjective.
Impairment of Long-Lived Assets
If events or changes in circumstances indicate that the
carrying values of operating properties, properties in
development or land held for future development may
be impaired, we perform a recovery analysis based on
the estimated undiscounted future cash flows to be
generated from the operations of the property and from
its eventual disposition. If the analysis indicates that
the carrying value of the tested property is not recov-
erable from estimated future cash flows, it is written
down to its estimated fair value and an impairment loss
is recognized. Fair values are determined based on
estimated future cash flows using appropriate discount
and capitalization rates. The estimated cash flows used
for the impairment analysis and determining the fair
values are based on our plans for the tested property
and our views of market and economic conditions. The
estimates consider matters such as current and historical
rental rates, occupancies for the tested property and
comparable properties and recent sales data for com-
parable properties. Changes in the estimated future cash
flows due to changes in our plans or views of market
and economic conditions could result in recognition
of impairment losses which, under the applicable
accounting guidance, could be substantial.
Properties held for sale are carried at the lower of
their carrying values (i.e., cost less accumulated depre-
ciation and any impairment loss recognized, where
applicable) or estimated fair values less costs to sell.
Accordingly, decisions made by us to sell certain
operating properties, properties in development or
land held for development will result in impairment
losses if carrying values of the specific properties
exceed their estimated fair values less costs to sell.
The estimates of fair value consider matters such as
recent sales data for comparable properties and,
where applicable, contracts or the results of negotia-
tions with prospective purchasers. These estimates
are subject to revision as market conditions, and our
assessment of such conditions, change.
Assessment of Lease Term
As discussed above, a significant portion of our
portfolio is leased to the United States Government,
and the majority of those leases consist of a series of
one-year renewal options. The applicable accounting
guidance requires us to recognize minimum rental
payments on a straight-line basis over the terms of each
lease, and requires us to assess the term as including all
periods for which failure to renew the lease imposes a
penalty on the lessee in such amounts that a renewal
appears, at the inception of the lease, to be reasonably
assured. Factors to consider when determining whether
a penalty is significant include the uniqueness of the
purpose or location of the property, the availability
of a comparable replacement property, the relative
importance or significance of the property to the
continuation of the lessee’s line of business and the
existence of leasehold improvements or other assets
whose value would be impaired by the lessee vacating
or discontinuing use of the leased property. We have
concluded, based on the factors above, that the United
States Government’s exercise of all of those renewal
options is reasonably assured. Changes in these assess-
ments could result in the write-off of any recorded
assets associated with straight-line rental revenue and
in the acceleration of depreciation and amortization
expense associated with costs we have incurred
related to these leases.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 24
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md&a continued
Accounting Method for Investments
Share-Based Compensation
We generally use three different accounting methods
to report our investments in entities: the consolidation
method; the equity method; and the cost method
(see Note 2 to our Consolidated Financial Statements).
We generally use the consolidation method when we
own most of the outstanding voting interests in an
entity and can control its operations. In accordance
with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46(R), “Consolidation of Variable
Interest Entities” (“FIN 46(R)”), we also consolidate
certain entities when control of such entities can
be achieved through means other than voting rights
(“variable interest entities” or “VIEs”) if we are deemed
to be the primary beneficiary. Generally, FIN 46(R)
applies when either (1) the equity investors (if any)
lack one or more of the essential characteristics of a
controlling financial interest; (2) the equity investment
at risk is insufficient to finance that entity’s activities
without additional subordinated financial support; or
(3) the equity investors have voting rights that are
not proportionate to their economic interests and the
activities of the entity involve, or are conducted on
behalf of, an investor with a disproportionately small
voting interest. We generally use the equity method
of accounting when we own an interest in an entity
and can exert significant influence over, but cannot
control, the entity’s operations.
In making these determinations, we typically need
to make subjective estimates and judgments regarding
the entity’s future operating performance, financial
condition, future valuation and other variables that
may affect the partners’ share of cash flow from the
entity over time. We must consider both our and our
partner’s ability to participate in the management of
the entity’s operations as well as make decisions that
allow the parties to manage their economic risks. We
may also need to estimate the probability of different
scenarios taking place over time and project the effect
that each of those scenarios would have on variables
affecting the partners’ cash flows. The conclusion
reached as a result of this process affects whether
or not we use the consolidation method in accounting
for our investment or the equity method. Whether
or not we consolidate an investment can materially
affect our Consolidated Financial Statements.
We issue options to purchase common shares (“options”)
and restricted common shares (“restricted shares”) to
many of our employees. Statement of Financial Account-
ing Standards No. 123(R), “Share-Based Payment”
(“SFAS 123(R)”) requires us to measure the cost of
employee services received in exchange for an award
of equity instruments based generally on the fair value
of the award on the grant date; such cost should then be
recognized over the period during which the employee
is required to provide service in exchange for the award
(generally the vesting period). We compute the grant
date fair value of options using the Black-Scholes
option-pricing model, which requires the following
input assumptions: risk-free interest rate; expected life;
expected volatility; and expected dividend yield. SFAS
123(R) also requires that share-based compensation be
computed based on awards that are ultimately expected
to vest; as a result, future forfeitures of our options and
restricted shares are to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The input assump-
tions used under the Black-Scholes option-pricing model
and the estimates used in deriving the forfeiture rates
for options and restricted common shares are subjec-
tive and require a fair amount of judgment. As a result,
these estimates and assumptions can affect the amount
of expense that we recognize in our Consolidated
Financial Statements for options and restricted shares.
ConCentration of oPerations
We refer to the measure “annualized rental revenue”
in various sections of the Management’s Discussion
and Analysis of Financial Condition and Results of
Operations section of this Annual Report. Annualized
rental revenue is a measure that we use to evaluate the
source of our rental revenue as of a point in time. It is
computed by multiplying by 12 the sum of monthly
contractual base rents and estimated monthly expense
reimbursements under active leases as of a point in
time. We consider annualized rental revenue to be a
useful measure for analyzing revenue sources because,
since it is point-in-time based, it does not contain
increases and decreases in revenue associated with
periods in which lease terms were not in effect;
historical revenue under GAAP does contain such
fluctuations. We find the measure particularly useful
for leasing, tenant, segment and industry analysis.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 24
Page 25
Customer Concentration of Property Operations
Our customer strategy focuses on establishing and nurturing long-term relationships with quality tenants and
accommodating their multi-locational needs. A result of this strategy is that the source of our revenue is highly
concentrated with certain tenants. The following schedule lists our 20 largest tenants in our portfolio of wholly
owned properties based on percentage of annualized rental revenue:
TENANT
United States Government
Northrop Grumman Corporation(1)
Booz Allen Hamilton, Inc.
Computer Sciences Corporation(1)
L-3 Communications Holdings, Inc.(1)
Unisys Corporation(2)
General Dynamics Corporation
The Aerospace Corporation
ITT Corporation(1)
Wachovia Corporation(1)
Comcast Corporation
AT&T Corporation(1)
The Boeing Company(1)
Ciena Corporation
BAE Systems PLC(1)
The Johns Hopkins Institutions
Science Applications International Corporation
Merck & Co., Inc.(2)
Magellan Health Services, Inc.
AARP
Wyle Laboratories, Inc.
Lockheed Martin Corporation
Harris Corporation
Subtotal of 20 largest tenants
All remaining tenants
Total
Percentage of Annualized Rental Revenue
of Wholly Owned Properties for
20 Largest Tenants as of December 31,
2008
17.3%
7.4%
5.2%
3.1%
2.5%
2.3%
2.0%
1.9%
1.8%
1.7%
1.7%
1.4%
1.1%
1.1%
0.8%
0.8%
0.8%
0.7%
0.7%
0.7%
N/A
N/A
N/A
55.0%
45.0%
2007
16.3%
7.4%
5.6%
3.2%
2.5%
2.5%
2.1%
1.9%
1.1%
1.9%
1.7%
1.7%
1.2%
1.0%
0.8%
0.8%
0.9%
0.8%
0.7%
N/A
0.7%
N/A
N/A
54.8%
45.2%
2006
16.3%
4.2%
6.9%
3.8%
3.0%
3.0%
2.4%
2.1%
0.8%
2.1%
N/A
3.0%
1.4%
1.2%
1.0%
N/A
1.1%
0.8%
1.0%
N/A
0.8%
1.0%
0.8%
56.7%
43.3%
100.0%
100.0%
100.0%
(1) Includes affiliated organizations and agencies and predecessor companies.
(2) Unisys Corporation (“Unisys”) subleases space to Merck & Co., Inc. (“Merck”); revenue from this subleased space is classified as Merck revenue.
We had no significant changes in these concentrations
from December 31, 2007 to December 31, 2008. The
United States Government increased in large part due
to it taking occupancy of most of our newly-constructed
square feet placed in service during the year, and
Northrop Grumman Corporation remained unchanged
despite our growth during the year in large part due to
its occupancy in a property that we acquired during the
year. Our changes in concentration from December 31,
2006 to December 31, 2007 occurred in large part due
to the Nottingham Acquisition (described in the section
below entitled “Geographic Concentration”); since none
of our 20 largest tenants as of December 31, 2006 had
significant leasing positions in the properties acquired,
the transaction: (1) had a decreasing effect on the level
of concentration with those tenants; and (2) led to the
addition of Comcast Corporation and Johns Hopkins
University as being among our 20 largest tenants.
Our customer strategy focuses in particular on tenants
in the United States Government, defense information
technology and data sectors. As of December 31, 2008,
54.8% of our annualized rental revenue was from
properties with tenants in these sectors. We believe
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 26
Page 27
md&a continued
that we are well positioned for future growth from
these sectors for reasons that include the following:
• our strong relationships and reputation for high
service levels that we have forged over the years
and continue to emphasize;
• the proximity of our properties to government
demand drivers (such as military installations) in
various regions of the country and our willing-
ness to expand to other regions where that type
of demand exists; and
• the depth of our collective team knowledge,
experience and capabilities in developing
and operating secure properties that meet the
United States Government’s Force Protection
requirements and data centers.
We classify the revenue from our leases into sector
groupings based solely on our knowledge of the
tenants’ operations in leased space. Occasionally,
classifications require subjective and complex
judgments. We do not use independent sources
such as Standard Industrial Classification codes
for classifying our revenue into industry groupings
and if we did, the resulting groupings would be
materially different.
There is a certain level of risk inherent in concentrating
such a large portion of our operations with any one
tenant. For example, our cash flow from operations and
financial condition would be adversely affected if our
larger tenants fail to make rental payments to us or
experience financial difficulties, including bankruptcy,
insolvency or general downturn of business, or if the
United States Government elects to terminate several of
its leases and the affected space cannot be re-leased on
satisfactory terms. There is also a certain level of risk
that is inherent in concentrating such a large portion of
our operations with so many tenants whose businesses
are in the same economic sector. For example, a reduc-
tion in government spending for defense information
technology activities could affect the ability of a large
number of our tenants to fulfill lease obligations
or decrease the likelihood that these tenants would
renew their leases, and, in the case of the United
States Government, a reduction in government spending
could result in the early termination of leases.
Most of our leases with the United States Government
provide for a series of one-year terms or provide for
early termination rights. The government may terminate
its leases if, among other reasons, the United States
Congress fails to provide funding.
Geographic Concentration of Property Operations
Our market strategy is to concentrate our operations in select markets and submarkets where we believe we
already possess or can achieve the critical mass necessary to maximize management efficiencies, operating
synergies and competitive advantages through our acquisition, property management, leasing and development
programs. A result of this strategy is that our property positions and operations are highly concentrated in a
small number of geographic regions. The table below sets forth the regional allocation of our annualized rental
revenue as of the end of the last three calendar years:
Region
Baltimore/Washington Corridor
Northern Virginia
Suburban Baltimore
Colorado Springs
Suburban Maryland
St. Mary’s and King George Counties
Greater Philadelphia
San Antonio
Northern/Central New Jersey
Other
Percentage of Annualized
Rental Revenue of Wholly Owned
Properties as of December 31,
2008
46.7%
18.8%
13.1%
5.7%
4.0%
3.4%
2.9%
2.6%
0.6%
2.2%
2007
46.2%
19.4%
14.1%
4.0%
4.3%
3.5%
3.1%
2.1%
1.0%
2.3%
2006
51.2%
20.5%
7.5%
4.2%
4.1%
4.2%
3.7%
2.4%
2.2%
N/A
100.0%
100.0%
100.0%
Number of
Wholly Owned Properties
as of December 31,
2008
2007
2006
104
15
63
17
5
18
4
5
2
5
238
101
14
64
13
5
18
4
2
4
3
228
87
14
23
11
5
18
4
2
6
N/A
170
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 26
Page 27
In 2007, we acquired 56 operating properties totaling
approximately 2.4 million square feet and land parcels
totaling 187 acres in a series of transactions that we
refer to collectively as the Nottingham Acquisition for
an aggregate cost of $366.9 million. All of the acquired
properties are located in Maryland, with 36 of the
operating properties, totaling 1.6 million square feet,
and land parcels totaling 175 acres, located in White
Marsh, Maryland (located in the Suburban Baltimore
region) and the remaining properties and land parcels
located in other regions in Northern Baltimore County
and the Baltimore/Washington Corridor.
The most significant change in our regional allocation
from December 31, 2007 to December 31, 2008 was
due to newly-constructed properties placed into service
in 2008. The most significant change in our regional
allocation from December 31, 2006 to December 31,
2007 occurred as a result of the Nottingham Acquisition
which, due to the large number of properties located in
Suburban Baltimore, significantly increased that region’s
allocation and had a decreasing effect on other regions.
As of December 31, 2008, we had construction
underway on four wholly owned properties in Colorado
Springs and three wholly owned properties in the
Baltimore/Washington Corridor; we expect that these
properties will be completed and begin generating
rental revenue between 2009 and 2010.
There is a certain level of risk that is inherent in
concentrating such large portions of our operations in
any one geographic region. For example, a decline in the
real estate market or general economic conditions in
the Mid-Atlantic region, the Greater Washington, D.C.
region or the office parks in which our properties are
located could have an adverse effect on our financial
position, results of operations and cash flows.
oCCuPanCy and leasing
The table below sets forth leasing information pertaining
to our portfolio of wholly owned operating properties:
Occupancy rates at year end
Total
Baltimore/Washington
Corridor
Northern Virginia
Suburban Baltimore
Colorado Springs
Suburban Maryland
St. Mary’s and King
George Counties
Greater Philadelphia
San Antonio
Northern/Central
New Jersey
Other
Renewal rate of square
footage for scheduled lease
expirations during year(1)
Average contractual annual
rental rate per square foot
at year end(2)
December 31,
2008
2007
2006
93.2% 92.6% 92.8%
93.4% 92.6% 95.1%
97.4% 98.6% 90.9%
83.1% 84.8% 81.1%
94.3% 96.7% 92.8%
97.7% 97.8% 83.2%
95.2% 91.6% 92.1%
100.0% 100.0% 100.0%
100.0% 100.0% 100.0%
100.0% 70.8% 97.2%
100.0% 100.0% N /A
78.1% 69.1% 55.4%
$22.40
$21.36
$20.90
(1) Includes the effects of early renewals and early lease terminations.
(2) Includes estimated expense reimbursements.
As shown in the above table, the total year end
occupancy rate for our portfolio of wholly owned
properties did not change significantly from 2007
to 2008. Our renewal rate of square footage for
scheduled lease expirations in 2008 was somewhat
high in comparison to previous calendar years dating
back to 2000, when the annual renewal rates ranged
from 55% to 76%, and averaged 68%. We believe that
our 2008 renewal rate was positively impacted by the
effect of a high number of early renewals during the
year. Our average contractual annual rent per square
foot increased 4.9% from December 31, 2007 to
December 31, 2008 which was primarily the result
of higher rates obtained on newly constructed space
placed in service and space renewed or retenanted
during the year.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 28
Page 29
md&a continued
We expect that the effects of the global downturn
on our real estate operations will make our leasing
activities increasingly challenging in 2009, 2010 and
perhaps beyond. Most of our regions are experiencing
decreased rates of job growth to varying extents.
The demand for space has diminished as businesses
downsize their space requirements, focusing on con-
taining costs and adjusting space needs in response to
decreases in the size of their workforces. We believe
that we will experience increased competition from
owners of other properties willing to offer tenants
aggressively lower rental rates or higher tenant improve-
ments terms than we may be willing to accept. As a
result, we may find it increasingly difficult to maintain
high levels of occupancy and tenant retention.
We believe that the immediacy of our exposure to the
increased challenges in the leasing environment is aided
to a certain extent by our leases generally not being
short-term in nature and our operating strategy of
monitoring concentrations of lease expirations occur-
ring in any one year. Our weighted average lease term
for wholly owned properties at December 31, 2008 was
approximately five years, and no more than 14% of our
annualized rental revenues at December 31, 2008 were
scheduled to expire in any one calendar year between
2009 and 2013.
We also believe that our customer and market strategies
could serve as advantages over our competitors in
meeting some of the leasing challenges we expect
to encounter. We believe that the United States
Government, defense information technology and
data sectors could still experience growth during
these tough economic times. Much of this growth
for us could be driven by increased government
spending that is expected in Federal cyber security
technology, which we believe could benefit not only
our tenants but also our markets and submarkets. In
addition, we believe that demand for leasing in our
markets and submarkets will benefit from the relocation
of military personnel to government installations in
many of the regions in which our properties are located
in connection with reporting by the Base Realignment
and Closure Commission of the United States Congress
(“BRAC”); we expect to see an increase in the momen-
tum of these relocation activities in 2009, with greater
activity in 2010 and 2011. Finally, we believe that
demand in most of our markets and submarkets will
be sustained, at least to a certain extent, based on their
close proximity to government demand drivers such
as Washington, D.C. and military installations.
Set forth below is some additional information pertaining
to our three largest regions (in terms of annualized
rental revenue) (the sources of the overall market
occupancy rate information set forth below are
reports compiled by CB Richard Ellis, Inc.):
• Baltimore/Washington Corridor: The 93.4%
occupancy of our properties in this region at
December 31, 2008 exceeded the overall market
occupancy rates for office space of 85.3% in
Anne Arundel County and 86.1% in Howard
County. The percentages of our annualized
rental revenues at December 31, 2008 from this
region scheduled to expire in each of the next
three years follow: 15% in 2009, 13% in 2010
and 10% in 2011. While we are experiencing
increased competition for tenants in this region,
we expect demand to benefit, at least to a certain
extent, from BRAC relocations to Fort George
G. Meade and much of the continuing growth in
our focus sectors discussed above.
• Northern Virginia: The 97.4% occupancy of our
properties in this region at December 31, 2008
exceeded the overall market occupancy rates for
office space of 85.8% in Fairfax County and
83.6% in Reston/Herndon. The percentages of
our annualized rental revenues at December 31,
2008 from this region scheduled to expire in
each of the next three years follow: 8% in 2009,
20% in 2010 and 4% in 2011.
• Suburban Baltimore: The 83.1% occupancy of
our properties in this region at December 31,
2008 was less than the overall market occupancy
rate for office space of 87.8% in Upper Suburban
Baltimore (which is where most of our properties
in this region are located). The percentages of
our annualized rental revenues at December 31,
2008 from this region scheduled to expire in
each of the next three years follow: 15% in 2009,
11% in 2010 and 20% in 2011. We expect to
experience considerable competition in this
region. This market benefits to a certain extent
from proximity to Washington, D.C. but not to
the same extent as the previous two markets.
However, we do expect some future growth in
demand from BRAC relocations to Aberdeen
Proving Ground.
All of our properties in the Greater Philadelphia region
are concentrated under three leases with Unisys that
expire in June 2009 (Unisys subleases approximately
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 28
Page 29
20% of this space to Merck). During 2008, we entered
into new long-term leases with Unisys and Merck for
39% of the currently leased space. We expect to remove
55% of the currently leased space from operations for
redevelopment to occur through at least 2010; the
removal of this space from operations will have an
adverse effect on our results of operations until the
redevelopment is completed and the space is leased.
We experienced increased delays in 2008 in the leasing
of certain projects under construction that were not
pre-leased. These delays resulted in the delay of some
square footage under construction from becoming
operational and also led to our deferral of certain
projects under development on which we were about
to commence construction. We believe that we need
to commence construction on properties that are not
pre-leased to a certain extent in certain of our markets
to enable us to meet the demand of United States
Government and defense information technology
tenants that may require space meeting their needs in
a short timeframe. In these situations, we are bearing
the risk of our lease expectations not being met on
such properties, which could adversely affect on our
financial position, results of operations and cash flows.
As noted above, most of the leases with our largest
tenant, the United States Government, provide for
consecutive one-year terms or provide for early termi-
nation rights; all of the leasing statistics set forth
above assume that the United States Government will
remain in the space that they lease through the end of
the respective arrangements, without ending consecu-
tive one-year leases prematurely or exercising early
termination rights. We report the statistics in this
manner since we manage our leasing activities using
these same assumptions and believe these assumptions
to be probable.
The table below sets forth occupancy information pertaining to operating properties in which we have a partial
ownership interest:
Geographic Region
Greater Harrisburg(1)
Suburban Maryland(2)
Northern Virginia(3)
(1) Includes 16 properties totaling 672,000 square feet.
Ownership
Interest
20.0%
(2)
N/A
Occupancy Rates at
December 31,
2008
89.4%
94.8%
N/A
2007
90.5%
76.2%
100.0%
2006
91.2%
47.9%
100.0%
(2) Includes two properties totaling 97,000 operational square feet at December 31, 2008 (we had a 50% interest in 56,000 square feet and a 45% interest in
41,000 square feet). Includes one property with 56,000 square feet in which we had a 50% interest at December 31, 2007 and 2006.
(3) Included one property with 78,000 operational square feet at December 31, 2007 and 2006. In December 2008, this property became wholly owned.
results of oPerations
While reviewing this section, you should refer to the
tables in the section entitled “Selected Financial Data.”
You should also consider the factors set forth herein
and in Item 1A of our 2008 Annual Report on Form
10-K that could negatively affect various aspects
of our operations.
Revenues from Real Estate Operations
and Property Operating Expenses
We typically view our changes in revenues from real
estate operations and property operating expenses
as being comprised of the following components:
• changes attributable to the operations of
properties owned and 100% operational through-
out the two years being compared. We define these
as changes from “Same-Office Properties.” For
further discussion of the concept of “operational,”
you should refer to the section of Note 2 of the
Consolidated Financial Statements entitled
“Commercial Real Estate Properties;” and
• changes attributable to operating properties
acquired during the two years being compared and
newly-constructed properties that were placed
into service and not 100% operational through-
out the two years being compared. We define
these as changes from “Property Additions.”
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 30
Page 31
md&a continued
The tables included in this section set forth the components of our changes in revenues from real estate
operations and property operating expenses (dollars in thousands). These tables, and the discussion that
follow, include results and information pertaining to properties included in continuing operations.
Changes from 2007 to 2008
Property
Additions
Dollar
Change(1)
Same-Office
Properties
Dollar
Change
Percentage
Change
Revenues from real estate operations
Rental revenue
Tenant recoveries and other real estate operations revenue
Total
Property operating expenses
Straight-line rental revenue adjustments included
in rental revenue
Amortization of deferred market rental revenue
$17,859
4,045
$ 5,360
7,391
$21,904
$12,751
$ 7,714
$ 9,973
$ 1,086
$ (2,629)
$ 596
$ (517)
Number of operating properties included in component category
76
162
2.0%
16.9%
4.1%
9.5%
N/A
N/A
N/A
Other
Dollar
Change(2)
$(973)
37
$(936)
Total
$22,246
11,473
$33,719
$ 194
$17,881
$ —
$ —
—
$ (1,543)
$ 79
238
(1) Includes 59 acquired properties, 15 newly-constructed properties and two redevelopment properties placed into service.
(2) Includes, among other things, the effects of amounts eliminated in consolidation. Certain amounts eliminated in consolidation are attributable to
the Property Additions and Same-Office Properties.
As the table above indicates, our total increase in
revenues from real estate operations and property
operating expenses from 2007 to 2008 was attribut-
able primarily to the Property Additions.
With regard to changes in the Same-Office Properties’
revenues from real estate operations from 2007 to 2008:
• the increase in rental revenue included the
following:
• an increase of $7.1 million, or 2.7%, in rental
revenue attributable primarily to changes in
occupancy and rental rates between the two
periods; partially offset by
• a decrease of $1.8 million, or 79.1%, in net
revenue from the early termination of leases.
• tenant recoveries and other revenue increased
due primarily to the increase in property operat-
ing expenses described below. While we do have
some lease structures under which tenants pay
for 100% of properties’ operating expenses, our
most prevalent lease structure is for tenants to
pay for a portion of property operating expenses
to the extent that such expenses exceed amounts
established in their respective leases that are based
on historical expense levels. As a result, while
there is an inherent direct relationship between
our tenant recoveries and property operating
expenses, this relationship does not result in a
dollar for dollar increase in tenant recoveries as
property operating expenses increase.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 30
Page 31
The increase in the Same-Office Properties’ property
operating expenses from 2007 to 2008 included
the following:
• an increase of $3.1 million attributable to direct
miscellaneous reimbursable expenses pertaining
to specific tenants;
• an increase of $1.8 million, or 9.2%, in real estate
taxes, which included the effect of increased
property value assessments in our portfolio, most
notably an increase of $1.3 million, or 19.9%,
attributable to our Northern Virginia portfolio;
• an increase of $1.5 million, or 13.8%, in costs for
asset and property management operations, much
of which was due to increases in the size of our
employee base supporting such operations;
• an increase of $885,000, or 3.5%, in electric
utilities expense, which included the effect of:
(1) increased usage at certain properties due to
increased occupancy; (2) our assumption of
responsibility for payment of utilities at certain
properties due to changes in lease structures;
and (3) rate increases that we believe are the
result of (a) increased oil prices and (b) energy
deregulation in Maryland;
• an increase of $814,000, or 6.8%, in cleaning
services and related supplies due in large part to
increased contract rates and increased occupancy
at certain properties;
• an increase of $803,000, or 14.5%, in heating
and air conditioning repairs and maintenance
due primarily to an increase in general repair
activity and the commencement of new service
arrangements at certain properties;
• an increase of $574,000, or 248.2%, in bad
debt expense due to additional reserves on
tenant receivables;
• an increase of $452,000, or 59.7%, in exterior
repairs and maintenance due in large part to
additional projects undertaken for roof repairs
and building caulking and sealing; and
• a decrease of $1.5 million, or 58.9%, in snow
removal due to decreased snow and ice in most
of our regions in 2008.
Property
Additions
Dollar
Change(1)
Changes from 2006 to 2007
Same-Office Properties
Dollar
Change
Percentage
Change
Other
Dollar
Change(2)
Total
Revenues from real estate operations
Rental revenue
Tenant recoveries and other real estate operations revenue
Total
Property operating expenses
Straight-line rental revenue adjustments included in
rental revenue
Amortization of deferred market rental revenue
Number of operating properties included in component category
$ 56,257
8,880
$ 5,092
4,238
$ 65,137
$ 9,330
$ 21,491
$ 6,872
$ 3,439
$(1,621)
$
28
77
$ 372
150
2.1%
12.0%
3.4%
7.8%
N/A
N/A
N/A
$ 326
(323)
$ 61,675
12,795
$ 3
$ 74,470
$1,807
$ 30,170
$ 81
$ 1,899
$ (114)
$
286
—
227
(1) Includes 63 acquired properties, 12 newly-constructed properties and two redevelopment properties placed into service.
(2) Includes, among other things, the effects of amounts eliminated in consolidation. Certain amounts eliminated in consolidation are attributable to the Property
Additions and Same-Office Properties.
As the table above indicates, our total increase in revenues from real estate operations and property operating
expenses from 2006 to 2007 was attributable primarily to the Property Additions.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 32
Page 33
md&a continued
• an increase of $701,000, or 16.1%, in heating and
air conditioning repairs and maintenance due to
an increase in general repair activity and the
commencement of new service arrangements at
certain properties; and
• an increase of $714,000, or 8.9%, in repairs and
maintenance labor due primarily to: (1) an
increase in labor hours due mostly to the addi-
tion of new employees to address staffing needs
and increased labor requirements at certain
properties with increased occupancy; and (2)
higher labor rates resulting from an increase in
the underlying costs for labor. The higher labor
rates were attributable in part to an inflationary
trend but also were due to the increased need
for us to employ individuals with specialized
skills who command higher rates.
The $1.8 million increase in property operating
expenses from 2006 to 2007 that was not attributable
to Property Additions or Same-Office Properties
included a $1.3 million increase associated with the
former Fort Ritchie United States Army base in
Cascade, Washington County, Maryland, of which
we acquired 500 acres on October 5, 2006 and 91
acres on November 29, 2007. While we had develop-
ment activities underway at the Fort Ritchie project
in 2007, the $1.3 million in operating expenses was
associated with the portions of the project held for
future lease or development.
With regard to changes in the Same-Office Properties’
revenues from real estate operations from 2006 to 2007:
• the increase in rental revenue included the
following:
• an increase of $6.2 million, or 2.7%, in
rental revenue attributable primarily to
changes in occupancy and rental rates
between the two periods. Included in this
increase was a $5.0 million increase attribut-
able to three properties ($3.8 million in
two properties in Northern Virginia and
$1.2 million in one property in the Baltimore/
Washington Corridor) and a $1.8 million
decrease attributable to one property in
Suburban Baltimore; partially offset by
• a decrease of $1.1 million, or 35.8%, in net
revenue from the early termination of leases.
• tenant recoveries and other revenue increased
due primarily to the increase in property operat-
ing expenses described below.
The increase in the Same-Office Properties’ property
operating expenses from 2006 to 2007 included
the following:
• an increase of $2.9 million, or 14.5%, in utilities
due primarily to the same reasons discussed
above for the change from 2007 to 2008;
• an increase of $1.6 million, or 201.7%, in snow
removal due to increased snow and ice in most
of our regions in 2007;
• an increase of $924,000, or 5.5%, in real estate
taxes reflecting primarily an increase in the
assessed value of many of our properties.
Included in this amount was an increase of
$241,000, or 55.8%, attributable to our Colorado
Springs portfolio which had a number of proper-
ties with significantly higher assessed values;
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 32
Page 33
Construction Contract and Other Service Revenues and Expenses
The table below sets forth changes in our construction contract and other service revenues and expenses
(dollars in thousands):
Changes from 2007 to 2008
Changes from 2006 to 2007
Construction
Contract
Dollar
Change
Other
Service
Operations
Dollar
Change
Total
Dollar
Change
Construction
Contract
Dollar
Change
Other
Service
Operations
Dollar
Change
Total
Dollar
Change
$149,534
146,388
$(2,374)
(2,039)
$147,160
144,349
$(15,108)
(14,238)
$(3,751)
(3,314)
$(18,859)
(17,552)
Service operations
Revenues
Expenses
Income from service operations
$ 3,146
$ (335)
$ 2,811
$ (870)
$ (437)
$ (1,307)
The revenues and costs associated with these services
include subcontracted costs that are reimbursed to us by
the customer at no mark up. As a result, the operating
margins from these operations are small relative to the
revenue. We use the net of service operations revenues
and expenses to evaluate performance. The increase
in income from service operations from 2007 to 2008
was due primarily to a large volume of construction
contract activity recognized in 2008 in connection
with three large contracts, all of which were with the
United States Government. The decrease in income
from service operations from 2006 to 2007 was due
primarily to: (1) a slow down in activity on certain
third party constructions jobs; and (2) a decrease in
third party work for heating and air conditioning
controls and plumbing services due primarily to our
decision in 2007 to limit the amount of these services
that we provide to third parties and, instead, focus on
providing services predominantly for our properties.
As evidenced in the changes set forth above, our
volume of construction contract activity is inherently
subject to significant variability depending on the
volume and nature of projects undertaken by us
(primarily on behalf of tenants), and therefore the
increase in activity that occurred in 2008 should
not necessarily be considered to be a trend that will
continue. We view our service operations as an ancil-
lary component of our overall operations that should
continue to be a small contributor to our operating
income relative to our real estate operations.
Depreciation and Amortization
Our depreciation and other amortization expense
from continuing operations increased from 2006 to
2007 by $28.4 million, or 37.1%, due primarily to a
$30.4 million increase attributable to the Property
Additions. Of the increase attributable to the Property
Additions, $22.8 million was attributable to the
Nottingham Acquisition. When we acquire operating
properties, a portion of the acquisition value of such
properties is generally allocated to assets with depre-
ciable lives that are based on the lives of the underlying
leases. Compared to other acquisitions completed by
us in the past, the Nottingham Acquisition had a con-
siderably larger portion of the value of the operating
properties allocated to assets with lives that are based
on the lives of the underlying leases; due to that fact
and the fact that a large number of the leases in these
properties had lives of four years or less, much of the
depreciation and amortization associated with these
properties was front-loaded to the four years following
the completion of the acquisition. This is resulting in
increased depreciation and amortization expense from
2007 to 2010. The net increase in depreciation and other
amortization expense from 2006 to 2007 also included
a decrease of $2.9 million attributable to one of the
Same-Office Properties that had significant depreciation
and amortization expense in 2006 associated with a
lease that terminated in 2006.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 34
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md&a continued
Our depreciation and other amortization expense
from continuing operations decreased from 2007
to 2008 by $2.0 million, or 1.9%, due primarily to a
number of shorter lived assets becoming fully amor-
tized during or prior to the current periods, including
assets associated with the Nottingham Acquisition.
The effect of these decreases more than offset addi-
tional depreciation and amortization associated with
new assets placed into service.
General and Administrative Expenses
Our general and administrative expense increased
by $3.6 million, or 16.7%, from 2007 to 2008, and by
$3.7 million, or 20.3%, from 2006 to 2007. Much of
this increase was attributable to an increase in the size
of our employee base in response to the continued
growth of the Company. A portion of the increase
from 2007 to 2008 can also be attributed to costs
associated with a number of information technology
initiatives pursued during the year, the largest of
which was for the implementation of an Enterprise
Resource Planning software package.
General and administrative expenses increased as a
percentage of operating income from 16.9% in 2006
to 18.4% in 2007 and to 18.8% in 2008. Much of this
trend can be attributed to the increase in the size of
our employee base in response to the continued growth
of the Company. We believe in 2008 that we substan-
tially completed the right-sizing of our employee
base that was required in response to our growth and,
therefore, expect only modest growth in general
and administrative expense in 2009 and 2010.
Interest Expense
Our interest expense included in continuing operations
decreased from 2007 to 2008 by $1.9 million, or 2.3%.
This decrease included the effects of the following:
• a decrease in the weighted average interest rates
of our debt from 5.8% to 5.2%, much of which
can be attributed to decreases in the one-month
LIBOR rate in the latter portion of 2007 and in
2008; partially offset by
• an increase in our average outstanding debt
balance by 7.4% due primarily to debt incurred to
fund our 2007 and 2008 construction activities.
Our interest expense included in continuing operations
increased from 2006 to 2007 by $12.6 million, or 17.3%.
This increase included the effects of the following:
• a 26.1% increase in our average outstanding
debt balance, resulting primarily from our 2006
and 2007 acquisition and construction activities;
offset in part by the effects of
• an increase in interest capitalized to construction,
development and redevelopment projects of $4.7
million, or 32.4%, due to increased construction,
development and redevelopment activity; and
• a decrease in our weighted average interest rates
from 6.2% to 5.8%.
Gain on Early Extinguishment of Debt
In November 2008, we repurchased a $37.5 million
aggregate principal amount of our 3.5% Exchangeable
Senior Notes for $26.7 million. We recognized a gain
of $10.4 million in connection with this repurchase.
Interest and Other Income
Included in interest and other income for 2008
was $1.4 million in interest income associated with
a mortgage loan receivable into which we entered
in August 2008, which is discussed in further detail
in the section below entitled “Investing and Financing
Activities During 2008.”
Included as interest and other income for 2007
was a $1.0 million gain recognized on the disposition
of most of our investment in TractManager, Inc., an
investment that we account for using the cost method
of accounting. TractManager, Inc. is an entity that
developed an Internet-based contract imaging system
for sale to real estate owners and healthcare providers.
Minority Interests
Interests in our Operating Partnership are in the
form of preferred and common units. The line entitled
“minority interests in income from continuing opera-
tions” includes primarily income from continuing
operations allocated to preferred and common units
not owned by us. Income is allocated to minority
interest preferred unitholders in an amount equal to
the priority return from the Operating Partnership
to which they are entitled. Income is allocated to
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 34
Page 35
minority interest common unitholders based on the
income earned by the Operating Partnership, after
allocation to preferred unitholders, multiplied by
the percentage of the common units in the Operating
Partnership owned by those common unitholders.
As of December 31, 2008, we owned 86.2% of the
outstanding common units and 95.8% of the outstand-
ing preferred units. The percentage of the Operating
Partnership owned by minority interests during the last
three years decreased in the aggregate due primarily
to the effect of the following transactions:
• the issuance of additional units to us as we issued
new preferred shares and common shares during
2006 through 2008 due to the fact that we
receive preferred units and common units in
the Operating Partnership each time we issue
preferred shares and common shares; and
• the exchange of common units for our common
shares by certain minority interest holders of
common units; offset in part by
• our issuance of common units to third parties
totaling 262,165 in 2007 and 181,097 in 2006 in
connection with acquisitions; and
• the redemption by us of the Series E and
Series F Cumulative Redeemable Preferred Shares
of beneficial interest, and the corresponding
Series E and Series F Preferred Units, in 2006.
Our income from continuing operations allocated to
minority interests increased by $4.2 million, or 124.8%,
from 2007 to 2008 and decreased by $411,000, or
11.0%, from 2006 to 2007. These changes are due
primarily to: (1) the changes in the income available
to allocate to minority interests holders of common
units attributable primarily to the reasons set forth
above for changes in revenue and expense items; and
(2) the decreasing effect of our increasing ownership
of common units (from 81.6% at December 31, 2005
to 86.2% at December 31, 2008).
Discontinued Operations, Net of
Minority Interests
Our discontinued operations decreased $16.2 million,
or 88.0%, from 2006 to 2007 due primarily to changes
in gain from sales of real estate included in discontinued
operations. See Note 17 to the Consolidated Financial
Statements for a summary of the components of income
from discontinued operations.
Adjustments to Net Income to Arrive
at Net Income Available to
Common Shareholders
In 2006, we recognized a $3.9 million decrease to net
income available to common shareholders pertaining
to the original issuance costs incurred on the Series E
and Series F Preferred Shares of beneficial interest that
were redeemed in 2006.
liquidity and
CaPital resourCes
Our primary cash requirements are for operating
expenses, debt service, development of new properties,
improvements to existing properties and acquisitions.
While we may experience increasing challenges dis-
cussed elsewhere herein due to the current economic
environment, we believe that our liquidity and capital
resources are adequate for our near-term and longer-
term requirements. We had cash and cash equivalents
of $6.8 million and $24.6 million at December 31,
2008 and 2007, respectively. We maintain sufficient
cash and cash equivalents to meet our operating cash
requirements and short term investing and financing
cash requirements. When we determine that the amount
of cash and cash equivalents on hand is more than we
need to meet such requirements, we may pay down
our Revolving Credit Facility (defined below) or forgo
borrowing under construction loan credit facilities
to fund development activities.
We rely primarily on fixed-rate, non-recourse mortgage
loans from banks and institutional lenders to finance
most of our operating properties. We have also made
use of the public equity and debt markets to meet our
capital needs, principally to repay or refinance corpo-
rate and property secured debt and to provide funds
for project development and acquisition costs. We have
an unsecured revolving credit facility (the “Revolving
Credit Facility”) with a group of lenders that provides
for borrowings of up to $600 million, $191.3 million of
which was available at December 31, 2008; this facility
is available through September 2011 and may be
extended by one year at our option, subject to certain
conditions. In addition, as discussed in greater detail
below, we entered into our Revolving Construction
Facility, which provides for borrowings of up to
$225.0 million, $143.7 million of which was available at
December 31, 2008 to fund future construction costs;
this facility is available until May 2011 and may be
extended by one year at our option, subject to certain
conditions. Selective dispositions of operating and
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 36
Page 37
md&a continued
other properties may also provide capital resources in 2009 and in future years. We are continually evaluating
sources of capital and believe that there are satisfactory sources available for meeting our capital requirements
without necessitating property sales.
In our discussions of liquidity and capital resources, we describe certain of the risks and uncertainties relating to
our business. Additional risks are described in Item 1A of our Annual Report on Form 10-K.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2008 (in thousands):
For the Years Ended December 31,
Contractual obligations(1)
2009
2010
2011
2012
2013
Thereafter
Total
Debt(2)
Balloon payments due upon maturity
Scheduled principal payments
Interest on debt(3)
Acquisitions of properties
New construction and development
contracts and obligations(4)(5)
Third-party construction and
development contracts(5)(6)
Capital expenditures for operating
properties(5)(7)
Operating leases(8)
Other purchase obligations(9)
$ 93,567
10,415
76,957
—
$ 64,658
9,375
73,348
—
$ 738,531
7,550
64,391
—
$ 257,524
6,076
46,752
—
$ 134,843
2,875
34,317
—
$ 536,587
4,121
81,815
4,000
$ 1,825,710
40,412
377,580
4,000
79,062
171,520
3,532
604
2,500
—
—
—
339
2,500
—
—
—
126
2,451
—
—
—
15
2,396
—
—
—
—
2,309
—
—
—
—
5,232
79,062
171,520
3,532
1,084
17,388
Total contractual cash obligations
$ 438,157
$ 150,220
$ 813,049
$ 312,763
$ 174,344
$ 631,755
$ 2,520,288
(1) The contractual obligations set forth in this table generally exclude individual contracts that had a value of less than $20,000. Also excluded are contracts
associated with the operations of our properties that may be terminated with notice of one month or less, which is the arrangement that applies to most of our
property operations contracts.
(2) Represents scheduled principal amortization payments and maturities only and therefore excludes a net premium of $501,000. We expect to refinance the bal-
loon payments that are due in 2009 and 2010 using primarily a combination of borrowings from our Revolving Credit Facility and proceeds from debt refi-
nancings. The principal maturities occurring in 2011 include $473.8 million that may be extended for one-year, subject to certain conditions.
(3) Represents interest costs for debt at December 31, 2008 for the terms of such debt. For variable rate debt, the amounts reflected above used December 31, 2008
interest rates on variable rate debt in computing interest costs for the terms of such debt.
(4) Represents contractual obligations pertaining to new construction, development and redevelopment activities. We expect to finance these costs primarily using
proceeds from our Revolving Construction Facility and Revolving Credit Facility.
(5) Because of the long-term nature of certain construction and development contracts, some of these costs will be incurred beyond 2009.
(6) Represents contractual obligations pertaining to projects for which we are acting as construction manager on behalf of unrelated parties who are our clients.
We expect to be reimbursed in full for these costs by our clients.
(7) Represents contractual obligations pertaining to capital expenditures for our operating properties. We expect to finance all of these costs using cash flow
from operations.
(8) We expect to pay these items using cash flow from operations.
(9) Primarily represents contractual obligations pertaining to managed-energy service contracts in place for certain of our operating properties. We expect to
pay these items using cash flow from operations.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, includ-
ing leverage ratio, minimum net worth, minimum fixed charge coverage, minimum debt service and maximum
secured indebtedness. As of December 31, 2008, we were in compliance with these financial covenants.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 36
Page 37
Other Future Cash Requirements
for Investing and Financing Activities
As of December 31, 2008, we had construction activities
underway on ten office properties totaling 1.2 million
square feet that were 43.3% leased, or considered
committed to lease (including three properties owned
through joint ventures). We estimate remaining costs
to be incurred will total approximately $82.4 million
upon completion of these properties; we expect to
incur these costs through 2010. We expect to fund
these costs using primarily borrowings from our
Revolving Construction Facility and Revolving
Credit Facility.
As of December 31, 2008, we had development
activities underway on seven new office properties
estimated to total 767,000 square feet. We estimate
that costs for these properties will total approximately
$165.0 million. As of December 31, 2008, costs incurred
on these properties totaled $17.7 million and the balance
is expected to be incurred through 2012. We expect
to fund most of these costs using borrowings from
our Revolving Construction Facility.
We had redevelopment activities underway on
one property at December 31, 2008 and expect to
commence redevelopment on an additional property
in 2009. We expect to incur an aggregate of approxi-
mately $40.0 million in costs in connection with
these projects from 2009 to 2010.
In September 2007, the City of Colorado Springs
announced that it had selected us to be the master
developer for the 277-acre site located in the Colorado
Springs Airport Business Park, known as Cresterra,
which is located at the entrance of the Colorado
Springs Airport and adjacent to Peterson Air Force
Base. We are currently in the process of negotiating
the development agreement and long-term ground
lease with the City of Colorado Springs regarding the
details of this arrangement; we expect that the terms
of these agreements will be finalized in 2009. We
expect that this business park can support potential
development of approximately 3.5 million square feet,
including office, retail, industrial, hospitality and flex
space. For this project, we expect to oversee develop-
ment, construction, leasing and management and have
a leasehold interest in buildings.
We often use our Revolving Credit Facility initially to
finance much of our investing and financing activities.
We then pay down our Revolving Credit Facility using
proceeds from long-term borrowings as attractive
financing conditions arise and equity issuances as
attractive equity market conditions arise. Amounts
available under the facility are computed based on
65% of our unencumbered asset value, as defined in
the agreement. As discussed above, as of December
31, 2008, the borrowing capacity under the Revolving
Credit Facility was $600.0 million, of which $191.3
million was available.
As previously discussed, the United States financial
markets are experiencing extreme volatility, and credit
markets have tightened considerably. As a result, the
level of risk that we may not be able to obtain new
financing for acquisitions, development activities or
other capital requirements at reasonable terms, if at all,
in the near future has increased. Actions taken by us
to reduce this level of risk include the following:
• we entered into the $225.0 million Revolving
Construction Facility in May 2008, which we
expect to use in funding much of our future
development activities;
• we managed our debt to avoid significant con-
centrations of maturities in any particular year
and have what we believe to be limited and man-
ageable maturities over the next two years;
• we raised $139.2 million in net proceeds from
the issuance of common shares in September
2008, which we used to pay down our Revolving
Credit Facility in order to create borrowing
capacity; and
• we entered into three new interest rate swaps to
manage our exposure to increases in interest rates.
We believe that we have sufficient capacity under
our Revolving Credit Facility to satisfy our 2009 debt
maturities. We also believe that we have sufficient
capacity under our Revolving Construction Facility
to fund the construction of properties that were under
construction by year end, as well as properties expected
to be started in 2009. We do expect to pursue a certain
amount of new permanent and medium-term debt in
2009; if we are successful in obtaining this debt, we
expect to use the proceeds to pay down our Revolving
Credit Facility to create additional borrowing capacity
to enable us to fund future investment opportunities.
We found it increasingly difficult in 2008 to locate
attractive acquisition opportunities due to a significant
spread between seller expectations and prices that met
our investment criteria. We are optimistic that there
will be more opportunities for acquisitions in 2009.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 38
Page 39
md&a continued
operations benefitted from a decrease in short-term
interest rates; if short-term interest rates were to
increase, the interest payments on our variable-rate
debt would increase, which would have a decreasing
effect on our cash flow from operations. These and
other factors that could negatively affect our ability
to generate cash flow from operations in the future
are discussed in further detail in Item 1A of our
2008 Annual Report on Form 10-K.
Investing and Financing Activities
During 2008
In 2008, we acquired three office properties totaling
247,000 square feet and three parcels of land that
we believe can support 1.8 million developable
square feet for $59.8 million. These acquisitions
were financed using primarily borrowings from
our Revolving Credit Facility.
We had seven newly-constructed buildings totaling
528,000 square feet (three located in Colorado Springs
and two each in the Baltimore/Washington Corridor
and San Antonio) become fully operational in 2008
(89,000 of these square feet were placed into service
in 2007). These properties were 85.6% leased or com-
mitted as of December 31, 2008. Costs incurred on
these properties through December 31, 2008 totaled
$84.6 million, $13.5 million of which was incurred
in 2008. We financed the 2008 costs using primarily
borrowings from our Revolving Credit Facility.
During 2008, we also placed into service 59,000 square
feet that were redeveloped in a property located in
Northern Virginia. Most of the costs for this space,
which became 100% leased subsequent to December
31, 2008, were incurred in prior years.
As discussed above, at December 31, 2008, we
had construction activities underway on ten office
properties totaling 1.2 million square feet that were
43.3% leased, or considered committed to lease
(including 85,000 square feet already placed into
service). Three of these properties are owned through
consolidated joint ventures. Costs incurred on these
properties through December 31, 2008 totaled
approximately $174.0 million, of which approximately
$121.3 million was incurred in 2008. The costs
incurred in 2008 were funded using borrowings from
our Revolving Credit Facility and Revolving
Construction Facility and cash reserves.
Given the current economic climate, we are
expecting that it could be more challenging in 2009
to raise capital through offerings of common and
preferred shares at favorable terms than it has been
historically. We also expect it to be challenging to
raise capital through the sale of properties due to a
lack of credit availability for potential buyers. As a
result, we expect that we would likely fund any future
acquisition opportunities using capacity created under
our Revolving Credit Facility from new debt.
Operating Activities
Our cash flow from operations increased $44.2 million,
or 32.1%, from 2007 to 2008; this increase is attribut-
able in large part to: (1) the additional cash flow from
operations generated by our property additions; and
(2) the timing of cash flow associated with third-party
construction projects in the current period. We expect
to continue to use cash flow provided by operations
to meet our short-term capital needs, including all
property operating expenses, general and administra-
tive expenses, interest expense, scheduled principal
amortization of debt, dividends to our shareholders,
distributions to our minority interest holders of pre-
ferred and common units in the Operating Partnership
and capital improvements and leasing costs. We do not
anticipate borrowing to meet these requirements.
As described previously, we expect that the effects of
the global downturn on our real estate operations will
make our leasing activities increasingly challenging in
2009, 2010 and perhaps beyond. As a result, there
could be an increasing likelihood as leases expire of
our being unsuccessful in renewing tenants or renew-
ing on terms less favorable to us than the terms of the
original leases. If a tenant leaves, we can expect to
experience a vacancy for some period of time as well
as higher tenant improvement and leasing costs than
if a tenant renews. As a result, our cash flow of opera-
tions would be adversely affected if we experience a
high volume of tenant departures at the end of their
lease terms. While we believe that our largest tenants
represent favorable credit risk, we believe that there
may be an increased likelihood in the current economic
climate of tenants encountering financial hardships;
if one of our major tenants or a number of our smaller
tenants were to experience financial difficulties,
including bankruptcy, insolvency or general downturn
of business, and as a result default in their lease obliga-
tions to us, our cash flow from operations would be
adversely affected. During 2008, our cash flow from
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 38
Page 39
In 2008, we completed the formation of M Square,
a consolidated joint venture in which we hold a 50%
equity interest through Enterprise Campus Developer,
LLC, another consolidated joint venture in which we
own a 90% interest. M Square was formed to develop
and own office properties, approved for up to approxi-
mately 750,000 square feet, located in M Square
Research Park in College Park, Maryland.
The table below sets forth the major components of
our additions to the line entitled “Total Commercial
Real Estate Properties” on our Consolidated Balance
Sheet for 2008 (in thousands):
Construction, development
and redevelopment
Acquisitions
Tenant improvements on operating properties
Capital improvements on operating properties
$ 188,460
55,286
20,280(1)
11,261
$ 275,287
(1) Tenant improvement costs incurred on newly-constructed
properties are classified in this table as construction,
development and redevelopment.
In 2008, we sold three operating properties totaling
223,000 square feet for a total of $25.3 million, result-
ing in a gain of $2.6 million. The net proceeds from
these sales after transaction costs totaled approximately
$25.0 million. Our approximate application of the
proceeds from these sales follows: $16.9 million to
pay down borrowings under our Revolving Credit
Facility; $5.1 million to fund an escrow that was used
to fund a subsequent acquisition; and $3.0 million
to fund cash reserves.
In 2008, we also completed the sale of six recently
constructed office condominiums located in Northern
Virginia for sale prices totaling $8.4 million in the
aggregate, resulting in net proceeds of $7.8 million.
We applied these proceeds to our cash operating
reserves. We recognized an aggregate gain before
minority interests and income taxes of $1.4 million
on these sales.
On August 26, 2008, we loaned $24.8 million to the
owner of a 17-story Class A+ rental office property
containing 471,000 square feet in Baltimore, Maryland.
We have a secured interest in the ownership of the
entity that owns the property and adjacent land parcels
that is subordinate to that of a first mortgage on the
property. The loan, which matures on August 26, 2011,
carries a primary interest rate of 16.0%, although
certain additional principal fundings available under
the loan agreement carry an interest rate of 20.0%.
While interest is payable to us under the loan on a
monthly basis, to the extent that the borrower does not
have sufficient net operating cash flow (as defined in
the agreement) to pay all or a portion of the interest
due under the loan in a given month, such unpaid
portion of the interest shall be added to the loan
principal amount used to compute interest in the
following month. We are obligated to fund an aggre-
gate of up to $26.6 million under this loan, excluding
any future compounding of unpaid interest. The
balance of this mortgage loan receivable was $25.8
million at December 31, 2008. The first mortgage
loan, which had a balance of $75.0 million at
December 31, 2008, matures on August 9, 2009 and
may be extended for two six-month periods, subject
to certain conditions. If a default occurs under the
terms of the loan with us or under the first mortgage
loan, in order to protect our investment, we may need
either to (1) purchase the first mortgage loan on the
property or (2) foreclose on the ownership interest in
the property and repay the first mortgage loan. For
2008, most of the interest that was payable under the
loan due to us was not paid due to the borrower having
insufficient net operating cash flow. Due to the com-
mencement of a lease in the borrower’s property in
the later portion of 2008, we are expecting an improve-
ment in the borrower’s net operating cash flow that
will enable them to pay the majority of interest
payable under the loan for the 2009 period.
On May 2, 2008, we entered into a construction loan
agreement with a group of lenders for which KeyBanc
Capital Markets, Inc. acted as arranger, KeyBank
National Association acted as administrative agent,
Bank of America, N.A. acted as syndication agent and
Manufacturers and Traders Trust Company acted as
documentation agent; we refer to this loan as the
“Revolving Construction Facility.” The construction
loan agreement provides for an aggregate commitment
by the lenders of $225.0 million, with a right for us
to further increase the lenders’ aggregate commitment
during the term to a maximum of $325.0 million,
subject to certain conditions. Ownership interests in
the properties for which construction costs are being
financed through loans under the agreement are
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 40
Page 41
md&a continued
pledged as collateral. Borrowings are generally avail-
able for properties included in this construction loan
agreement based on 85% of the total budgeted costs
of construction of the applicable improvements for such
properties as set forth in the properties’ construction
budgets, subject to certain other loan-to-value and
debt coverage requirements. As loans for properties
under the construction loan agreement are repaid in
full and the ownership interests in such properties are
no longer pledged as collateral, capacity under the
construction loan agreement’s aggregate commitment
will be restored, giving us the ability to obtain new
loans for other construction properties in which we
pledge the ownership interests as collateral. The con-
struction loan agreement matures on May 2, 2011 and
may be extended by one year at our option, subject to
certain conditions. The variable interest rate on each
loan is based on one of the following, to be selected
by us: (1) subject to certain conditions, the LIBOR rate
for the interest period designated by us (customarily
the one-month rate) plus 1.6% to 2.0%, as determined
by our leverage levels at different points in time; or
(2) the greater of (a) the prime rate of the lender then
acting as agent or (b) the Federal Funds Rate, as defined
in the construction loan agreement, plus 0.50%. Interest
is payable at the end of each interest period (as defined
in the agreement), and principal outstanding under each
loan under the agreement is payable on the maturity
date. The construction loan agreement also carries a
quarterly fee that is based on the unused amount of
the commitment multiplied by a per annum rate of
0.125% to 0.20%. At December 31, 2008, $81.3 million
was outstanding under this facility and $143.7 million
was available to fund future development costs.
On July 18, 2008, we borrowed $221.4 million under
a mortgage loan requiring interest only payments for
the term at a variable rate of LIBOR plus 225 basis
points (subject to a floor of 4.25%). This loan facility
has a four-year term with an option to extend by an
additional year. We used $63.5 million of the proceeds
from this loan to repay construction loan facilities
that were due to mature in 2008, $11.8 million to
repay borrowings under the Revolving Construction
Facility, $142.0 million to repay borrowings under
our Revolving Credit Facility and the balance to
fund transaction costs.
In September 2008, we issued 3.7 million common
shares at a public offering price of $39 per share, for net
proceeds of $139.2 million after underwriting discount
but before offering expenses. We contributed these net
proceeds to our Operating Partnership in exchange for
3.7 million common units. The proceeds were then
used to pay down our Revolving Credit Facility.
During 2008, we entered into the following interest
rate swap agreements:
• $100.0 million notional amount on October 24,
2008 that fixes the one-month LIBOR base rate
at 2.51% effective on November 3, 2008 and
expiring on December 31, 2009;
• $120.0 million notional amount on December 17,
2008 that fixes the one-month LIBOR base rate at
1.76% effective on January 2, 2009 and expiring
on May 1, 2012; and
• $100.0 million notional amount on December 29,
2008 that fixes the one-month LIBOR base rate at
1.975% effective on January 1, 2010 and expiring
on May 1, 2012.
Analysis of Cash Flow Associated With
Investing and Financing Activities
Our net cash flow used in investing activities
decreased $37.6 million from 2007 to 2008. This
decrease was due primarily to the following:
• a $72.5 million decrease in purchases of and
additions to commercial real estate due primarily
to the completion of the Nottingham Acquisition
in 2007; offset in part by
• a $25.3 million mortgage loan receivable
discussed above that was funded in 2008.
Our cash flow provided by financing activities
decreased $116.3 million from 2007 to 2008. This
decrease was due primarily to the following:
• a $429.5 million increase in balloon payments
on debt due in large part to: (1) a higher level
of debt refinancing activity in the current period;
and (2) additional debt paid down using $139.2
million in proceeds from our issuance of common
shares in September 2008; offset in part by
• a $213.2 million increase in proceeds from
mortgage and other loans payable due primarily
to a higher level of debt refinancing activity in
the current period; and
• a $134.3 million increase in net proceeds from our
issuance of common shares in September 2008.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 40
Page 41
Off-Balance Sheet Arrangements
During 2008, we owned an investment in an unconsol-
idated joint venture, Harrisburg Corporate Gateway
Partners, L.P., for which we accounted using the equity
method of accounting. This joint venture was entered
into in 2005 to enable us to contribute office properties
that were previously wholly owned by us into the joint
venture in order to partially dispose of our interest in
the properties. We managed the joint venture’s property
operations and any required construction projects and
earned fees for these services in 2008. This joint ven-
ture has a two-member management committee that
is responsible for making major decisions (as defined
in the joint venture agreement) and we control one
of the management committee positions.
We and our partner receive returns in proportion
to our investments in the joint venture. As part of
our obligations under the joint venture arrangement,
we agreed to indemnify the partnership’s lender
for 80% of losses under standard nonrecourse loan
guarantees (environmental indemnifications and
guarantees against fraud and misrepresentation)
during the period of time in which we manage the
partnership’s properties; we do not expect to incur
any losses under these loan guarantees.
We have distributions in excess of our investment
in this unconsolidated joint venture of $4.8 million
at December 31, 2008 due to our not recognizing
gain on the contribution of properties into the joint
venture; we did not recognize a gain on the contribu-
tion since we have contingent obligations, as described
above, remaining in effect as long as we continue to
manage the joint venture’s properties that may exceed
our proportionate interest. We recognized a loss on
our investment in this joint venture of $203,000 in
2008. We also realized a net cash inflow from this
joint venture of $338,000 in 2008. In addition, we
earned fees totaling $268,000 from the joint venture
in 2008 for construction, asset management and
property management services.
During 2008, we also owned investments in six joint
ventures that we accounted for using the consolidation
method of accounting. We enter into joint ventures
such as these from time to time for reasons that
include the following: (1) they can provide a facility
to access new markets and investment opportunities
while enabling us to benefit from the expertise and
relationships of our partners; (2) they are an alternative
source for raising capital to put towards acquisition
or development activities; and (3) they can reduce our
exposure to risks associated with a property and its
activities. Our consolidated and unconsolidated joint
ventures are discussed in Note 5 to our Consolidated
Financial Statements, and certain commitments and
contingencies related to these joint ventures are
discussed in Note 18.
We had no other material off-balance sheet arrange-
ments during 2008.
funds from oP erations
Funds from operations (“FFO”) is defined as net
income computed using GAAP, excluding gains (or
losses) from sales of real estate, plus real estate-related
depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures.
Gains from sales of newly-developed properties
less accumulated depreciation, if any, required under
GAAP are included in FFO on the basis that develop-
ment services are the primary revenue generating
activity; we believe that inclusion of these development
gains is in accordance with the National Association
of Real Estate Investment Trusts (“NAREIT”) defini-
tion of FFO, although others may interpret the
definition differently.
Accounting for real estate assets using historical
cost accounting under GAAP assumes that the value
of real estate assets diminishes predictably over time.
NAREIT stated in its April 2002 White Paper on
Funds from Operations that “since real estate asset
values have historically risen or fallen with market
conditions, many industry investors have considered
presentations of operating results for real estate
companies that use historical cost accounting to be
insufficient by themselves.” As a result, the concept
of FFO was created by NAREIT for the REIT industry
to “address this problem.” We agree with the concept
of FFO and believe that FFO is useful to management
and investors as a supplemental measure of operating
performance because, by excluding gains and losses
related to sales of previously depreciated operating
real estate properties 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.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 42
Page 43
md&a continued
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 alter-
native 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. The FFO we present may not be comparable
to the FFO presented by other REITs since they may
interpret the current NAREIT definition of FFO
differently or they may not use the current NAREIT
definition of FFO.
Basic funds from operations (“Basic FFO”) is FFO
adjusted to (1) subtract (a) preferred share dividends and
(b) issuance costs associated with redeemed preferred
shares and (2) add back GAAP net income allocated to
common units in the Operating Partnership not owned
by us. 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 inves-
tors 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; man-
agement compensates for these limitations in essentially
the same manner as described above for FFO.
Diluted funds from operations (“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. However, the computation of Diluted
FFO does not assume conversion of securities other
than common units in the Operating Partnership that
are convertible into common shares if the conversion
of those securities would increase Diluted FFO per
share in a given period. We believe that Diluted FFO
is useful to investors because it is the numerator used
to compute Diluted FFO per share, discussed below.
In addition, since most equity REITs provide Diluted
FFO information to the investment community, we
believe Diluted FFO is a useful supplemental measure
for comparing us to other equity REITs. 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 limita-
tions 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. The Diluted
FFO that we present may not be comparable to
the Diluted FFO presented by other REITs.
Diluted funds from operations per share (“Diluted FFO
per share”) is (1) Diluted FFO divided by (2) the sum
of the (a) weighted average common shares outstanding
during a period, (b) weighted average common units
outstanding during a period and (c) weighted average
number of potential additional common shares that
would have been outstanding during a period if other
securities that are convertible or exchangeable into
common shares were converted or exchanged. However,
the computation of Diluted FFO per share does not
assume conversion of securities other than common
units in the Operating Partnership that are convertible
into common shares if the conversion of those securi-
ties would increase Diluted FFO per share in a given
period. We believe that Diluted FFO per share is useful
to investors because it provides investors with a further
context for evaluating our FFO results in the same
manner that investors use earnings per share (“EPS”)
in evaluating net income available to common share-
holders. In addition, since most equity REITs provide
Diluted FFO per share information to the investment
community, we believe Diluted FFO per share is a
useful supplemental measure for comparing us to other
equity REITs. We believe that diluted EPS is the most
directly comparable GAAP measure to Diluted FFO
per share. Diluted FFO per share has most of the same
limitations as Diluted FFO (described above); manage-
ment compensates for these limitations in essentially
the same manner as described above for Diluted FFO.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 42
Page 43
Our Basic FFO, Diluted FFO and Diluted FFO per share for 2004 through 2008 and reconciliations of (1) net
income to FFO, (2) the numerator for diluted EPS to diluted FFO and (3) the denominator for diluted EPS to the
denominator for diluted FFO per share are set forth in the following table:
(in thousands, except per share data)
2008
2007
2006
2005
2004
Net income
Add: Real estate-related depreciation and amortization
Add: Depreciation and amortization on unconsolidated
real estate entities
Less: Depreciation and amortization allocable to minority
$ 58,668
102,772
$ 34,784
106,260
$ 49,227
78,631
$ 39,031
62,850
$ 37,032
51,371
648
666
910
182
106
For the Years Ended December 31,
interests in other consolidated entities
(270)
(188)
(163)
(114)
Less: Gain on sales of real estate, net of taxes, excluding
development portion(1)
Funds from operations (“FFO”)
Add: Minority interests—common units in the
Operating Partnership
Less: Preferred share dividends
Less: Issuance costs associated with redeemed preferred shares
Funds from Operations—basic (“Basic FFO”)
Add: Expense on dilutive share-based compensation
Add: Convertible preferred share dividends
(86)
(95)
(2,630)
(3,827)
(17,644)
(4,422)
159,188
137,695
110,961
97,527
88,328
7,315
(16,102)
—
150,401
—
—
3,682
(16,068)
—
125,309
—
—
7,276
(15,404)
(3,896)
98,937
—
—
5,889
(14,615)
—
88,801
—
—
5,659
(16,329)
(1,813)
75,845
382
21
Funds from Operations—diluted (“Diluted FFO”)
$ 150,401
$ 125,309
$ 98,937
$ 88,801
$ 76,248
Weighted average common shares
Conversion of weighted average common units
Weighted average common shares/units—Basic FFO
Dilutive effect of share-based compensation awards
Assumed conversion of weighted average convertible
preferred shares
48,132
8,107
56,239
733
46,527
8,296
54,823
1,103
41,463
8,511
49,974
1,799
37,371
8,702
46,073
1,626
33,173
8,726
41,899
1,896
—
—
—
—
134
Weighted average common shares/units—Diluted FFO
56,972
55,926
51,773
47,699
43,929
Diluted FFO per share
$
2.64
$
2.24
$
1.91
$
1.86
$
1.74
Numerator for diluted EPS
Add: Minority interests—common units in the
Operating Partnership
Add: Real estate-related depreciation and amortization
Add: Depreciation and amortization on unconsolidated
real estate entities
Less: Depreciation and amortization allocable to minority
$ 42,566
$ 18,716
$ 29,927
$ 24,416
$ 18,911
7,315
102,772
3,682
106,260
7,276
78,631
5,889
62,850
5,659
51,371
648
666
910
182
interests in other consolidated entities
(270)
(188)
(163)
(114)
Less: Gain on sales of real estate, net of taxes, excluding
development portion(1)
Add: Expense on dilutive share-based compensation
(2,630)
—
(3,827)
—
(17,644)
—
(4,422)
—
106
(86)
(95)
382
Diluted FFO
$ 150,401
$ 125,309
$ 98,937
$ 88,801
$ 76,248
Denominator for diluted EPS
Weighted average common units
Dilutive effect of share-based compensation awards
Denominator for Diluted FFO per share
48,865
8,107
—
56,972
47,630
8,296
—
55,926
43,262
8,511
—
51,773
38,997
8,702
—
47,699
34,982
8,726
221
43,929
(1) Gains from the sale of real estate, net of taxes, that are attributable to sales of non-operating properties are included in FFO. Gains from newly-developed or
re-developed properties less accumulated depreciation, if any, required under GAAP are also included in FFO on the basis that development services are the
primary revenue generating activity; we believe that inclusion of these development gains is in compliance with the NAREIT definition of FFO, although
others may interpret the definition differently.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 44
Page 45
md&a continued
inflation
Most of our tenants are obligated to pay their share
of a building’s operating expenses to the extent such
expenses exceed amounts established in their leases,
based on historical expense levels. Some of our tenants
are obligated to pay their full share of a building’s
operating expenses. These arrangements somewhat
reduce our exposure to increases in such costs resulting
from inflation. In addition, since our average lease life
is approximately five years, we generally expect to be
able to compensate for increased operating expenses
through increased rental rates upon lease renewal
or expiration.
Our costs associated with constructing buildings and
completing renovation and tenant improvement work
increased due to higher cost of materials. We expect to
recover a portion of these costs through higher tenant
rents and reimbursements for tenant improvements.
The additional costs that we do not recover increase
depreciation expense as projects are completed and
placed into service.
reCent aCCounting
PronounCements
For disclosure regarding recent accounting pronounce-
ments and the anticipated impact they will have on
our operations, you should refer to Note 2 to our
Consolidated Financial Statements.
quantitative and qualitative disClosures about market risk
We are exposed to certain market risks, the most predominant of which is change in interest rates. Increases
in interest rates can result in increased interest expense under our Revolving Credit Facility and our other debt
carrying variable interest rate terms. Increases in interest rates can also result in increased interest expense when
our debt carrying fixed interest rate terms mature and need to be refinanced. Our capital strategy favors long-term,
fixed-rate, secured debt over variable-rate debt to minimize the risk of short-term increases in interest rates. As of
December 31, 2008, 94.3% of our fixed-rate debt was scheduled to mature after 2009. As of December 31, 2008,
26.0% of our total debt had variable interest rates, including the effect of interest rate swaps. As of December 31,
2008, the percentage of our variable-rate debt, including the effect of interest rate swaps, relative to our total
assets was 17.2%.
The following table sets forth our long-term debt obligations by scheduled maturity and weighted average interest
rates at December 31, 2008 (dollars in thousands):
For the Years Ending December 31,
2009
2010
2011(1)
2012
2013
Thereafter
Total
Long term debt:
Fixed rate(2)
Weighted average interest rate
Variable rate
$63,393
$74,033
$272,314
$ 42,200
$137,718
$540,708
$1,130,366
6.89%
5.98%
4.30%
6.33%
5.57%
5.58%
5.40%
$40,589
$ — $473,767
$221,400
$ — $ — $ 735,756
(1) Includes amounts outstanding at December 31, 2008 of $392.5 million under our Revolving Credit Facility and $81.3 million under our Revolving
Construction Facility that may be extended for a one-year period, subject to certain conditions.
(2) Represents principal maturities only and therefore excludes net premiums of $501,000.
The fair market value of our debt was $1.71 billion at December 31, 2008 and $1.83 billion at December 31, 2007.
If interest rates on our fixed-rate debt had been 1% lower, the fair value of this debt would have increased by
$56.2 million at December 31, 2008 and $53.7 million at December 31, 2007.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 44
Page 45
md&a continued
We occasionally use derivative instruments such as interest rate swaps to further reduce our exposure to changes
in interest rates. The following table sets forth information pertaining to our interest rate swap contracts in place
as of December 31, 2008 and 2007, and their respective fair values (dollars in thousands):
Notional
Amount
$ 50,000
25,000
25,000
50,000
100,000
120,000
100,000
One-Month
LIBOR base
5.0360%
5.2320%
5.2320%
4.3300%
2.5100%
1.7600%
1.9750%
Effective
Date
3/28/2006
5/1/2006
5/1/2006
10/23/2007
11/3/2008
1/2/2009
1/1/2010
Expiration
Date
3/30/2009
5/1/2009
5/1/2009
10/23/2009
12/31/2009
5/1/2012
5/1/2012
Fair Value at December 31,
2008
$ (540)
(385)
(385)
(1,449)
(1,656)
(478)
(209)
$(5,102)
2007
$ (765)
(486)
(486)
(596)
N/A
N/A
N/A
$(2,333)
Based on our variable-rate debt balances, including the effect of interest rate swap contracts in place, our interest
expense would have increased by $4.8 million in 2008 and $3.0 million in 2007 if short-term interest rates were
1% higher. Interest expense in 2008 was more sensitive to a change in interest rates than 2007 due primarily to
our having a higher average variable-rate debt balance in 2008.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 46
Page 47
management’s report on Internal Control Over Financial Reporting
Management is responsible for establishing and
maintaining adequate internal control over financial
reporting, and for performing an assessment of the
effectiveness of internal control over financial report-
ing as of December 31, 2008. Internal control over
financial reporting is a process designed to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles. Our internal
control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of finan-
cial statements in accordance with generally accepted
accounting principles, and that our receipts and
expenditures are being made only in accordance
with authorizations of our management and trustees;
and (iii) provide reasonable assurance regarding preven-
tion or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a
material effect on the financial statements. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may
become inadequate because of changes in conditions,
or that the degree of compliance with the policies or
procedures may deteriorate.
Management performed an assessment of the
effectiveness of our internal control over financial
reporting as of December 31, 2008 based upon criteria
in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our assess-
ment, management determined that our internal
control over financial reporting was effective as of
December 31, 2008 based on the criteria in Internal
Control—Integrated Framework issued by the COSO.
The effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008
has been audited by PricewaterhouseCoopers LLP,
an independent registered public accounting firm,
as stated in their report which appears herein.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 46
Page 47
report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
Corporate Office Properties Trust:
In our opinion, the accompanying consolidated
financial statements present fairly, in all material
respects, the financial position of Corporate Office
Properties Trust and its subsidiaries at December 31,
2008 and December 31, 2007, and the results of their
operations and their cash flows for each of the three
years in the period ended December 31, 2008 in
conformity with accounting principles generally
accepted in the United States of America. Also in
our opinion, the Company maintained, in all material
respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s
management is responsible for these financial state-
ments, for maintaining effective internal control over
financial reporting and for its assessment of the effec-
tiveness of internal control over financial reporting,
included in the accompanying “Management’s Report
on Internal Control over Financial Reporting.” Our
responsibility is to express opinions on these financial
statements, and on the Company’s internal control
over financial reporting based on our integrated audits.
We conducted our audits in accordance with the stan-
dards of the Public Company Accounting Oversight
Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are
free of material misstatement and whether effective
internal control over financial reporting was maintained
in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used
and significant estimates made by management, and
evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting
included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing
such other procedures as we considered necessary in
the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes
in accordance with generally accepted accounting
principles. A company’s internal control over financial
reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reason-
able detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements
in accordance with generally accepted accounting
prin ciples, and that receipts and expenditures of the
company are being made only in accordance with
authorizations of management and directors of the com-
pany; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acqui-
sition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk
that controls may become inadequate because of
changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Baltimore, Maryland
February 27, 2009
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 48
Page 49
consolidated balance sheets
(Dollars in thousands)
ASSETS
Properties, net:
Operating properties, net
Projects under construction or development
Property held for sale
Total properties, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Deferred rent receivable
Intangible assets on real estate acquisitions, net
Deferred charges, net
Prepaid expenses and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EqUITY
Liabilities:
Mortgage and other loans payable
3.5% Exchangeable Senior Notes
Accounts payable and accrued expenses
Rents received in advance and security deposits
Dividends and distributions payable
Deferred revenue associated with acquired operating leases
Distributions in excess of investment in unconsolidated real estate joint venture
Other liabilities
Total liabilities
Minority interests:
Common units in the Operating Partnership
Preferred units in the Operating Partnership
Other consolidated real estate joint ventures
Total minority interests
Commitments and contingencies (Note 18)
Shareholders’ equity:
Preferred Shares of beneficial interest with an aggregate liquidation preference
of $216,333 at December 31, 2008 and 2007 (Note 11)
Common Shares of beneficial interest ($0.01 par value; 75,000,000
shares authorized, shares issued and outstanding of 51,790,442 at
December 31, 2008 and 47,366,475 at December 31, 2007)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2008
2007
$ 2,283,806
493,083
—
$ 2,192,939
396,012
14,988
2,776,889
6,775
13,745
13,684
64,131
91,848
52,006
93,789
2,603,939
24,638
15,121
24,831
53,631
108,661
49,051
51,981
$ 3,112,867
$ 2,931,853
$ 1,704,123
162,500
93,625
30,464
25,794
10,816
4,770
9,596
$ 1,625,842
200,000
75,535
31,234
22,441
11,530
4,246
8,288
2,041,688
1,979,116
118,810
8,800
10,255
137,865
114,127
8,800
7,168
130,095
81
81
518
1,091,890
(154,426)
(4,749)
474
950,615
(126,156)
(2,372)
933,314
822,642
$ 3,112,867
$ 2,931,853
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 48
Page 49
consolidated statements of operations
(Dollars in thousands, except per share data)
Revenues
Rental revenue
Tenant recoveries and other real estate operations revenue
Construction contract revenues
Other service operations revenues
Total revenues
Expenses
Property operating expenses
Depreciation and other amortization associated with
real estate operations
Construction contract expenses
Other service operations expenses
General and administrative expenses
Total operating expenses
Operating income
Interest expense
Interest and other income
Gain on early extinguishment of debt
Income from continuing operations before equity in loss of
unconsolidated entities, income taxes and minority interests
Equity in loss of unconsolidated entities
Income tax expense
Income from continuing operations before minority interests
Minority interests in income from continuing operations
Common units in the Operating Partnership
Preferred units in the Operating Partnership
Other
Income from continuing operations
Discontinued operations, net of minority interests and taxes
Income before gain on sales of real estate
Gain on sales of real estate, net of minority interests and taxes
Net income
Preferred share dividends
Issuance costs associated with redeemed preferred shares
For the Years Ended December 31,
2008
2007
2006
$ 336,942
62,691
186,608
1,777
$ 314,696
51,218
37,074
4,151
$ 253,021
38,423
52,182
7,902
588,018
407,139
351,528
141,139
123,258
93,088
102,720
182,111
2,031
25,329
104,700
35,723
4,070
21,704
76,344
49,961
7,384
18,048
453,330
289,455
244,825
134,688
(83,646)
2,070
10,376
117,684
(85,576)
3,030
—
106,703
(72,984)
1,077
—
63,488
(147)
(201)
35,138
(224)
(569)
34,796
(92)
(887)
63,140
34,345
33,817
(6,772)
(660)
(56)
55,652
2,179
57,831
837
58,668
(16,102)
—
(2,793)
(660)
122
31,014
2,210
33,224
1,560
34,784
(16,068)
—
(3,218)
(660)
136
30,075
18,420
48,495
732
49,227
(15,404)
(3,896)
Net income available to common shareholders
$ 42,566
$ 18,716
$ 29,927
Basic earnings per common share
Income from continuing operations
Discontinued operations
Net income available to common shareholders
Diluted earnings per common share
Income from continuing operations
Discontinued operations
Net income available to common shareholders
Dividends declared per common share
See accompanying notes to consolidated financial statements.
$
0.84
0.04
$
0.35
0.05
$
0.28
0.44
$
0.88
$
0.40
$
0.72
$
0.83
0.04
$
0.35
0.04
$
0.27
0.42
$
0.87
$
0.39
$
0.69
$ 1.425
$ 1.300
$ 1.180
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 50
Page 51
consolidated statements of shareholders’ equity
(Dollars in thousands)
Balance at December 31, 2005
Preferred
Shares
Common
Shares
Additional
Paid-in
Capital
Cumulative
Distributions
in Excess of
Net Income
Accumulated
Other
Comprehensive
Loss
Total
(39,927,316 common shares outstanding)
$ 67
$ 399
$
650,226
$ (67,697)
$ (482)
$ 582,513
Conversion of common units to common shares
(245,793 shares)
Common shares issued to the public (2,000,000 shares)
Series J Preferred Shares issued to the public
(3,390,000 shares)
Series E Preferred Shares redemption
Series F Preferred Shares redemption
Decrease in fair value of derivatives
Reversal of unearned restricted common share grants
upon adoption of SFAS 123(R)
Exercise of share options (581,932 shares)
Share-based compensation
Adjustments to minority interests resulting
from changes in ownership of Operating
Partnership by COPT
Increase in tax benefit from share-based compensation
Net income
Dividends
Balance at December 31, 2006
(42,897,639 common shares outstanding)
Conversion of common units to common shares
(554,221 shares)
Common shares issued in connection with acquisition of
properties, net of transaction costs (3,161,000 shares)
Series K Preferred Shares issued in connection with
acquisition of properties, net of transaction costs
(531,667 shares)
Exercise of share options (620,858 shares)
Share-based compensation
Restricted common share redemptions (6,685 shares)
Adjustments to minority interests resulting
from changes in ownership of Operating
Partnership by COPT
Decrease in fair value of derivatives
Net income
Dividends
Balance at December 31, 2007
(47,366,475 common shares outstanding)
Conversion of common units to common shares
(258,917 shares)
Common shares issued to the public (3,737,500 shares)
Exercise of share options (180,239 shares)
Share-based compensation
Restricted common share redemptions (61,258 shares)
Adjustments to minority interests resulting
from changes in ownership of Operating
Partnership by COPT
Decrease in fair value of derivatives
Increase in tax benefit from share-based compensation
Net income
Dividends
Balance at December 31, 2008
—
—
34
(11)
(14)
—
—
—
—
—
—
—
—
76
—
—
5
—
—
—
—
—
—
—
81
—
—
—
—
—
—
—
—
—
—
3
20
—
—
—
—
1
6
—
—
—
—
—
11,075
82,413
81,823
(28,739)
(35,611)
—
1,944
6,761
3,833
(16,255)
562
—
—
—
—
—
—
—
—
—
—
—
—
—
49,227
(65,071)
—
—
—
—
—
(211)
—
—
—
—
—
—
—
11,078
82,433
81,857
(28,750)
(35,625)
(211)
1,945
6,767
3,833
(16,255)
562
49,227
(65,071)
429
758,032
(83,541)
(693)
674,303
6
32
—
6
1
—
—
—
—
—
25,402
156,619
26,562
7,470
6,642
(351)
—
—
—
—
—
—
—
—
—
—
—
—
(29,761)
—
—
—
—
—
34,784
(77,399)
—
(1,679)
—
—
25,408
156,651
26,567
7,476
6,643
(351)
(29,761)
(1,679)
34,784
(77,399)
474
950,615
(126,156)
(2,372)
822,642
3
37
2
2
—
—
—
—
—
—
7,505
138,886
2,833
9,034
(1,320)
—
—
—
—
—
—
—
—
—
—
(16,716)
—
1,053
—
—
—
—
—
58,668
(86,938)
—
(2,377)
—
—
—
7,508
138,923
2,835
9,036
(1,320)
(16,716)
(2,377)
1,053
58,668
(86,938)
(51,790,442 common shares outstanding)
$ 81
$ 518
$ 1,091,890
$(154,426)
$(4,749)
$ 933,314
See accompanying notes to consolidated financial statements.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 50
Page 51
consolidated statements of cash flows
(Dollars in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests
Depreciation and other amortization
Amortization of deferred financing costs
Amortization of deferred market rental revenue
Gain on sales of real estate
Other gain on sales
Gain on redemption of 3.5% Exchangeable Senior Notes
Share-based compensation
Excess income tax benefits from share-based compensation
Other
Changes in operating assets and liabilities:
Increase in deferred rent receivable
Decrease (increase) in accounts receivable
Increase in restricted cash and prepaid and other assets
Increase (decrease) in accounts payable, accrued expenses,
and other liabilities
(Decrease) increase in rents received in advance and security deposits
Net cash provided by operating activities
Cash flows from investing activities
Purchases of and additions to commercial real estate properties
Proceeds from sales of properties
Proceeds from sale of non-real estate investment
Mortgage loan receivable funded
Proceeds from sale of unconsolidated real estate joint venture
Acquisition of partner interests in consolidated joint ventures
Leasing costs paid
(Increase) decrease in restricted cash associated with investing activities
Purchases of furniture, fixtures and equipment
Other
Net cash used in investing activities
Cash flows from financing activities
Proceeds from mortgage and other loans payable
Proceeds from 3.5% Exchangeable Senior Notes
Repayments of debt
Balloon payments
Scheduled principal amortization
Repurchase of 3.5% Exchangeable Senior Notes
Deferred financing costs paid
Net proceeds from issuance of common shares
Net proceeds from issuance of preferred shares
Redemption of preferred shares
Dividends paid
Distributions paid
Excess income tax benefits from share-based compensation
Restricted share redemptions
Other
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2008
2007
2006
$
58,668 $ 34,784 $ 49,227
8,147
104,968
3,955
(2,064)
(4,208)
(49)
(10,376)
9,036
(1,053)
(999)
4,220
107,625
3,676
(1,985)
(6,979)
(1,033)
—
6,643
—
(546)
7,800
80,074
2,981
(1,904)
(17,920)
—
—
3,833
(562)
(157)
(10,594)
11,128
(15,061)
(11,988)
1,544
(5,040)
(10,004)
(10,844)
(7,098)
31,136
(770)
(3,250)
10,030
13,544
4,181
181,864
137,701
113,151
(279,959)
33,412
91
(25,251)
—
(115)
(7,670)
(842)
(3,581)
(6,227)
(352,427)
21,684
2,526
—
—
(1,262)
(12,182)
16,018
(1,663)
(408)
(282,099)
46,704
—
—
1,524
(5,250)
(10,480)
5,260
(8,109)
(1,384)
(290,142)
(327,714)
(253,834)
1,080,999
—
867,842
673,176
— 200,000
(988,945)
(13,668)
(26,890)
(6,461)
141,758
—
—
(83,753)
(12,002)
1,053
(1,320)
(356)
(743,274)
(559,467)
(19,316)
(19,928)
—
—
(6,605)
(4,171)
89,202
7,446
81,857
—
— (64,375)
(62,845)
(10,422)
562
—
(138)
(74,277)
(11,188)
—
(351)
822
90,415
206,728
137,822
(17,863)
16,715
(2,861)
24,638
7,923
10,784
$
6,775 $ 24,638 $
7,923
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 52
Page 53
notes to consolidated financial statements
(Dollars in thousands, except per share data)
1. organiZation and business
Corporate Office Properties Trust (“COPT”) and
subsidiaries (collectively, the “Company”) is a fully-
integrated and self-managed real estate investment
trust (“REIT”) that focuses primarily on strategic
customer relationships and specialized tenant require-
ments in the United States Government, defense
information technology and data sectors. We acquire,
develop, manage and lease properties that are typically
concentrated in large office parks primarily located
adjacent to government demand drivers and/or in
demographically strong markets possessing growth
opportunities. As of December 31, 2008, our invest-
ments in real estate included the following:
• 238 wholly owned operating properties totaling
18.5 million square feet;
• 14 wholly owned properties under construction or
development that we estimate will total approxi-
mately 1.6 million square feet upon completion;
• wholly owned land parcels totaling 1,611 acres
that we believe are potentially developable into
approximately 14.0 million square feet; and
• partial ownership interests in a number of
other real estate projects in operations, under
construction or redevelopment or held for
future development.
We conduct almost all of our operations through our
operating partnership, Corporate Office Properties, L.P.
(the “Operating Partnership”), for which we are the
managing general partner. The Operating Partnership
owns real estate both directly and through subsidiary
partnerships and limited liability companies (“LLCs”).
A summary of our Operating Partnership’s forms of
ownership and the percentage of those ownership
forms owned by COPT as of December 31, 2008
and 2007 follows:
Common Units
Series G Preferred Units
Series H Preferred Units
Series I Preferred Units
Series J Preferred Units
Series K Preferred Units
December 31,
2008
2007
86% 85%
100% 100%
100% 100%
0%
0%
100% 100%
100% 100%
Three of our trustees controlled, either directly or
through ownership by other entities or family members,
an additional 12% of the Operating Partnership’s
common units.
In addition to owning real estate, the Operating
Partnership also owns 100% of a number of entities
that provide real estate services such as property
management, construction and development and
heating and air conditioning services primarily for
our properties but also for third parties.
2. summary of signifiCant
aCCounting PoliCies
Basis of Presentation
The consolidated financial statements include the
accounts of COPT, the Operating Partnership, their
subsidiaries and other entities in which we have a
majority voting interest and control. We also consoli-
date certain entities when control of such entities can
be achieved through means other than voting rights
(“variable interest entities” or “VIEs”) if we are deemed
to be the primary beneficiary of such entities. We
eliminate all significant intercompany balances and
transactions in consolidation.
We use the equity method of accounting when we
own an interest in an entity and can exert significant
influence over the entity’s operations but cannot control
the entity’s operations. We use the cost method of
accounting when we own an interest in an entity and
cannot exert significant influence over its operations.
Use of Estimates in the Preparation
of Financial Statements
We make estimates and assumptions when preparing
financial statements under generally accepted account-
ing principles (“GAAP”). These estimates and assump-
tions affect various matters, including:
• the reported amounts of assets and liabilities in
our Consolidated Balance Sheets at the dates of
the financial statements;
• the disclosure of contingent assets and liabilities
at the dates of the financial statements; and
• the reported amounts of revenues and expenses
in our Consolidated Statements of Operations
during the reporting periods.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 52
Page 53
Significant estimates are inherent in the presentation of
our financial statements in a number of areas, including
the evaluation of the collectability of accounts and
notes receivable, the allocation of real estate acquisi-
tion costs, the determination of estimated useful lives
of assets, the evaluation of impairment of long-lived
assets and the level of expense recognized in connec-
tion with share-based compensation. Actual results
could differ from these and other estimates.
Acquisitions of Real Estate
We allocate the purchase price of acquired properties
to tangible and identified intangible assets based on
their relative fair values at the date of acquisition. In
making estimates of fair values for purposes of allocating
a purchase price, we use a number of sources, including
independent appraisals that may be obtained in connec-
tion with the acquisition or financing of the respective
property and other market data. We allocate the costs
of real estate acquisitions to the following components:
• properties based on a valuation of the acquired
property performed with the assumption that
the property is vacant upon acquisition (the
“if-vacant value”). The if-vacant value is allocated
between land, buildings, tenant improvements
and equipment based on our estimates of the
relative fair values;
• above-market and below-market lease intangible
assets or liabilities based on the present value
(using an interest rate which reflects the risks
associated with the leases acquired) of the
difference between (i) the contractual amounts
to be received pursuant to the in-place leases
and (ii) our estimate of fair market lease rates
for the corresponding space, measured over a
period equal to the remaining non-cancelable
term of the lease (including those under bargain
renewal options). The capitalized above- and
below-market lease values are amortized as
adjustments to rental revenue over the remaining
terms of the respective leases (including periods
under bargain renewal options);
• in-place lease value based on our estimates of
carrying costs during the expected lease-up
periods and costs to execute similar leases. Our
estimate of carrying costs includes real estate
taxes, insurance and other operating expenses
and lost rentals during the expected lease-up
periods considering current market conditions.
Our estimate of costs to execute similar leases
includes leasing commissions, legal and other
related costs;
• tenant relationship value based on our evaluation
of the specific characteristics of each tenant’s
lease and our overall relationship with that
respective tenant. Characteristics we consider in
determining these values include the nature and
extent of our existing business relationships with
the tenant, growth prospects for developing new
business with the tenant, the tenant’s credit
quality and expectations of lease renewals,
among other factors; and
• market concentration premium based on our
estimate of the additional amount that we pay
for a property over the fair value of assets in
connection with our strategy of increasing our
presence in regional submarkets.
Properties
We report properties to be developed or held and
used in operations at our depreciated cost, reduced for
impairment losses, where appropriate. The amounts
reported for our properties include our costs of:
• acquisitions;
• development and construction;
• building and land improvements; and
• tenant improvements paid by us.
We capitalize interest expense, real estate taxes,
direct internal labor (including allocable overhead
costs) and other costs associated with real estate
undergoing construction and development activities
to the cost of such activities. The preconstruction
stage of development of an operating property (or
an expansion of an existing property) includes efforts
and related costs to secure land control and zoning,
evaluate feasibility and complete other initial tasks
which are essential to development. We continue to
capitalize these costs while construction and develop-
ment activities are underway until a property becomes
“operational,” which occurs upon the earlier of when
leases commence on space or one year after the cessa-
tion of major construction activities. When leases
commence on portions of a newly-constructed
property’s space in the period prior to one year
from the cessation of major construction activities,
we consider that property to be “partially operational.”
When a property is partially operational, we allocate
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 54
Page 55
notes continued
the costs associated with the property between the
portion that is operational and the portion under
construction. We start depreciating newly-constructed
properties as they become operational.
We depreciate our assets evenly over their estimated
useful lives as follows:
• Buildings and
10–40 years
building improvements
• Land improvements
10–20 years
• Tenant improvements
on operating properties
• Equipment and
personal property
Related lease terms
3–10 years
If events or circumstances indicate that a property
to be held and used may be impaired, we perform a
recoverability analysis based on the estimated undis-
counted cash flows to be generated by the property.
If the analysis indicates that the carrying value of the
property is not recoverable from future cash flows, the
property is written down to fair value and an impair-
ment loss is recognized. Fair values are determined
based on appraisals and/or estimated future cash flows
using appropriate discount and capitalization rates.
When we determine that a real estate asset will be held
for sale, we discontinue the recording of depreciation
expense of the asset and estimate the sales price, net
of selling costs; if we then determine that the estimated
sales price, net of selling costs, is less than the net book
value of the asset, we recognize an impairment loss
equal to the difference and reduce the carrying
amounts of assets.
When we sell an operating property, or determine that
an operating property is held for sale, and determine
that we have no significant continuing involvement in
such property, we classify the results of operations for
such property as discontinued operations. Interest
expense that is specifically identifiable to properties
included in discontinued operations is used in the
computation of interest expense attributable to dis-
continued operations. When properties classified as
discontinued operations are included in computations
that determine the amount of our borrowing capacity
under certain debt instruments (including our Revolving
Credit Facility), we allocate a portion of such debt
instruments’ interest expense to discontinued operations;
we compute this allocation based on the percentage
that the related properties represent of all properties
included in determining the amount of our borrowing
capacity under such debt instruments.
We expense property maintenance and repair costs
when incurred.
Sales of Interests in Real Estate
We recognize gains from sales of interests in real
estate using the full accrual method, provided that
various criteria relating to the terms of sale and any
subsequent involvement by us with the real estate sold
are met. We recognize gains relating to transactions
that do not meet the requirements of the full accrual
method of accounting when the full accrual method
of accounting criteria are met.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid
investments that mature three months or less from when
they are purchased. Cash equivalents are reported at
cost, which approximates fair value. We maintain our
cash in bank accounts in amounts that may exceed
Federally insured limits at times. We have not experi-
enced any losses in these accounts in the past and
believe that we are not exposed to significant credit
risk because our accounts are deposited with major
financial institutions.
Accounts Receivable
Our accounts receivable are reported net of an
allowance for bad debts of $1,455 at December 31,
2008 and $448 at December 31, 2007. We use judg-
ment in estimating the uncollectability of our accounts
receivable based primarily upon the payment history
and credit status of the entities associated with the
individual accounts.
Revenue Recognition
We recognize minimum rental revenue on a straight-line
basis over the non-cancelable term of tenant leases. The
non-cancelable term of a lease includes periods when
a tenant: (1) may not terminate its lease obligation
early; or (2) may terminate its lease obligation early in
exchange for a fee or penalty that we consider material
enough such that termination would not be probable.
We report the amount by which our minimum rental
revenue recognized on a straight-line basis under
leases exceeds the contractual rent billings associated
with such leases as deferred rent receivable on our
Consolidated Balance Sheets.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 54
Page 55
We recognize tenant recovery revenue in the same
periods in which we incur the related expenses. Tenant
recovery revenue includes payments from tenants as
reimbursement for property taxes, utilities and other
property operating expenses.
We recognize fees received for lease terminations
as revenue and write off against such revenue any
(1) deferred rents receivable and (2) deferred revenue
and intangible assets that are amortizable into rental
revenue associated with the leases; the resulting net
amount is the net revenue from the early termination
of the leases. When a tenant’s lease for space in a
property is terminated early but the tenant continues
to lease such space under a new or modified lease in
the property, the net revenue from the early termina-
tion of the lease is generally recognized evenly over
the remaining life of the new or modified lease in
place on that property.
We recognize fees for services provided by us
once services are rendered, fees are determinable and
collectability is assured. We recognize revenue under
construction contracts using the percentage of com-
pletion method when the revenue and costs for such
contracts can be estimated with reasonable accuracy;
when these criteria do not apply to a contract, we
recognize revenue on that contract using the com-
pleted contract method. Under the percentage of
completion method, we recognize a percentage of the
total estimated revenue on a contract based on the cost
of services provided on the contract as of a point in time
relative to the total estimated costs on the contract.
Intangible Assets and Deferred Revenue
on Real Estate Acquisitions
We capitalize intangible assets and deferred revenue
on real estate acquisitions as described in the section
above entitled “Acquisitions of Real Estate.” We amortize
the intangible assets and deferred revenue as follows:
• Above- and
Related lease terms
below-market leases
• In-place lease assets
Related lease terms
• Tenant relationship value
Estimated period
of time that tenant
will lease space
in property
• Market concentration
40 years
premium
We recognize the amortization of acquired above-market
and below-market leases as adjustments to rental reve-
nue; we refer to this amortization as amortization of
deferred market rental revenue. We recognize the
amortization of other intangible assets on real estate
acquisitions as amortization expense.
Deferred Charges
We defer costs that we incur to obtain new tenant
leases or extend existing tenant leases. We amortize
these costs evenly over the lease terms. When tenant
leases are terminated early, we expense any unamortized
deferred leasing costs associated with those leases.
We also defer costs for long-term financing arrangements
and recognize these costs as interest expense over the
related loan terms on a straight-line basis, which approxi-
mates the amortization that would occur under the
effective interest method of amortization. We expense
any unamortized loan costs when loans are retired early.
When the costs of acquisitions exceed the fair value of
tangible and identifiable intangible assets and liabilities,
we record goodwill in connection with such acquisi-
tions. We test goodwill annually for impairment and
in interim periods if certain events occur indicating
that the carrying value of goodwill may be impaired.
We recognize an impairment loss when the discounted
expected future cash flows associated with the related
reporting unit are less than its unamortized cost.
Derivatives
We are exposed to the effect of interest rate changes
in the normal course of business. We use interest rate
swap, interest rate cap and forward starting swap
agreements in order to attempt to reduce the impact
of such interest rate changes. Interest rate differentials
that arise under interest rate swap and interest rate cap
contracts are recognized in interest expense over the
life of the respective contracts. Interest rate differen-
tials that arise under forward starting swaps are recog-
nized in interest expense over the life of the respective
loans for which such swaps are obtained. We do not use
such derivatives for trading or speculative purposes.
We manage counter-party risk by only entering into
contracts with major financial institutions based upon
their credit ratings and other risk factors.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 56
Page 57
notes continued
The Operating Partnership has 352,000 Series I
Preferred Units issued to an unrelated party that have
a liquidation preference of $25.00 per unit, plus any
accrued and unpaid distributions of return thereon
(as described below), and may be redeemed for cash
by the Operating Partnership at our option any time
after September 22, 2019. The owner of these units is
entitled to a priority annual cumulative return equal
to 7.5% of their liquidation preference through
September 22, 2019; the annual cumulative preferred
return increases for each subsequent five-year period,
subject to certain maximum limits. These units are con-
vertible into common units on the basis of 0.5 common
units for each Series I Preferred Unit; the resulting
common units would then be exchangeable for common
shares in accordance with the terms of the Operating
Partnership’s agreement of limited partnership.
Earnings Per Share (“EPS”)
We present both basic and diluted EPS. We compute
basic EPS by dividing net income available to common
shareholders by the weighted average number of
common shares outstanding during the year. Our
computation of diluted EPS is similar except that:
• the denominator is increased to include: (1) the
weighted average number of potential additional
common shares that would have been outstanding
if securities that are convertible into our common
shares were converted; and (2) the effect of dilu-
tive potential common shares outstanding during
the period attributable to share-based compensa-
tion using the treasury stock method; and
• the numerator is adjusted to add back any
convertible preferred dividends and any other
changes in income or loss that would result from
the assumed conversion into common shares
that we added to the denominator.
We recognize all derivatives as assets or liabilities in
the balance sheet at fair value with the offset to:
• the accumulated other comprehensive loss
component of shareholders’ equity (“AOCL”),
net of the share attributable to minority interests,
for any derivatives designated as cash flow
hedges to the extent such derivatives are
deemed effective in hedging risks (risk in
the case of our existing derivatives being
defined as changes in interest rates);
• interest expense on our Statements of Operations
for any derivatives designated as cash flow hedges
to the extent such derivatives are deemed ineffec-
tive in hedging risks; or
• other revenue on our Statements of Operations
for any derivatives designated as fair value hedges.
We use standard market conventions and techniques
such as discounted cash flow analysis, option pricing
models, replacement cost and termination cost
in computing the fair value of derivatives at each
balance sheet date.
Minority Interests
As discussed previously, we consolidate the accounts of
our Operating Partnership and its subsidiaries into our
financial statements. However, we do not own 100%
of the Operating Partnership. We also do not own
100% of certain consolidated real estate joint ventures.
The amounts reported for minority interests on our
Consolidated Balance Sheets represent the portion of
these consolidated entities’ equity that we do not own.
The amounts reported for minority interests on our
Consolidated Statements of Operations represent the
portion of these consolidated entities’ net income not
allocated to us.
Common units of the Operating Partnership (“common
units”) are substantially similar economically to our
common shares of beneficial interest (“common shares”).
Common units not owned by us are also exchangeable
into our common shares, subject to certain conditions.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 56
Page 57
Our computation of diluted EPS does not assume conversion of securities into our common shares if conversion
of those securities would increase our diluted EPS in a given year. A summary of the numerator and denominator
for purposes of basic and diluted EPS calculations is set forth below (in thousands, except per share data):
Numerator:
Income from continuing operations
Add: Gain on sales of real estate, net
Less: Preferred share dividends
Less: Issuance costs associated with redeemed preferred shares
Numerator for basic and diluted EPS from continuing operations
Add: Income from discontinued operations, net
For the Years Ended December 31,
2008
2007
2006
$ 55,652
837
(16,102)
—
$ 31,014
1,560
(16,068)
—
$ 30,075
732
(15,404)
(3,896)
40,387
2,179
16,506
2,210
11,507
18,420
Numerator for basic and diluted EPS on net income available to common shareholders
$ 42,566
$ 18,716
$ 29,927
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
Dilutive effect of share-based compensation awards
Denominator for diluted EPS
Basic EPS:
Income from continuing operations
Income from discontinued operations
Net income available to common shareholders
Diluted EPS:
Income from continuing operations
Income from discontinued operations
Net income available to common shareholders
Our diluted EPS computations do not include the
effects of the following securities since the conversions
of such securities would increase diluted EPS for the
respective periods:
Weighted Average Shares
Excluded from
Denominator for the Years
Ended December 31,
2008
2007
2006
Conversion of common units 8,107
Conversion of convertible
preferred units
Conversion of convertible
preferred shares
Anti-dilutive share-based
compensation awards
1,142
176
434
8,296
8,511
176
425
695
176
N/A
387
48,132
733
48,865
46,527
1,103
47,630
41,463
1,799
43,262
$
0.84
0.04
$
0.35
0.05
$
0.28
0.44
$
0.88
$
0.40
$
0.72
$
0.83
0.04
$
0.35
0.04
$
0.27
0.42
$
0.87
$
0.39
$
0.69
As discussed in Note 9, the Operating Partnership
has outstanding 3.50% Exchangeable Senior Notes
that are due in 2026. The notes have an exchange
settlement feature that provides that the notes may,
under certain circumstances, be exchangeable for cash
(up to the principal amount of the notes) and, with
respect to any excess exchange value, may be exchange-
able into (at our option) cash, our common shares or
a combination of cash and our common shares at an
exchange rate of 18.6947 shares per one thousand
dollar principal amount of the notes (exchange rate is
as of December 31, 2008 and is equivalent to an
exchange price of $53.49 per common share). The
Exchangeable Senior Notes did not affect our diluted
EPS reported above since the weighted average
closing price of our common shares during each
of the periods was less than the exchange price per
common share applicable for such periods.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 58
Page 59
notes continued
Share-Based Compensation
Fair Value of Financial Instruments
We have historically issued two forms of share-based
compensation: options to purchase common shares
(“options”) and restricted common shares (“restricted
shares”). We account for our share-based compensa-
tion in accordance with Statement of Financial
Accounting Standards No. 123(R), “Share-Based
Payment” (“SFAS 123(R)”). SFAS 123(R) establishes
standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods
or services, focusing primarily on accounting for trans-
actions in which an entity obtains employee services
in share-based payment transactions. The statement
requires us to measure the cost of employee services
received in exchange for an award of equity instruments
based generally on the fair value of the award on the
grant date; such cost is then recognized over the period
during which the employee is required to provide
service in exchange for the award (generally the vesting
period). No compensation cost is recognized for
equity instruments for which employees do not render
the requisite service. SFAS 123(R) also requires that
share-based compensation be computed based on
awards that are ultimately expected to vest; as a result,
future forfeitures of awards are estimated at the time of
grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. We
capitalize costs associated with share-based compensa-
tion attributable to employees engaged in construction
and development activities.
When we adopted SFAS 123(R), we elected to adopt
the alternative transition method for calculating the tax
effects of share-based compensation. The alternative
transition method enabled us to use a simplified method
to establishing the beginning balance of the additional
paid-in capital pool related to the tax effects of employee
share-based compensation, which was available to
absorb tax deficiencies recognized subsequent to the
adoption of SFAS 123(R).
We compute the fair value of share options under
SFAS 123(R) using the Black-Scholes option-pricing
model. Under that model, the risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the
time of grant. The expected option life is based on our
historical experience of employee exercise behavior.
Expected volatility is based on historical volatility of our
common shares. Expected dividend yield is based on
the average historical dividend yield on our common
shares over a period of time ending on the grant date
of the options.
In September 2006, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a frame-
work for measuring fair value in generally accepted
accounting principles and expands disclosures about fair
value measurements. The Statement does not require
or permit any new fair value measurements but does
apply under other accounting pronouncements that
require or permit fair value measurements. The changes
to current practice resulting from the Statement relate
to the definition of fair value, the methods used to
measure fair value and the expanded disclosures about
fair value measurements. With respect to SFAS 157,
the FASB also issued FASB Staff Position SFAS 157-1,
“Application of FASB Statement No. 157 to FASB State-
ment No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13”
(“FSP FAS 157-1”) and FASB Staff Position SFAS 157-2,
“Effective Date of FASB Statement No. 157” (“FSP FAS
157-2”). FSP FAS 157-1 amends SFAS 157 to exclude
from the scope of SFAS 157 certain leasing transactions
accounted for under Statement of Financial Accounting
Standards No. 13, “Accounting for Leases.” FSP FAS
157-2 amends SFAS 157 to defer the effective date of
SFAS 157 for all non-financial assets and non-financial
liabilities except those that are recognized or disclosed
at fair value in the financial statements on a recurring
basis to fiscal years beginning after November 15, 2008.
Effective January 1, 2008, we adopted, on a prospective
basis, the portions of SFAS 157 not deferred by FSP
FAS 157-2; this adoption did not have a material effect
on our financial position, results of operations or cash
flows. We do not expect that the adoption of SFAS 157
for our non-financial assets and non-financial liabilities
on January 1, 2009 will have a material effect on our
financial position, results of operations or cash flows.
We also adopted FASB Staff Position SFAS 157-3,
“Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active” (“FSP
FAS-157-3”), effective upon its issuance by the FASB
on October 10, 2008. The adoption of FSP FAS-157-3
did not have a material effect on our financial position,
results of operations or cash flows.
Under SFAS 157, fair value is defined as the exit
price, or the amount that would be received upon
sale of an asset or paid to transfer a liability in an
orderly transaction between market participants as
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 58
Page 59
of the measurement date. SFAS 157 also establishes
a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that
the most observable inputs be used when available.
Observable inputs are inputs market participants would
use in valuing the asset or liability developed based
on market data obtained from sources independent
of us. Unobservable inputs are inputs that reflect
our assumptions about the factors market participants
would use in valuing the asset or liability developed
based upon the best information available in the
circum stances. The hierarchy of these inputs is broken
down into three levels: Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities; Level 2 inputs include (1) quoted prices for
similar assets or liabilities in active markets, (2) quoted
prices for identical or similar assets or liabilities in
markets that are not active and (3) inputs (other than
quoted prices) that are observable for the asset or
liability, either directly or indirectly; and Level 3
inputs are unobservable inputs for the asset or liability.
Categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the
fair value measurement.
The assets held in connection with our non-qualified
elective deferred compensation plan and the corre-
sponding liability to the participants are measured at
fair value on a recurring basis on our consolidated bal-
ance sheet using quoted market prices. The assets are
treated as trading securities for accounting purposes
and included in restricted cash on our consolidated
balance sheet. The offsetting liability is adjusted to
fair value at the end of each accounting period based
on the fair value of the plan assets and reported in
other liabilities in our consolidated balance sheet. The
assets and corresponding liability of our non-qualified
elective deferred compensation plan are classified in
Level 1 of the fair value hierarchy.
The valuation of our derivatives is determined using
widely accepted valuation techniques, including dis-
counted cash flow analysis on the expected cash flows
of each derivative. This analysis reflects the contractual
terms of the derivatives, including the period to matu-
rity, and uses observable market-based inputs, including
interest rate market data and implied volatilities in such
interest rates. While we determined that the majority
of the inputs used to value our derivatives fall within
Level 2 of the fair value hierarchy under SFAS 157,
the credit valuation adjustments associated with our
derivatives also utilize Level 3 inputs, such as estimates
of current credit spreads to evaluate the likelihood of
default. However, as of December 31, 2008, we
assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of our
derivatives and determined that these adjustments are
not significant to the overall valuation of our deriva-
tives. As a result, we determined that our derivative
valuations in their entirety are classified in Level 2
of the fair value hierarchy.
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring
basis as of December 31, 2008:
Description
Assets:
Deferred compensation plan assets(1)
Liabilities:
Deferred compensation plan liability(2)
Interest rate swap contracts(2)
Liabilities
quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$ 4,549
$ 4,549
—
$ 4,549
$ —
$ —
5,102
$ 5,102
$—
$—
—
$—
Total
$ 4,549
$ 4,549
5,102
$ 9,651
(1) Included in the line entitled “restricted cash” on our Consolidated Balance Sheet.
(2) Included in the line entitled “other liabilities” on our Consolidated Balance Sheet.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 60
Page 61
notes continued
The carrying values of cash and cash equivalents,
restricted cash, accounts receivables, other assets
(excluding mortgage loans receivable) and accounts
payable and accrued expenses are reasonable estimates
of their fair values because of the short maturities of
these instruments. We estimated the fair values of our
mortgage loans receivable by using discounted cash
flow analyses based on an appropriate market rate for a
similar type of instrument. We estimated fair values of
our debt based on quoted market prices for publicly-
traded debt and on the discounted estimated future
cash payments to be made for other debt; the discount
rates used approximate current market rates for loans,
or groups of loans, with similar maturities and credit
quality, and the estimated future payments include
scheduled principal and interest payments. Fair value
estimates are made at a specific point in time, are
subjective in nature and involve uncertainties and
matters of significant judgment. Settlement of such
fair value amounts may not be possible and may not
be a prudent management decision.
For additional fair value information, please refer to
Note 8 for mortgage loans receivable, Note 9 for debt
and Note 10 for derivatives.
Reclassification
We reclassified certain amounts from the prior periods
to conform to the current period presentation of our
Consolidated Financial Statements. These reclassifica-
tions did not affect previously reported consolidated
net income or shareholders’ equity.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”).
SFAS 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value.
Unrea lized gains and losses on items for which
the fair value option has been elected are reported
in earnings. We adopted SFAS 159 on a prospective
basis effective January 1, 2008. Our adoption of
SFAS 159 did not have a material effect on our
financial position, results of operations or cash flows
since we did not elect to apply the fair value option
for any of our eligible financial instruments or other
items on the January 1, 2008 effective date.
In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 141(R), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) requires the
acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed
in the transactions; establishes the acquisition-date fair
value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the informa-
tion they need to evaluate and understand the nature
and financial effect of the business combination. SFAS
141(R) is effective for us beginning on January 1, 2009.
SFAS 141(R) will require us to expense transaction costs
associated with property acquisitions occurring subse-
quent to the pronouncement’s effective date, which is a
significant change since our current practice is to capi-
talize such costs into the cost of the acquisitions. Other
than the effect this change will have in connection with
future acquisitions, we do not believe that our adoption
of SFAS 141(R) will have a material effect on our finan-
cial position, results of operations or cash flows.
In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 160, “Noncon-
trol ling Interests in Consolidated Financial Statements”
(“SFAS 160”). SFAS 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as
equity in the consolidated financial statements. SFAS
160 is effective for us beginning on January 1, 2009.
We believe that SFAS 160 will primarily affect how we
present minority interests on our consolidated balance
sheets, statements of operations and cash flows but will
not otherwise have a material effect on our financial
position, results of operations or cash flows.
In March 2008, the FASB issued Statement of Financial
Accounting Standards No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (“SFAS
161”). This new standard expands the disclosure require-
ments for derivative instruments and for hedging
activities in order to provide users of financial statements
with an enhanced understanding of: (1) how and why an
entity uses derivative instruments; (2) how derivative
instruments and related hedged items are accounted
for under Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities” and its related interpretations;
and (3) how derivative instruments and related hedged
items affect an entity’s financial position, financial per-
formance, and cash flows. SFAS 161 is to be applied
prospectively for the first annual reporting period
beginning on or after November 15, 2008. We believe
that SFAS 160 will lead to additional disclosure regard-
ing derivatives in our notes to future financial statements
but will not otherwise affect our financial position,
results of operations or cash flows.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 60
Page 61
In May 2008, the FASB issued FASB Staff Position No.
APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement)” (“FSP APB-14-1”). FSP APB-14-1
requires that the initial proceeds from convertible debt
instruments that may be settled in cash, including par-
tial cash settlements, be allocated between a liability
component and an equity component associated with
the embedded conversion option. This pronouncement’s
objective is to require the liability and equity compo-
nents of convertible debt to be separately accounted
for in order to enable interest expense to be recorded
at a rate that would reflect the issuer’s conventional
debt borrowing rate (previously, interest expense on
such debt was recorded based on the contractual rate
of interest under the debt). Under this pronouncement,
the liability component is recorded at its fair value, as
calculated based on the present value of its cash flows
discounted using the issuer’s conventional debt borrow-
ing rate. The equity component is recorded based on the
differ ence between the debt proceeds and the fair value
of the liability. The difference between the liability’s
principal amount and fair value is reported as a debt dis-
count and amortized as interest expense over the debt’s
expected life using the effective interest method. The
provisions of FSP APB-14-1 will be effective beginning
January 1, 2009 and are to be applied retrospectively
to all periods presented. While we are in the process of
evaluating FSP APB-14-1, we currently believe that this
pronouncement will affect the accounting for our 3.5%
Exchangeable Senior Notes primarily by: (1) resulting
in our recognition of additional interest expense, net of
capitalized amounts, of approximately $3,200 in 2008,
$3,100 in 2007 and $1,000 in 2006; and (2) decrease
the amount of gain that we recognized on our repur-
chase of a $37,500 aggregate principal amount of such
notes in 2008 by approximately $2,300.
In June 2008, the FASB issued FASB Staff Position
No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are
Participating Securities” (“FSP EITF 03-6-1”). FSP
EITF 03-6-1 requires that all unvested share-based
payment awards that contain nonforfeitable rights to
dividends be considered participating securities and
therefore shall be included in the computation of EPS
pursuant to the two-class method. The two-class method
is an earnings allocation formula that determines EPS for
each class of common shares and participating security
according to dividends declared (or accumulated) and
participation rights in undistributed earnings. FSP EITF
03-6-1 is effective for us beginning January 1, 2009, and
interim periods within that year, and the EPS of prior
periods will be adjusted retrospectively. We believe
that upon our adoption of FSP EITF 03-6-1, we will
be required to include a larger number of shares in our
denominator for EPS attributable to our weighted
average unvested restricted shares outstanding, which
will have a decreasing effect to our EPS; however, we
do not believe that this decreasing effect to our EPS
from the larger number of shares will be material.
3. ConCentration
of rental revenue
We derived large concentrations of our revenue from
real estate operation from certain tenants during the
periods set forth in our Consolidated Statements of
Operations. The following table summarizes the per-
centage of our rental revenue (which excludes tenant
recoveries and other real estate operations revenue)
earned from (1) individual tenants that accounted for
at least 5% of our rental revenue from continuing and
discontinued operations and (2) the aggregate of the
five tenants from which we recognized the most rental
revenue in the respective years:
For the Years Ended
December 31,
2008
2007
2006
United States Government
Northrop Grumman Corporation(1)
Booz Allen Hamilton, Inc.
Five largest tenants
15% 13% 13%
8% 9% N/A
6% 7% 7%
35% 32% 32%
(1) Includes affiliated organizations and agencies and
predecessor companies.
We also derived in excess of 80% of our construction
contract revenue from the United States Government
in each of the years set forth on the Consolidated
Statements of Operations.
In addition, we derived large concentrations of our
total revenue from real estate operations (defined as
the sum of rental revenue and tenant recoveries and
other real estate operations revenue) from certain
geographic regions. These concentrations are set forth
in the segment information provided in Note 15. Several
of these regions, including the Baltimore/Washington
Corridor, Northern Virginia, Suburban Baltimore,
Maryland (“Suburban Baltimore”), Suburban Maryland
and St. Mary’s & King George Counties, are within close
proximity to each other, and all but two of our regions
(Colorado Springs, Colorado (“Colorado Springs”) and
San Antonio, Texas (“San Antonio”)) are located in the
Mid-Atlantic region of the United States.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 62
Page 63
notes continued
As of December 31, 2007, an office property located in
Dayton, New Jersey was classified as held for sale. We
completed the sale of this property on January 31, 2008.
Projects we had under construction or development
consisted of the following:
Land
Construction in progress
December 31,
2008
2007
$ 220,863 $ 214,696
181,316
272,220
$ 493,083 $ 396,012
4. CommerCial real estate
ProPerties
Operating properties consisted of the following:
December 31,
2008
2007
Land
Buildings and improvements
$ 423,985 $ 413,779
2,064,960
2,202,931
Less: accumulated depreciation
2,626,916
(343,110)
2,478,739
(285,800)
$2,283,806 $2,192,939
2008 Acquisitions
We acquired the following office properties in 2008:
Project Name
Location
Date of
Acquisition
Number of
Buildings
3535 Northrop Grumman Point
1560 Cable Ranch Road (Buildings A and B)
Colorado Springs, CO
San Antonio, TX
6/10/2008
6/19/2008
1
2
3
Total
Rentable
Square Feet
124,305
122,975
247,280
Acquisition
Cost
$ 23,240
17,317
$ 40,557
The table below sets forth the allocation of the
acquisition costs of these properties:
Land, operating properties
Building and improvements
Intangible assets on real estate acquisitions
Total assets
Below-market leases
Total acquisition cost
$ 3,396
32,478
7,631
43,505
(2,948)
$ 40,557
Intangible assets recorded in connection with the
above acquisitions included the following:
Weighted
Average
Amortization
Period (in Years)
In-place lease value
Tenant relationship value
$ 6,094
1,537
$ 7,631
10
12
11
We also completed the following acquisitions in 2008:
• a 107-acre land parcel in Frederick, Maryland
that we believe can support approximately 1.0
million developable square feet for $8,703
(Frederick, Maryland is located in our Suburban
Maryland region); and
• land parcels totaling 46 acres located in San
Antonio that we believe can support approximately
750,000 developable square feet for $10,570.
2008 Construction
and Development Activities
During 2008, we had seven newly-constructed buildings
totaling 528,000 square feet (three located in Colorado
Springs and two each in the Baltimore/Washington
Corridor and San Antonio) become fully operational
(89,000 of these square feet were placed into service
in 2007) and placed into service 85,000 square feet in
two partially operational properties (one each located
in Suburban Maryland and Colorado Springs). We also
placed into service 59,000 redeveloped square feet in a
property located in Northern Virginia.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 62
Page 63
As of December 31, 2008, we had construction
underway on four new buildings each in the Baltimore/
Washington Corridor and Colorado Springs and two in
Suburban Maryland (including the 85,000 square feet
in operational properties described above). We also had
development activities underway on three new buildings
in the Baltimore/Washington Corridor and two each
in Suburban Baltimore and San Antonio. In addition,
we had redevelopment underway on one property
located in the Baltimore/Washington Corridor.
2008 Dispositions
We sold the following operating properties in 2008:
Project Name
Location
Date
of Sale
Number of
Buildings
429 Ridge Road
7253 Ambassador Road
47 Commerce Road
Dayton, New Jersey
Woodlawn, Maryland
Cranbury, New Jersey
1/31/2008
6/2/2008
4/1/2008
1
1
1
3
Total
Rentable
Square Feet
142,385
38,930
41,398
222,713
Sale Price
$ 17,000
5,100
3,150
$ 25,250
Gain
on Sale
$ 1,365
1,278
—
$ 2,643
The gain from these sales is included on the line of our
Consolidated Statements of Operations entitled “income
from discontinued operations, net of minority interests.”
During 2008, we also completed the sale of six recently
constructed office condominiums located in Herndon,
Virginia (located in the Northern Virginia region) for
sale prices totaling $8,388 in the aggregate. We recog-
nized an aggregate gain before minority interests and
taxes of $1,368 on these sales, which is included on
the line of our Consolidated Statements of Operations
entitled “gain on sales of real estate, net.”
2007 Acquisitions
On January 9 and 10, 2007, we completed a series
of transactions that resulted in the acquisition of 56
operating properties totaling approximately 2.4 million
square feet and land parcels totaling 187 acres. We refer
to these transactions collectively as the Nottingham
Acquisition. All of the acquired properties are located in
Maryland, with 36 of the operating properties, totaling
1.6 million square feet, and land parcels totaling 175
acres, located in White Marsh, Maryland (located in the
Suburban Baltimore region and the remaining properties
and land parcels located in other regions in Northern
Baltimore County and the Baltimore/Washington
Corridor). We believe that the land parcels can
support at least 2.0 million developable square feet.
We completed the Nottingham Acquisition for
an aggregate cost of $366,852. The table below sets
forth the allocation of the acquisition costs of the
Nottingham Acquisition:
Land, operating properties
Land, construction or development
Building and improvements
Intangible assets on real estate acquisitions
Total assets
Below-market leases
Total acquisition cost
$ 70,754
37,309
210,264
53,214
371,541
(4,689)
$ 366,852
Intangible assets recorded in connection with the
Nottingham Acquisition included the following:
Weighted
Average
Amortization
Period (in Years)
Tenant relationship value
In-place lease value
Above-market leases
$ 25,778
23,631
3,805
$ 53,214
8
4
4
6
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 64
Page 65
notes continued
Other acquisitions completed in 2007 included
the following:
2007 Construction
and Development Activities
• the remaining 50% undivided interest in a
132-acre parcel of land located in Colorado
Springs that we believe can support approxi-
mately 1.9 million developable square feet
of office space for $13,586; and
• a 56-acre parcel of land located in Aberdeen,
Maryland that we believe can support up to
800,000 developable square feet for $10,455
(Aberdeen, Maryland is located in our Suburban
Baltimore region). The property is located
adjacent to Aberdeen Proving Ground, a
United States Government installation.
In addition, we acquired a 23-acre parcel of land
located in Hanover, Maryland, with a fair value upon
our acquisition of $9,829 (including improvements
thereon contributed by us), through Arundel Preserve
#5, LLC, a consolidated joint venture in which we own
a 50% interest (Hanover, Maryland is located in our
Baltimore/Washington Corridor region). The joint
venture is completing the construction of an office
property on the land parcel totaling approximately
152,000 square feet, and we believe the land parcel can
support up to 303,000 additional developable square
feet. We discuss joint ventures further in Note 5.
2007 Dispositions
We sold the following operating properties in 2007:
During 2007, we had five properties totaling 568,433
square feet (three located in the Baltimore/Washington
Corridor and two in our Other region) become fully
operational (68,196 of these square feet were placed
into service in 2006) and placed into service 48,377
square feet in a partially operational property located
in the Baltimore/Washington Corridor.
As of December 31, 2007, we had construction
underway on four new buildings in the Baltimore/
Washington Corridor (including the partially opera-
tional property discussed above and one property
owned through Arundel Preserve #5, LLC), four in
Colorado Springs and two in San Antonio. We also
had development activities underway on four new
buildings located in the Baltimore/Washington
Corridor, two each in Colorado Springs and Suburban
Baltimore and one each in Suburban Maryland and
King George County, Virginia. In addition, we had
redevelopment underway on one wholly owned
existing building located in Colorado Springs
and three properties owned by joint ventures
(two are located in Northern Virginia and one
in the Baltimore/Washington Corridor).
Project Name
Location
Date
of Sale
Number of
Buildings
2 and 8 Centre Drive
7321 Parkway Drive
10552 Philadelphia Road
Monroe, New Jersey
Hanover, Maryland
White Marsh, Maryland
9/7/2007
9/7/2007
12/27/2007
2
1
1
4
Total
Rentable
Square Feet
32,331
39,822
56,000
Sale Price
$ 6,000
5,000
6,800
Gain
on Sale
$ 1,931
855
1,127 (1)
128,153
$ 17,800
$ 3,913
(1) Excluding income tax of $44 on this gain.
We also sold three parcels of land in our Suburban Baltimore region totaling 16 acres developable into approximately
230,000 square feet for an aggregate of $8,687, resulting in a gain of $3,002 (excluding income tax of $1,069).
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 64
Page 65
5. real estate Joint ventures
During the periods included herein, we had an investment in one unconsolidated real estate joint venture
accounted for using the equity method of accounting. Information pertaining to this joint venture investment
is set forth below:
Investment Balance at
December 31,
Date
2008
2007
Acquired Ownership
Nature of Activity
Total
Assets at
12/31/2008
Maximum
Exposure
to Loss(1)
Harrisburg Corporate
Gateway Partners, L.P.
$ (4,770)(2)
$ (4,246)(2) 9/29/05
20%
Operates 16 buildings(3)
$69,838
$—
(1) Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are
additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective
ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, which we would be
required to make if certain contingent events occur (see Note 18).
(2) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5,196 at December 31, 2008 and
2007 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent
the nature of our continuing involvement in the joint venture remains the same.
(3) This joint venture’s property is located in Greater Harrisburg, Pennsylvania.
A two-member management committee is responsible
for making major decisions (as defined in the joint
venture agreement) for Harrisburg Corporate Gateway
Partners, L.P., and we control one of its management
committee positions. Net cash flows of the joint
venture are distributed to the partners in proportion
to their respective ownership interests. We earned
fees from the joint venture totaling $268 in 2008, $458
in 2007 and $619 in 2006 for property management,
construction and leasing services. We believe that this
entity is a VIE under FIN 46(R), but we do not believe
that we are the primary beneficiary of the VIE due
primarily to our partner’s: (1) greater exposure to
economic risks as a result of the magnitude of its
investment in comparison to ours; and (2) rights to
control the activities of the entity.
The following table sets forth condensed balance sheets
for Harrisburg Corporate Gateway Partners, L.P.:
December 31,
2008
2007
Commercial real estate property
Other assets
$ 62,308
7,530
$ 63,773
9,051
Total assets
Liabilities
Owners’ equity
$ 69,838
$ 72,824
$ 67,725
2,113
$ 67,991
4,833
Total liabilities and owners’ equity $ 69,838
$ 72,824
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 66
Page 67
The following table sets forth combined condensed
statements of operations for the two unconsolidated
real estate joint ventures we owned from January 1,
2006 through December 31, 2008, which included
Harrisburg Corporate Gateway Partners, L.P. and
Route 46 Partners, a joint venture that was dissolved
on July 26, 2006:
For the Years Ended
December 31,
2008
2007
2006
Revenues
Property operating expenses
Interest expense
Depreciation and
amortization expense
Gain on sale
$ 9,593 $ 9,795 $ 11,521
(4,067)
(4,224)
(3,371)
(3,943)
(3,467)
(4,099)
(3,291)
—
(3,397)
(4,464)
— 4,032
Net (loss) income
$ (1,012) $ (1,168) $ 2,798
We acquired the following interests in consolidated
real estate joint ventures in 2007 and 2008:
• a 45% economic interest in M Square Associates,
LLC (“M Square”) on January 29, 2008. We
acquired this interest through our 90% ownership
interest in Enterprise Campus Developer, LLC
(“Enterprise Campus”), which in turn owns a
50% interest in M Square. M Square was created
to ground lease, develop and manage office
properties, approved for up to approximately
750,000 square feet, located in M Square Research
Park in College Park, Maryland (in the Suburban
Maryland region). Enterprise Campus’s partner in
M Square received a capital credit for the value
of the land that it leased to the joint venture.
Enterprise Campus is responsible for funding
and obtaining financing for all development and
construction activities; its members expect to
fund a portion of the costs through capital
contributions in proportion to their respective
ownership interests, and the remaining costs for
which third party financing cannot be obtained
will be funded through loans from us. Net cash
flows of M Square will be distributed to the
partners as follows: (1) member loans and accrued
interest; (2) Enterprise Campus’s preferred return
and capital contributions used to fund infrastruc-
ture costs; (3) the partners’ preferred returns and
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 66
Page 67
notes continued
capital contributions used to fund all other costs,
including the base land value credit, in proportion
to the accrued returns and capital accounts; and
(4) residual amounts distributed 50% to each
member. Net cash flows of Enterprise Campus
will then be distributed to its members as follows:
(1) a $250 priority preferred return to us repre-
senting a return on a deposit we paid in lieu of a
development bond on behalf of the joint venture;
(2) the partners’ preferred returns and capital
investments in proportion to the partners’
respective ownership interests; and (3) residual
amounts according to a waterfall distribution
schedule defined in the joint venture agreement
under which our partner, who is acting as manager
of day-to-day construction activities of the
project, receives returns incrementally higher
than its ownership percentage as net cash flows
to the joint venture increase;
• a 50% interest in Arundel Preserve #5, LLC,
on July 2, 2007. The joint venture owns a land
parcel located in Hanover, Maryland on which
it is constructing an office property totaling
approximately 152,000 square feet. We believe
the land parcel can support up to 303,000
additional developable square feet. Our partner
received a capital credit for its contribution
of the land to the joint venture, and we are
responsible for funding all development and
construction costs for which financing is not
obtained. Net cash flows will be distributed to
the partners as follows: (1) preferred returns in
proportion to the partners’ respective capital
accounts; (2) repayment of any building operating
reserves funded by us; and (3) residual cash flows
in proportion to the partners’ respective ownership
interests; and
• a 92.5% interest in 13849 Park Center Road, LLC,
a joint venture formed in 2007 to own property
undergoing redevelopment that was previously
owned by COPT Opportunity Invest I, LLC. This
joint venture constructed office condominium units
in Herndon, Virginia and, during 2008, sold six
such units, as discussed in Note 4. Net cash flows
of the joint venture were distributed to the partners
in proportion to and to the extent of their capital
accounts. On December 31, 2008, we acquired
our partner’s 7.5% interest in this joint venture.
The table below sets forth information pertaining to our investments in consolidated joint ventures at
December 31, 2008:
M Square Associates, LLC
COPT Opportunity Invest I, LLC
Arundel Preserve #5, LLC
COPT-FD Indian Head, LLC
MOR Forbes 2 LLC
Date
Acquired
6/26/2007
12/20/2005
7/2/2007
10/23/2006
12/24/2002
Ownership
% at
12/31/2008 Nature of Activity
Total
Assets at
12/31/2008
Collateralized
Assets at
12/31/2008
45.0%
92.5%
50.0%
75.0%
50.0%
Developing land parcels(1)
Redeveloping one property(2)
Developing land parcel(3)
Developing land parcel(4)
Operates one building(5)
$31,569
27,992
27,820
5,243
4,530
$97,154
$ —
—
—
—
—
$ —
(1) This joint venture is developing land parcels located in College Park, Maryland. We own a 90% interest in Enterprise Campus Developers, LLC,
which in turn owns a 50% interest in M Square.
(2) This joint venture owns a property in the Baltimore/Washington Corridor region. On December 31, 2008, we acquired our partner’s interest
in an affiliate of this joint venture that owns a property in the Northern Virginia region.
(3) This joint venture is developing a land parcel located in Hanover, Maryland.
(4) This joint venture’s property is located in Charles County, Maryland (located in our “Other” business segment).
(5) This joint venture’s property is located in Lanham, Maryland (located in the Suburban Maryland region).
For COPT Opportunity Invest I, LLC and MOR Forbes
2 LLC, net cash flows will be distributed to the partners
in proportion to and to the extent of (1) their preferred
returns (as defined in the joint venture agreements) and
(2) their capital accounts, and any residual amounts
according to a waterfall distribution schedule defined in
the joint venture agreements under which our partners,
who are acting as managers of day-to-day construction
activities of the projects, receive returns incrementally
higher than their ownership percentages as net cash flows
to the joint venture increase. For COPT-FD Indian Head,
LLC, net cash flows will be distributed to the partners
in proportion to their respective ownership interest.
We determined that all of our consolidated joint
ventures were VIEs under FIN 46(R) and that we are
the primary beneficiary of each VIE because of factors
relating to our exposure to the potential economic
risks of the ventures due primarily to: (1) the magni-
tude of our investment in comparison to our partners’;
and/or (2) our responsibility to obtain financing and/or
fund the activities of the ventures.
Our commitments and contingencies pertaining
to our real estate joint ventures are disclosed in
Note 18.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 68
Page 69
notes continued
6. intangible assets on real estate aCquisitions
Intangible assets on real estate acquisitions consisted of the following:
In-place lease value
Tenant relationship value
Above-market leases
Market concentration premium
December 31, 2008
December 31, 2007
Gross
Carrying
Amount
$ 118,235
33,768
8,817
1,333
Accumulated
Amortization
$ 53,213
11,336
5,542
214
Net
Carrying
Amount
$ 65,022
22,432
3,275
1,119
Gross
Carrying
Amount
$ 142,471
35,189
14,428
1,333
$ 162,153
$ 70,305
$ 91,848
$ 193,421
Accumulated
Amortization
$ 67,132
7,892
9,555
181
$ 84,760
Net
Carrying
Amount
$ 75,339
27,297
4,873
1,152
$ 108,661
Amortization of the intangible asset categories set
forth above totaled $24,030 in 2008, $32,157 in 2007
and $20,675 in 2006. The approximate weighted aver-
age amortization periods of the categories set forth
above follow: in-place lease value: nine years; tenant
relationship value: seven years; above-market leases:
four years; and market concentration premium: 34
years. The approximate weighted average amortization
period for all of the categories combined is eight
years. Estimated amortization expense associated with
the intangible asset categories set forth above is:
$18,762 for 2009; $14,457 for 2010; $11,693 for 2011;
$9,523 for 2012; and $7,068 for 2013.
7. deferred Charges
Deferred charges consisted of the following:
Deferred leasing costs
Deferred financing costs
Goodwill
Deferred other
Accumulated amortization
December 31,
2008
2007
$ 69,529
21,805
1,853
131
$ 63,052
32,617
1,853
155
93,318
(41,312)
97,677
(48,626)
Deferred charges, net
$ 52,006
$ 49,051
8. PrePaid exPenses
and other assets
Prepaid expenses and other assets consisted of
the following:
Mortgage loans receivable(1)
Construction contract costs
incurred in excess of billings
Prepaid expenses
Furniture, fixtures and equipment
Other assets
December 31,
2008
2007
$ 29,380
$ 3,582
21,934
18,357
12,819
11,299
19,425
13,907
11,410
3,657
Prepaid expenses and other assets
$ 93,789
$ 51,981
(1) On August 26, 2008, we loaned $24,813 to the owner of a 17-story
Class A+ rental office property containing 471,000 square feet in
Baltimore, Maryland. We have a secured interest in the ownership of
the entity that owns the property and adjacent land parcels that is sub-
ordinate to that of a first mortgage on the property. The loan, which
matures on August 26, 2011, carries a primary interest rate of 16.0%,
although certain additional principal fundings available under the loan
agreement carry an interest rate of 20.0%. While interest is payable to
us under the loan on a monthly basis, to the extent that the borrower
does not have sufficient net operating cash flow (as defined in the agree-
ment) to pay all or a portion of the interest due under the loan in a
given month, such unpaid portion of the interest shall be added to the
loan principal amount used to compute interest in the following month.
We are obligated to fund an aggregate of up to $26,550 under this
loan, excluding any future compounding of unpaid interest. Our maxi-
mum exposure to loss under this loan is equal to any outstanding
principal, including any unpaid compounded interest. The balance of
this mortgage loan receivable was $25,797 at December 31, 2008.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 68
Page 69
The fair value of our mortgage loans receivable totaled $28,951 at December 31, 2008 and $3,582 at
December 31, 2007.
9. debt
Our debt consisted of the following:
Maximum
Principal Amount
Under Debt at
December 31, 2008
Carrying Value at
December 31,
2008
2007
Stated Interest
Rates at
December 31, 2008
Scheduled
Maturity Dates at
December 31, 2008
Mortgage and other loans payable:
Revolving Credit Facility
Mortgage and Other Secured Loans
Fixed rate mortgage loans(3)
Revolving Construction Facility(6)
Other variable rate secured loans
Other construction loan facilities
Total mortgage and other
secured loans
Note Payable
Unsecured seller notes
Total mortgage and
other loans payable
3.5% Exchangeable Senior Notes
Total debt
$600,000
$ 392,500 $ 361,000
LIBOR + 0.75%
to 1.25%(1)
September 30, 2011(2)
N/A
225,000
N/A
48,000
967,617 1,124,551
5.20%–8.63%(4)
81,267
— LIBOR + 1.60%
2009–2034(5)
May 2, 2011(2)
to 2.00%
221,400
40,589
34,500 LIBOR + 2.25%(7)
104,089 LIBOR + 1.50%(8)
August 1, 2012(2)
2009
1,310,873 1,263,140
N/A
N/A
750
1,702
5.95%
2016
1,704,123 1,625,842
200,000
162,500
$ 1,866,623 $ 1,825,842
3.50%
September 2026(9)
(1) The weighted average interest rate on the Revolving Credit Facility was 1.49% at December 31, 2008.
(2) These loans may be extended for a one-year period at our option, subject to certain conditions.
(3) Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore are recorded at their fair value
based on applicable effective interest rates. The carrying values of these loans reflect net premiums totaling $501 at December 31, 2008 and $605 at
December 31, 2007.
(4) The weighted average interest rate on these loans was 5.72% at December 31, 2008.
(5) A loan with a balance of $4,742 at December 31, 2008 that matures in 2034 may be repaid in March 2014, subject to certain conditions.
(6) This loan is described in further detail below. The weighted average interest rate on this loan was 2.25% at December 31, 2008
(7) The one loan in this category at December 31, 2008 is subject to a floor of 4.25%, which was the interest rate in effect at December 31, 2008.
(8) The weighted average interest rate on these loans was 2.86% at December 31, 2008.
(9) Refer to the paragraph below for descriptions of provisions for early redemption and repurchase of these notes.
On October 1, 2007, we amended and restated the
credit agreement on our Revolving Credit Facility with
a group of lenders for which KeyBanc Capital Markets
and Wachovia Capital Markets, LLC acted as co-lead
arrangers, KeyBank National Association acted as
administrative agent and Wachovia Bank, National
Association acted as syndication agent. The amended
and restated credit agreement increased the amount of
the lenders’ aggregate commitment under the facility
from $500,000 to $600,000, which includes a $50,000
letter of credit subfacility and a $50,000 swingline
facility (same-day draw requests), with a right for us
to further increase the lenders’ aggregate commitment
during the term to a maximum of $800,000, subject to
certain conditions. Amounts available under the facility
are computed based on 65% of our unencumbered
asset value, as defined in the agreement. The facility
matures on September 30, 2011, and may be extended
by one year at our option, subject to certain conditions.
The variable interest rate on the facility is based on one
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 70
Page 71
notes continued
of the following, to be selected by us: (1) the LIBOR
rate for the interest period designated by us (custom-
arily the one-month rate) plus 0.75% to 1.25%, as
determined by our leverage levels at different points
in time; or (2) the greater of (a) the prime rate of
the lender then acting as the administrative agent or
(b) the Federal Funds Rate, as defined in the credit
agreement, plus 0.50%. Interest is payable at the end
of each interest period (as defined in the agreement),
and principal outstanding under the facility is payable
on the maturity date. The facility also carries a quarterly
fee that is based on the unused amount of the facility
multiplied by a per annum rate of 0.125% to 0.20%.
As of December 31, 2008, the maximum amount of
borrowing capacity under this line of credit totaled
$600,000, of which $191,250 was available.
On May 2, 2008, we entered into a construction loan
agreement with a group of lenders for which KeyBanc
Capital Markets, Inc. acted as arranger, KeyBank
National Association acted as administrative agent,
Bank of America, N.A. acted as syndication agent and
Manufacturers and Traders Trust Company acted as
documentation agent; this loan is referred to in the
table above as the “Revolving Construction Facility.”
The construction loan agreement provides for an
aggregate commitment by the lenders of $225,000,
with a right for us to further increase the lenders’
aggregate commitment during the term to a maximum
of $325,000, subject to certain conditions. Ownership
interests in the properties for which construction costs
are being financed through loans under the agreement
are pledged as collateral. Borrowings are generally avail-
able for properties included in this construction loan
agreement based on 85% of the total budgeted costs
of construction of the applicable improvements for such
properties as set forth in the properties’ construction
budgets, subject to certain other loan-to-value and
debt coverage requirements. As loans for properties
under the construction loan agreement are repaid in
full and the ownership interests in such properties are
no longer pledged as collateral, capacity under the
construction loan agreement’s aggregate commitment
will be restored, giving us the ability to obtain new loans
for other construction properties in which we pledge
the ownership interests as collateral. The construction
loan agreement matures on May 2, 2011 and may be
extended by one year at our option, subject to certain
conditions. The variable interest rate on each loan is
based on one of the following, to be selected by us:
(1) subject to certain conditions, the LIBOR rate for
the interest period designated by us (customarily the
one-month rate) plus 1.6% to 2.0%, as determined
by our leverage levels at different points in time; or
(2) the greater of (a) the prime rate of the lender then
acting as agent or (b) the Federal Funds Rate, as defined
in the construction loan agreement, plus 0.50%. Interest
is payable at the end of each interest period (as defined
in the agreement), and principal outstanding under each
loan under the agreement is payable on the maturity
date. The construction loan agreement also carries a
quarterly fee that is based on the unused amount of
the commitment multiplied by a per annum rate of
0.125% to 0.20%.
On July 18, 2008, we borrowed $221,400 under a
mortgage loan requiring interest only payments for
the term at a variable rate of LIBOR plus 225 basis
points, subject to a floor of 4.25%. This loan facility
has a four-year term with an option to extend by
an additional year.
In 2006, our Operating Partnership issued a $200,000
aggregate principal amount of 3.50% Exchangeable
Senior Notes due 2026. Interest on the notes is pay-
able on March 15 and September 15 of each year.
The notes have an exchange settlement feature that
provides that the notes may, under certain circum-
stances, be exchangeable for cash (up to the principal
amount of the notes) and, with respect to any excess
exchange value, may be exchangeable into (at our
option) cash, our common shares or a combination
of cash and our common shares at an exchange rate
(subject to adjustment) of 18.6947 shares per one
thousand dollar principal amount of the notes (exchange
rate is as of December 31, 2008 and is equivalent to an
exchange price of $53.49 per common share). On or
after September 20, 2011, the Operating Partnership
may redeem the notes in cash in whole or in part. The
holders of the notes have the right to require us to
repurchase the notes in cash in whole or in part on
each of September 15, 2011, September 15, 2016 and
September 15, 2021, or in the event of a “fundamental
change,” as defined under the terms of the notes, for
a repurchase price equal to 100% of the principal
amount of the notes plus accrued and unpaid interest.
Prior to September 11, 2011, subject to certain excep-
tions, if (1) a “fundamental change” occurs as a result
of certain forms of transactions or series of transactions
and (2) a holder elects to exchange its notes in connec-
tion with such “fundamental change,” we will increase
the applicable exchange rate for the notes surrendered
for exchange by a number of additional shares of our
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 70
Page 71
common shares as a “make whole premium.” The notes
are general unsecured senior obligations of the Operating
Partnership and rank equally in right of payment with all
other senior unsecured indebtedness of the Operating
Partnership. The Operating Partnership’s obligations
under the notes are fully and unconditionally guaranteed
by us. In November 2008, we repurchased a $37,500
aggregate principal amount of our 3.5% Exchangeable
Senior Notes for $26,654 from which we recognized a
gain of $10,376, net of unamortized loan issuance costs.
In the case of each of our mortgage loans, we have
pledged certain of our real estate assets as collateral.
Many of our real estate properties were pledged on loan
obligations as of December 31, 2008. Certain of our debt
instruments require that we comply with a number of
restrictive financial covenants, including adjusted con-
solidated net worth, minimum property interest coverage,
minimum property hedged interest coverage, minimum
consolidated interest coverage, maximum consolidated
unhedged floating rate debt and maximum consoli-
dated total indebtedness. As of December 31, 2008,
we were in compliance with these financial covenants.
Our debt matures on the following schedule:
2009
2010
2011
2012
2013
Thereafter
Total
$103,982
74,033
746,081
263,600
137,718
540,708
$1,866,122(1)
(1) Represents scheduled principal amortization and maturities only
and therefore excludes net premiums of $501.
Weighted average borrowings under our Revolving
Credit Facility totaled $412,718 in 2008 and $298,901
in 2007. The weighted average interest rate on this
credit facility was 4.33% in 2008 and 6.45% in 2007.
We capitalized interest costs of $17,632 in 2008,
$19,274 in 2007 and $14,559 in 2006.
The following table sets forth information pertaining to the fair value of our debt:
December 31, 2008
December 31, 2007
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
$ 1,130,867
735,756
$ 1,866,623
$ 1,010,127
702,092
$ 1,712,219
$ 1,326,253
499,589
$ 1,825,842
$ 1,326,884
499,589
$ 1,826,473
Fixed-rate debt
Variable-rate debt
10. derivatives
The following table sets forth the key terms and fair values of our interest rate swap contracts:
Notional
Amount
$ 50,000
25,000
25,000
50,000
100,000
120,000
100,000
One-Month
LIBOR base
5.0360%
5.2320%
5.2320%
4.3300%
2.5100%
1.7600%
1.9750%
Effective
Date
3/28/2006
5/1/2006
5/1/2006
10/23/2007
11/3/2008
1/2/2009
1/1/2010
Expiration
Date
3/30/2009
5/1/2009
5/1/2009
10/23/2009
12/31/2009
5/1/2012
5/1/2012
Fair Value at December 31,
2008
$ (540)
(385)
(385)
(1,449)
(1,656)
(478)
(209)
$ (5,102)
2007
$ (765)
(486)
(486)
(596)
N/A
N/A
N/A
$ (2,333)
These amounts are included on our Consolidated Balance Sheets as other liabilities.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 72
Page 73
notes continued
We designated these derivatives as cash flow hedges. These contracts hedge the risk of changes in interest rates
on certain of our one-month LIBOR-based variable rate borrowings.
The table below sets forth our accounting application of changes in derivative fair values:
For the Years Ended
December 31,
2008
2007
2006
$(2,769)
$(2,025)
$(308)
Decrease in fair value applied to AOCL(1) and minority interests
(1) AOCL is defined in Note 2.
11. shareholders’ equity
Preferred Shares
At December 31, 2008, we had 15.0 million preferred shares of beneficial interest (“preferred shares”) authorized
at $0.01 par value. The table below sets forth additional information pertaining to our preferred shares of
beneficial interest:
Series
Series G
Series H
Series J
Series K
# of
Shares
Issued
2,200,000
2,000,000
3,390,000
531,667
Aggregate
Liquidation
Preference
$ 55,000
50,000
84,750
26,583
8,121,667
$ 216,333
Month of
Issuance
August 2003
December 2003
July 2006
January 2007
Annual
Dividend
Yield
8.000%
7.500%
7.625%
5.600%
Annual
Dividend
Per Share
$ 2.00000
$ 1.87500
$ 1.90625
$ 2.80000
Earliest
Redemption
Date
8/11/2008
12/18/2008
7/20/2011
1/9/2017
Each series of preferred shares is nonvoting and
redeemable for cash in the amount of its liquidation
preference at our option on or after the earliest
redemption date. Holders of all preferred shares are
entitled to cumulative dividends, payable quarterly
(as and if declared by the Board of Trustees). In the
case of each series of preferred shares, there is a series
of preferred units in the Operating Partnership owned
by us that carries substantially the same terms.
On January 9, 2007, we issued the Series K Cumulative
Redeemable Preferred Shares (“Series K Preferred
Shares”) in the Nottingham Acquisition at a value
of, and liquidation preference equal to, $50 per share.
Series K Preferred Shares are nonvoting and are
convertible, subject to certain conditions, into
common shares on the basis of 0.8163 common
shares for each preferred share, in accordance with
the terms of the Articles Supplementary describing
the Series K Preferred Shares.
Common Shares
In connection with the Nottingham Acquisition in
January 2007, we issued 3.2 million common shares
at a value of $49.57 per share.
In September 2008, we issued 3.7 million common
shares at a public offering price of $39 per share. We
contributed the net proceeds after underwriting dis-
count but before offering costs totaling $139,203
to our Operating Partnership in exchange for 3.7
million common units.
Common units in our Operating Partnership were
converted into common shares on the basis of one
common share for each common unit in the amount
of 258,917 in 2008, 554,221 in 2007 and 245,793
in 2006.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 72
Page 73
Accumulated Other Comprehensive Loss
The table below sets forth activity in the accumulated
other comprehensive loss component of shareholders’
equity:
For the Years Ended December 31,
2008
2007
2006
$ (2,372)
$ (693)
$ (482)
(2,430)
(1,731)
(262)
53
52
51
Beginning balance
Unrealized loss on
derivatives, net of
minority interests
Realized loss on
derivatives, net of
minority interests
Ending balance
$ (4,749)
$ (2,372)
$ (693)
The table below sets forth our comprehensive income:
For the Years Ended December 31,
2008
2007
2006
$58,668
$34,784
$49,227
(2,430)
(1,731)
(262)
53
52
51
Net income
Unrealized loss on
derivatives, net of
minority interests
Realized loss on
derivatives, net of
minority interests
Total comprehensive
income
$56,291
$33,105
$49,016
12. share-based ComPensation
and emPloyee benefit Plans
Share-Based Compensation Plans
In 1993, we adopted a plan for our Trustees under
which we have 75,000 options reserved for issuance.
As of December 31, 2007, there were no remaining
awards available for future grant under this plan.
In March 1998, we adopted a long-term incentive plan
for our Trustees and employees. This plan, which
expired in March 2008, provided for the award of
options, restricted shares and dividend equivalents.
We were authorized to issue awards under the plan
amounting to no more than 13% of the total of (1) our
common shares outstanding plus (2) the number of
shares that would be outstanding upon redemption of
all units of the Operating Partnership or other securities
that are convertible into our common shares.
At our 2008 Annual Meeting of Shareholders held
on May 22, 2008, our shareholders approved the 2008
Omnibus Equity and Incentive Plan, under which we
may issue equity-based awards to officers, employees,
non-employee trustees and any other key persons of
us and our subsidiaries, as defined in the plan. The
plan provides for a maximum of 2,900,000 common
shares of beneficial interest to be issued in the form of
share options, share appreciation rights, deferred share
awards, restricted share awards, unrestricted share
awards, performance shares, dividend equivalent rights
and other equity-based awards and for the granting of
cash-based awards. This plan expires on May 22, 2018.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 74
Page 75
notes continued
Trustee options under these plans become exercisable beginning on the first anniversary of their grant. The
vesting periods for employees’ options under this plan vary from award to award. Options expire ten years after
the date of grant. Restricted shares vest based on increments and over periods of time set forth under the terms
of the respective awards. Shares for each of our share-based compensation plans are issued under registration
statements on Form S-8 that became effective upon filing with the Securities and Exchange Commission.
The following table summarizes option transactions under the plans described above:
Range of
Exercise Price
per Share
Weighted Average
Exercise Price
per Share
Weighted Average
Remaining
Contractual Term
(in Years)
Aggregate
Intrinsic
Value
Outstanding at December 31, 2005
Granted—2006
Forfeited/Expired—2006
Exercised—2006
Outstanding at December 31, 2006
Granted—2007
Forfeited/Expired—2007
Exercised—2007
Outstanding at December 31, 2007
Granted—2008
Forfeited/Expired—2008
Exercised—2008
Shares
2,709,927
503,800
(68,107)
(589,101)
2,556,519
297,691
(99,177)
(613,689)
2,141,344
40,000
(51,786)
(180,239)
$5.63–$36.08
$36.24–$50.59
$13.60–$47.79
$5.63–$34.76
$7.38–$50.59
$42.40–$57.00
$20.34–$53.16
$5.25–$44.73
$7.38–$57.00
$37.81
$8.00–$53.16
$7.63–$34.76
Outstanding at December 31, 2008
1,949,319
$7.38–$57.00
Exercisable at December 31, 2006
Exercisable at December 31, 2007
1,753,428
1,507,876
Exercisable at December 31, 2008
1,657,956
(1)
(2)
(3)
Options expected to vest
272,240
$36.24–$57.00
$ 14.41
$ 42.84
$ 33.43
$ 11.49
$ 20.18
$ 47.87
$ 42.31
$ 12.18
$ 25.29
$ 37.81
$ 43.07
$ 15.72
$ 25.96
$ 12.65
$ 18.05
$ 22.60
$ 45.00
6
5
5
8
$ 22,639
$ 18,744
$ 18,744
$
—
(1) 234,082 of these options had an exercise price ranging from $7.38 to $7.99; 754,068 had an exercise price ranging from $8.00 to $10.99; 456,732 had an
exercise price ranging from $11.00 to $16.99; 198,241 had an exercise price ranging from $17.00 to $25.99; and 110,305 had an exercise price range of
$26.00 to $36.08.
(2) 232,982 of these options had an exercise price ranging from $7.38 to $7.99; 291,762 had an exercise price ranging from $8.00 to $10.99; 406,211 had an
exercise price ranging from $11.00 to $16.99; 237,382 had an exercise price ranging from $17.00 to $25.99; 163,648 had an exercise price ranging from
$26.00 to $34.99; 130,265 had an exercise price ranging from $35.00 to $43.99; and 45,626 had an exercise price ranging from $44.00 to $52.99.
(3) 228,732 of these options had an exercise price ranging from $7.38 to $7.99; 195,950 had an exercise price ranging from $8.00 to $10.99; 395,217 had an
exercise price ranging from $11.00 to $16.99; 226,805 had an exercise price ranging from $17.00 to $25.99; 210,373 had an exercise price ranging from
$26.00 to $34.99; 242,082 had an exercise price ranging from $35.00 to $43.99; and 158,797 had an exercise price ranging from $44.00 to $57.00.
The aggregate intrinsic value of options exercised was $3,682 in 2008, $23,627 in 2007 and $19,748 in 2006.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 74
Page 75
We realized windfall tax benefits of $1,053 in 2008
and $562 in 2006 on options exercised and vesting
restricted shares in connection with employees of our
subsidiaries that are subject to income tax. We did not
realize a windfall tax benefit in 2007 because COMI
had a net operating loss carryforward for tax purposes;
had COMI not had a net operating loss carryforward
in 2007, we would have recognized a windfall tax
benefit of $1,691 in 2007.
The table below sets forth information relating to
expenses from share-based compensation included
in our Consolidated Statements of Operations:
For the Years Ended
December 31,
2008
2007
2006
Increase in general and
administrative expenses $ 6,324
$ 4,461
$ 2,659
Increase in construction
contract and other
service operations
expenses
Share-based
compensation expense
Income taxes
Minority interests
Net share-based
compensation expense
1,943
1,749
964
8,267
(45)
(1,224)
6,210
(150)
(946)
3,623
(107)
(617)
$ 6,998
$ 5,114
$ 2,899
We also capitalized share-based compensation costs
of approximately $769 in 2008, $433 in 2007 and $212
in 2006.
The amounts included in our Consolidated Statements
of Operations for share-based compensation reflected
an estimate of pre-vesting forfeitures of 7% for options
and a range of 2% to 5% for restricted shares for 2008
and 2007 and 5% for all share-based awards in 2006.
We computed share-based compensation expense
under the fair value method using the Black-Scholes
option-pricing model; the weight average assumptions
we used in that model are set forth below:
For the Years Ended
December 31,
2008(4)
2007
2006
Weighted average fair value
of grants on grant date
Risk-free interest rate(1)
Expected life-years
Expected volatility(2)
Expected dividend yield(3)
$8.00
3.62%
6.52
$9.58
4.64%
6.15
24.22% 21.46% 23.69%
3.82%
3.24%
$8.99
4.91%
6.82
3.07%
(1) Ranged from 4.53% to 4.91% in 2007 and from 4.38%
to 5.30% in 2006.
(2) Ranged from 21.28% to 21.75% in 2007 and from 22.37%
to 25.11% in 2006.
(3) Ranged from 3.12% to 3.35% in 2007 and from 3.36%
to 4.25% in 2006.
(4) Since one group of grants sharing the same terms took place
in 2008, the assumptions used for such grants were uniform.
The following table summarizes restricted share trans-
actions under the plans described above:
Weighted
Average
Grant Date
Fair Value
$ 19.88
$ 42.65
$ 23.67
$ 17.16
$ 29.51
$ 49.50
$ 50.57
$ 22.54
$ 38.50
$ 31.76
$ 36.07
$ 35.32
Shares
395,609
163,420
(20,822)
(124,517)
413,690
141,359
(1,917)
(137,227)
415,905
308,569
(19,851)
(142,195)
Unvested at December 31, 2005
Granted
Forfeited
Vested
Unvested at December 31, 2006
Granted
Forfeited
Vested
Unvested at December 31, 2007
Granted
Forfeited
Vested
Unvested at December 31, 2008
562,428
$ 35.69
Restricted shares expected to vest
535,721
The fair value of restricted shares that vested was
$5,023 in 2008, $6,938 in 2007 and $5,319 in 2006.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 76
Page 77
notes continued
As of December 31, 2008, there was $1,300 of unrec-
ognized compensation cost related to unvested options
that is expected to be recognized over a weighted
average period of approximately one year. As of
December 31, 2008, there was $12,929 of unrecog-
nized compensation cost related to unvested restricted
shares that is expected to be recognized over a
weighted average period of approximately two years.
fully vested. Deferred compensation related to the
Company’s matching contribution is charged to expense
and vests in annual one-third increments. Once an
employee has been with us for three years, all matching
contributions are fully vested. The balance of the plan,
which was fully funded, totaled $4,549 at December 31,
2008 and $6,014 at December 31, 2007, and is included
in the accompanying Consolidated Balance Sheets.
401(k) Plan
13. oPerating leases
We lease our properties to tenants under operating
leases with various expiration dates extending to
the year 2025. Gross minimum future rentals on
noncancelable leases in our consolidated properties
at December 31, 2008 were as follows:
For the Years Ended December 31,
2009
2010
2011
2012
2013
Thereafter
Total
$ 321,815
270,435
228,894
192,495
146,578
506,733
$ 1,666,950
We consider a lease to be noncancelable when a tenant
(1) may not terminate its lease obligation early or
(2) may terminate its lease obligation early in exchange
for a fee or penalty that we consider material enough
such that termination would be highly unlikely.
We have a 401(k) defined contribution plan covering
substantially all of our employees that permits par-
ticipants to defer up to a maximum of 15% of their
compensation. We match a participant’s contribution
in an amount equal to 50% of the participant’s elective
deferral for the plan year up to a maximum of 6% of
a participant’s annual compensation. Employees’
contributions are fully vested and our matching
contributions vest in annual one-third increments.
Once an employee has been with us for three years,
all matching contributions are fully vested. We fund
all contributions with cash. Our matching contribu-
tions under the plan totaled approximately $641 in
2008, $442 in 2007 and $538 in 2006. The 401(k)
plan is fully funded at December 31, 2008.
Deferred Compensation Plan
We have a non-qualified elective deferred compensation
plan for certain members of our management team that
permits participants to defer up to 100% of their com-
pensation on a pre-tax basis and receive a tax-deferred
return on such deferrals. We match the participant’s
contribution in an amount equal to 50% of the par-
ticipant’s elective deferral for the plan year up to a
maximum of 6% of a participant’s annual compensation
after deducting contributions, if any, made under our
401(k) plan. Deferred compensation related to an
employee contribution is charged to expense and is
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 76
Page 77
14. suPPlemental information to statements of Cash flows
Interest paid, net of capitalized interest
Income taxes paid
Supplemental schedule of non-cash investing and financing activities:
Debt assumed in connection with acquisitions
Issuance of common shares in connection with acquisition of properties
(before transaction costs)
Issuance of preferred shares in connection with acquisition of properties
(before transaction costs)
Proceeds from sales of properties invested in restricted cash account
Restricted cash used in connection with acquisitions of properties
Issuance of common units in the Operating Partnership in connection with
acquisition of properties (before transaction costs)
Note receivable assumed upon sale of real estate property
For the Years Ended December 31,
2008
2007
2006
$ 82,015
$ 84,278
$ 68,617
$ 1,115
$
123
$
54
$
$
$
$
$
$
$
— $ 38,996
$ 39,011
— $ 156,691
$ —
— $ 26,583
$ —
— $
701
$ 33,730
— $ 20,827
$ —
— $ 12,125
$ 7,497
— $ 3,582
$ —
(Decrease) increase in accrued capital improvements and leasing costs
$ (14,799)
$ 8,638
$ 18,181
Consolidation of real estate joint venture:
Real estate assets
Prepaid and other assets
Minority interest
Net adjustment
Reclassification of operating assets to investment assets in connection with
consolidation of real estate joint ventures
Property acquired through lease arrangement included in rents received
in advance and security deposits
$ 14,208
(10,859)
(3,349)
$ 3,864
1,021
(4,885)
$ —
—
—
$
$
$
— $
— $ —
— $ 16,725
$ —
— $
711
$ 1,282
Decrease in fair value of derivatives applied to AOCL and minority interests
$ (2,769)
$ (2,025)
$
(308)
Adjustments to minority interests resulting from changes in ownership of
Operating Partnership by COPT
Dividends/distribution payable
$ 16,716
$ 29,761
$ 16,255
$ 25,794
$ 22,441
$ 19,164
Decrease in minority interests and increase in shareholders’ equity in connection
with the conversion of common units into common shares
$ 7,508
$ 25,408
$ 11,078
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 78
Page 79
notes continued
15. information by business segment
As of December 31, 2008, we had nine primary office property segments: Baltimore/Washington Corridor;
Northern Virginia; Suburban Baltimore; Colorado Springs; Suburban Maryland; Greater Philadelphia; St. Mary’s
& King George Counties; San Antonio; and Northern/Central New Jersey.
The table below reports segment financial information. Our segment entitled “Other” includes assets and operations
not specifically associated with the other defined segments, including corporate assets and investments in uncon-
solidated entities. We measure the performance of our segments based on total revenues less property operating
expenses, a measure we define as net operating income (“NOI”). We believe that NOI is an important supplemental
measure of operating performance for a REIT’s operating real estate because it provides a measure of the core
operations that is unaffected by depreciation, amortization, financing and general and administrative expenses;
this measure is particularly useful in our opinion in evaluating the performance of geographic segments,
same-office property groupings and individual properties.
Baltimore/
Washington
Corridor
Northern
Virginia
Suburban
Baltimore
Colorado
Springs
Suburban
Maryland
Greater
Philadelphia
St. Mary’s
& King
George
Counties
Northern/
Central
New
Jersey
San
Antonio
Intersegment
Eliminations
Total
Other
Year Ended
December 31, 2008
Revenues
Property operating
expenses
$ 186,459 $ 77,017 $ 54,799 $ 20,372 $ 19,346
$ 10,025
$ 12,939 $ 9,311 $ 2,567 $ 10,708
$ (3,552)
$ 399,991
65,474
29,520
23,978
7,284
7,102
202
3,245
2,425
344
3,192
(1,417)
141,349
NOI
$ 120,985 $ 47,497 $ 30,821 $ 13,088 $ 12,244
$ 9,823
$ 9,694 $ 6,886 $ 2,223 $ 7,516
$ (2,135)
$ 258,642
Additions to
commercial real
estate properties
$
87,246 $ 5,449 $ 17,132 $ 73,526 $ 39,468
$ 1,575
$ 2,801 $ 34,973 $
43 $ 13,146
$
(72)
$ 275,287
Segment assets at
December 31, 2008 $ 1,264,170 $ 464,202 $ 438,818 $ 252,129 $ 154,983
$ 95,783
$ 95,244 $ 96,643 $ 21,179 $ 230,711
$ (995)
$ 3,112,867
Year Ended
December 31, 2007
Revenues
Property operating
expenses
$
173,509 $ 72,402 $ 54,570 $ 15,304 $ 16,675
$ 10,025
$ 12,665 $ 7,370 $ 4,846 $
5,586
$ (3,430)
$
369,522
56,871
25,893
22,034
5,912
6,681
131
3,064
1,578
2,053
4,774
(3,862)
125,129
NOI
$
116,638 $ 46,509 $ 32,536 $
9,392 $
9,994
$ 9,894
$ 9,601 $ 5,792 $ 2,793 $
812
$ 432
$
244,393
Additions to
commercial real
estate properties
Segment assets at
December 31, 2007
Year Ended
December 31, 2006
Revenues
Property operating
expenses
$
159,759 $ 23,645 $ 280,234 $ 49,924 $
2,927
$ 1,236
$ 1,040 $ 3,204 $
647 $ 61,046
$ (1,955)
$
581,707
$ 1,215,497 $ 482,570 $ 448,093 $ 181,641 $ 116,812
$ 96,051
$ 95,208 $ 59,295 $ 40,672 $ 197,002
$
(988)
$ 2,931,853
$
147,630 $ 63,516 $ 28,571 $
9,774 $ 15,316
$ 10,025
$ 12,087 $ 7,441 $ 12,296 $
581
$ (2,522)
$
304,715
45,708
22,729
11,896
3,663
5,720
174
3,125
1,535
3,313
2,243
(3,741)
96,365
NOI
$
101,922 $ 40,787 $ 16,675 $
6,111 $
9,596
$ 9,851
$ 8,962 $ 5,906 $ 8,983 $
(1,662)
$ 1,219
$
208,350
Additions to
commercial real
estate properties
Segment assets at
December 31, 2006
$
191,999 $ 21,640 $
4,250 $ 66,628 $
4,664
$ 1,202
$ 1,823 $ 8,814 $ 1,398 $ 39,464
$ (1,720)
$
340,162
$ 1,084,348 $ 473,539 $ 159,771 $ 135,115 $ 117,573
$ 97,792
$ 97,661 $ 52,661 $ 48,499 $ 155,083
$ (2,441)
$ 2,419,601
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 78
Page 79
The following table reconciles our segment revenues
to total revenues as reported on our Consolidated
Statements of Operations:
For the Years Ended
December 31,
2008
2007
2006
$ 399,991 $ 369,522 $ 304,715
186,608
37,074
52,182
1,777
4,151
7,902
(358)
(3,608)
(13,271)
Segment revenues
Construction
contract revenues
Other service
operations revenues
Less: Revenues
from discontinued
operations (Note 17)
Total revenues
$ 588,018 $ 407,139 $ 351,528
As previously discussed, we own 100% of a number of
entities that provide real estate services such as prop-
erty management, construction and development and
heating and air conditioning services primarily for our
properties but also for third parties. The revenues and
costs associated with these services include subcontracted
costs that are reimbursed to us by the customer at no
mark up. As a result, the operating margins from these
operations are small relative to the revenue. We use the
net of such revenues and expenses to evaluate the per-
formance of our service operations since we view such
service operations to be an ancillary component of our
overall operations that we expect to continue to be a small
contributor to our operating income relative to our
real estate operations. The table below sets forth the
computation of our income from service operations:
The following table reconciles our segment property
operating expenses to property operating expenses as
reported on our Consolidated Statements of Operations:
For the Years Ended
December 31,
2008
2007
2006
For the Years Ended
December 31,
2008
2007
2006
Construction
contract revenues
Other service
operations revenues
Construction
contract expenses
Other service
operations expenses
$ 186,608 $ 37,074 $ 52,182
1,777
4,151
7,902
(182,111)
(35,723)
(49,961)
(2,031)
(4,070)
(7,384)
$ 141,349 $ 125,129 $ 96,365
Income from
service operations
$ 4,243 $ 1,432 $ 2,739
Segment property
operating expenses
Less: Property
expenses from
discontinued
operations (Note 17)
(210)
(1,871)
(3,277)
Total property
operating expenses
$ 141,139 $ 123,258 $ 93,088
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 80
Page 81
notes continued
The following table reconciles our NOI for reportable
segments and income from service operations to
income from continuing operations as reported on
our Consolidated Statements of Operations:
administrative expense, income taxes and minority
interests because these items represent general
corporate items not attributable to segments.
For the Years Ended
December 31,
2008
2007
2006
NOI for
reportable segments $ 258,642 $ 244,393 $ 208,350
Income from
service operations
4,243
1,432
2,739
Interest and
other income
Gain on early
extinguishment
of debt
Equity in loss of
unconsolidated
entities
Income tax expense
Other adjustments:
Depreciation and
other amortization
associated with real
estate operations
General and
administrative
expenses
Interest expense
on continuing
operations
Minority interests
in continuing
operations
NOI from
discontinued
operations
Income from
continuing
operations
2,070
3,030
1,077
10,376
—
—
(147)
(201)
(224)
(569)
(92)
(887)
(102,720) (104,700)
(76,344)
(25,329)
(21,704)
(18,048)
(83,646)
(85,576)
(72,984)
(7,488)
(3,331)
(3,742)
(148)
(1,737)
(9,994)
$ 55,652 $ 31,014 $ 30,075
The accounting policies of the segments are the same
as those previously disclosed for Corporate Office
Properties Trust and subsidiaries, where applicable.
We did not allocate interest expense, amortization of
deferred financing costs and depreciation and other
amortization to segments since they are not included in
the measure of segment profit reviewed by management.
We also did not allocate construction contract revenues,
other service operations revenues, construction con-
tract expenses, other service operations expenses,
equity in loss of unconsolidated entities, general and
16. inCome taxes
Corporate Office Properties Trust elected to be
treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code. To qualify as a REIT, we
must meet a number of organizational and operational
requirements, including a requirement that we distrib-
ute at least 90% of our adjusted taxable income to our
shareholders. As a REIT, we generally will not be sub-
ject to Federal income tax on taxable income that we
distribute to our shareholders. If we fail to qualify as
a REIT in any tax year, we will be subject to Federal
income tax on our taxable income at regular corporate
rates and may not be able to qualify as a REIT for
four subsequent tax years.
The differences between taxable income reported on our
income tax return (estimated 2008 and actual 2007 and
2006) and net income as reported on our Consolidated
Statements of Operations are set forth below:
For the Years
Ended December 31,
2008
2007
2006
(Estimated)
$ 58,668 $ 34,784 $ 49,227
(13,458)
(6,128)
(8,186)
2,053
(18,685)
(17,079)
1,007
194
(118)
(831)
6,451
(10,690)
(2,398)
779
(1,476)
572
(2,288)
887
36,717
44,215
26,554
277
342
709
(973)
(2,674)
(1,119)
(1,233)
1,862
696
Net income
Adjustments:
Rental revenue
recognition
Compensation
expense recognition
Operating
expense recognition
Gain on sales
of properties
Losses from
service operations
Income tax expense
Depreciation
and amortization
Income from
unconsolidated
entities
Minority
interests, gross
Other
Taxable income
$ 79,167 $ 57,917 $ 41,574
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 80
Page 81
For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital
gains or return of capital. The characterization of dividends declared on our common and preferred shares
during each of the last three years was as follows:
Ordinary income
Long term capital gain
Return of capital
Common Shares
Preferred Shares
For the Years Ended December 31,
For the Years Ended December 31,
2008
94.0%
1.5%
4.5%
2007
59.5%
16.4%
24.1%
2006
50.3%
7.2%
42.5%
2008
98.4%
1.6%
0.0%
2007
78.4%
21.6%
0.0%
2006
87.4%
12.6%
0.0%
We distributed all of our REIT taxable income in
2008, 2007 and 2006 and, as a result, did not incur
Federal income tax in those years on such income.
However, we did incur income tax totaling $1,112 in
2007 on built-in gain on properties, which is included
in the Consolidated Statements of Operations as
follows: $1,068 in gain in sales of real estate, net of
minority interests and income taxes; and $44 in
discontinued operations net of minority interests
and income taxes.
We own a taxable REIT subsidiary (“TRS”) that is
subject to Federal and state income taxes. Our TRS had
income before income taxes under GAAP of $2,015 in
2008, $1,476 in 2007 and $2,288 in 2006. Our TRS’
provision for income tax consisted of the following:
Deferred
Federal
State
Current
Federal
State
For the Years Ended
December 31,
2008
2007
2006
$352
26
$468
104
$641
141
378
572
782
328
73
401
—
—
86
19
— 105
Total income tax expense
$779
$572
$887
Reported on line entitled
income taxes
Reported on line entitled gain
on sales of real estate, net
$201
$569
$887
578
3
—
Total income tax expense
$779
$572
$887
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 82
Page 83
notes continued
A reconciliation of our TRS’ Federal statutory rate to
the effective tax rate for income tax reported on our
Statements of Operations is set forth below:
17. disContinued oPerations
Income from discontinued operations includes revenues
and expenses associated with the following:
For the Years Ended
December 31,
2008
2007
2006
34.0% 34.0% 34.0%
4.6%
0.6%
4.6%
0.1%
4.6%
0.2%
• two Lakeview at the Greens properties that
were sold on February 6, 2006;
• 68 Culver Road property that was sold
on March 8, 2006;
• 710 Route 46 property that was sold
on July 26, 2006;
• 230 Schilling Circle property that was sold
Income taxes at U.S.
statutory rate
State and local, net of U.S.
Federal tax benefit
Other
Effective tax rate
39.2% 38.7% 38.8%
on August 9, 2006;
Items in our TRS contributing to temporary differ-
ences that lead to deferred taxes include net operating
losses that are not deductible until future periods,
depreciation and amortization, share-based com-
pensation, certain accrued compensation and
compensation paid in the form of contributions to
a deferred nonqualified compensation plan.
We are subject to certain state and local income and
franchise taxes. The expense associated with these
state and local taxes is included in general and admin-
istrative expense on our Consolidated Statements of
Operations. We did not separately state these amounts
on our Consolidated Statements of Operations
because they are insignificant.
• 7 Centre Drive property that was sold
on August 30, 2006;
• Brown’s Wharf property that was sold
on September 28, 2006;
• 2 and 8 Centre Drive properties that were sold
on September 7, 2007;
• 7321 Parkway property that was sold
on September 7, 2007;
• 10552 Philadelphia Road property that was sold
on December 27, 2007;
• 429 Ridge Road property that was sold
on January 31, 2008 (this property was classified
as held for sale as of December 31, 2007);
• 47 Commerce Drive property that was sold
on April 1, 2008; and
• 7253 Ambassador Road property that
was sold on June 2, 2008.
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 82
Page 83
Certain reclassifications have been made in prior
periods to reflect discontinued operations consistent
with the current period presentation. The table
below sets forth the components of income from
discontinued operations:
For the Years
Ended December 31,
2008
2007
2006
Revenue from
real estate operations
$ 358 $ 3,608
$ 13,271
Expenses from
real estate operations:
Property operating
expenses
Depreciation
and amortization
Interest expense
Other
Expenses from real
estate operations
Income from discontinued
operations before gain
on sales of real estate
and minority interests
Gain on sales of real estate
Income taxes
Minority interests in
discontinued operations
Income from discontinued
operations, net of
minority interests
210
1,871
3,277
52
51
—
1,560
1,382
—
2,287
2,417
—
313
4,813
7,981
45
2,526
—
(1,205)
3,871
(44)
5,290
17,031
—
(392)
(412)
(3,901)
$ 2,179 $ 2,210
$ 18,420
18. Commitments
and ContingenCies
In the normal course of business, we are involved in
legal actions arising from our ownership and adminis-
tration of properties. Management does not anticipate
that any liabilities that may result will have a materially
adverse effect on our financial position, operations or
liquidity. We are subject to various Federal, state and
local environmental regulations related to our property
ownership and operation. We have performed environ-
mental assessments of our properties, the results of
which have not revealed any environmental liability
that we believe would have a materially adverse effect
on our financial position, operations or liquidity.
Acquisitions
At December 31, 2008, we were obligated to make an
additional cash payment of up to $4,000 in a future year
in connection with our acquisition of the land at the
former Fort Ritchie United States Army base in Cascade,
Washington County, Maryland. This payment could be
reduced by a range of $750 to the full $4,000 depend-
ing on (1) defined levels of job creation resulting from
the future development of the property taking place and
(2) future real estate taxes generated by the property.
Joint Ventures
As part of our obligations under the partnership agree-
ment of Harrisburg Corporate Gateway Partners, LP,
we agreed to indemnify the partnership’s lender for
80% of losses under standard nonrecourse loan guar-
antees (environmental indemnifications and guarantees
against fraud and misrepresentation) during the period
of time in which we manage the partnership’s proper-
ties; we do not expect to incur any losses under these
loan guarantees.
We are party to a contribution agreement that formed
a joint venture relationship with a limited partnership
to develop up to 1.8 million square feet of office space
on 63 acres of land located in Hanover, Maryland.
Under the contribution agreement, we agreed to fund
up to $2,200 in pre-construction costs associated with
the property. As we and the joint venture partner agree
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 84
Page 85
notes continued
Environmental Indemnity Agreement
We agreed to provide certain environmental indemni-
fications in connection with a lease of three properties
in our New Jersey region. The prior owner of the
properties, a Fortune 100 company which is responsi-
ble for groundwater contamination at such properties,
previously agreed to indemnify us for (1) direct losses
incurred in connection with the contamination and (2)
its failure to perform remediation activities required
by the State of New Jersey, up to the point that the
state declares the remediation to be complete. Under
the lease agreement, we agreed to the following:
• to indemnify the tenant against losses covered
under the prior owner’s indemnity agreement
if the prior owner fails to indemnify the tenant
for such losses. This indemnification is capped
at $5,000 in perpetuity after the State of New
Jersey declares the remediation to be complete;
• to indemnify the tenant for consequential dam-
ages (e.g., business interruption) at one of the
buildings in perpetuity and another of the build-
ings for 15 years after the tenant’s acquisition of
the property from us, if such acquisition occurs.
This indemnification is capped at $12,500; and
• to pay 50% of additional costs related to con-
struction and environmental regulatory activities
incurred by the tenant as a result of the indemni-
fied environmental condition of the properties.
This indemnification is capped at $300 annually
and $1,500 in the aggregate.
to proceed with the construction of buildings in the
future, our joint venture partner would contribute land
into newly-formed entities and we would make additional
cash capital contributions into such entities to fund
development and construction activities for which
financing is not obtained. We owned a 50% interest in
one such joint venture as of December 31, 2008.
We may be required to make our pro rata share of
additional investments in our real estate joint ventures
(generally based on our percentage ownership) in the
event that additional funds are needed. In the event
that the other members of these joint ventures do not
pay their share of investments when additional funds
are needed, we may then deem it appropriate to make
even larger investments in these joint ventures.
Office Space Operating Leases
We are obligated as lessee under three operating leases
for office space. Future minimum rental payments due
under the terms of these leases as of December 31,
2008 follow:
2009
2010
2011
$178
135
57
$370
Other Operating Leases
We are obligated under various leases for vehicles and
office equipment. Future minimum rental payments
due under the terms of these leases as of December 31,
2008 follow:
2009
2010
2011
2012
$426
204
69
15
$714
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 84
Page 85
notes continued
19. quarterly data (unaudited)
The tables below set forth selected quarterly information for the years ended December 31, 2008 and 2007.
Certain of the amounts below have been reclassified to conform to the current period presentation of our
Consolidated Financial Statements. In addition, revenues for the three months ended March 31, 2008 and
June 30, 2008 include adjustments of $1,622 and $7,280, respectively, representing increases to construction
contract revenues that were offset by an equal dollar amount of increases to construction contract expenses;
these adjustments did not affect the operating income or net income previously reported on the Forms 10-q
filed with respect to such periods and are not material to the financial statements.
Revenues
Operating income
For the Year Ended December 31, 2008
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 107,616
$ 120,370
$ 191,088
$ 168,944
$ 31,742
$ 33,496
$ 35,891
$ 33,559
Income from continuing operations
$ 9,521
$ 11,707
$ 12,953
$ 21,471
Income (loss) from discontinued operations
$ 1,072
$ 1,115
$
(8)
$
—
Net income
Preferred share dividends
$ 11,395
(4,025)
$ 12,853
(4,026)
$ 12,949
(4,025)
$ 21,471
(4,026)
Net income available to common shareholders
$ 7,370
$ 8,827
$ 8,924
$ 17,445
Basic earnings per share:
Income from continuing operations
Net income available to common shareholders
Diluted earnings per share:
Income from continuing operations
Net income available to common shareholders
Revenues
Operating income
Income from continuing operations
Income (loss) from discontinued operations
Net income
Preferred share dividends
$
$
$
$
0.13
0.16
0.13
0.15
$
$
$
$
0.16
0.19
0.16
0.18
$
$
$
$
0.19
0.19
0.19
0.19
$
$
$
$
0.34
0.34
0.34
0.34
For the Year Ended December 31, 2007
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
$ 98,705
$ 101,321
$ 104,263
$ 102,850
$ 26,429
$ 28,867
$ 30,605
$ 31,783
$
$
$
5,411
136
5,547
(3,993)
$
$
$
8,112
(396)
$
$
8,347
2,046
7,877
(4,025)
$ 11,431
(4,025)
$
$
$
9,144
424
9,929
(4,025)
Net income available to common shareholders
$
1,554
$
3,852
$
7,406
$
5,904
Basic earnings per share:
Income from continuing operations
Net income available to common shareholders
Diluted earnings per share:
Income from continuing operations
Net income available to common shareholders
$
$
$
$
0.03
0.03
0.03
0.03
$
$
$
$
0.09
0.08
0.09
0.08
$
$
$
$
0.11
0.16
0.11
0.15
$
$
$
$
0.12
0.13
0.11
0.12
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 86
Page 87
market for registrant’s common equity
Related Stockholder Matters and Issuer Repurchases of Equity Securities
market information
Our common shares trade on the New York Stock
Exchange (“NYSE”) under the symbol “OFC.” The
table below shows the range of the high and low sale
prices for our common shares as reported on the NYSE,
as well as the quarterly common share dividends per
share declared:
2007
First quarter
Second quarter
Third quarter
Fourth quarter
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
Low
High
$ 44.85
$ 40.47
$ 35.21
$ 30.81
$ 56.45
$ 48.81
$ 44.63
$ 45.39
Price Range
Low
High
$ 25.43
$ 33.65
$ 32.00
$ 20.39
$ 36.16
$ 40.00
$ 43.50
$ 39.84
Dividends
Per Share
$ 0.3100
$ 0.3100
$ 0.3400
$ 0.3400
Dividends
Per Share
$ 0.3400
$ 0.3400
$ 0.3725
$ 0.3725
The number of holders of record of our common
shares was 619 as of December 31, 2008. This number
does not include shareholders whose shares are held of
record by a brokerage house or clearing agency, but
does include any such brokerage house or clearing
agency as one record holder.
We will pay dividends at the discretion of our Board
of Trustees. Our ability to pay cash dividends will be
dependent upon: (i) the income and cash flow gener-
ated from our operations; (ii) cash generated or used
by our financing and investing activities; and (iii) the
annual distribution requirements under the REIT pro-
visions of the Code described above and such other
factors as the Board of Trustees deems relevant. Our
ability to make cash dividends will also be limited by
the terms of our Operating Partnership Agreement
and our financing arrangements, as well as limitations
imposed by state law and the agreements governing
any future indebtedness.
common shares performance graph
The graph and the table set forth below assume $100 was invested on December 31, 2003 in the common
shares of Corporate Office Properties Trust. The graph and the table compare the cumulative return (assuming
reinvestment of dividends) of this investment with a $100 investment at that time in the S&P 500 Index or the
All Equity REIT Index of the National Association of Real Estate Investment Trusts (“NAREIT”):
NAREIT
S&P 500
COPT
TOTAL RETURN PERFORMANCE
300
250
200
150
100
50
0
300
250
200
150
100
50
0
300
250
200
150
100
50
0
e
u
l
a
V
x
e
d
n
I
$300
250
200
150
100
50
0
Corporate Office Properties Trust
NAREIT All Equity REIT Index
S&P 500
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Index
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Corporate Office Properties Trust
S&P 500
NAREIT All Equity REIT Index
100.00
100.00
100.00
145.16
110.88
131.58
181.97
116.33
147.58
265.27
134.70
199.32
171.13
142.10
168.05
174.16
89.53
104.65
Value at
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 86
Page 87
reConCiliation of diluted ffo Per share ComPonents to
diluted ePs ComPonents (unaudited)
(Dollars and shares in thousands,
except per share data)
Numerator for diluted
Years Ended December 31,
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
EPS
$ 8,952 $ 14,788 $ 11,332 $ 13,573 $ 13,711 $ 7,650 $ 18,911 $ 24,416 $ 29,927 $ 18,716 $ 42,566
Add: Minority interests-
common units in the
Operating Partnership
Add: Real estate-related
depreciation and
amortization
Add: Depreciation and
amortization on uncon-
solidated real estate
entities
Less: Depreciation and
amortization allocable
to minority interests in
other consolidated
entities
Less: Gain on sales of real
estate, net of taxes,
excluding development
portion
Add: Convertible pre-
— 3,449
6,322
6,592
5,800
6,712
5,659
5,889
7,276
3,682
7,315
6,238
11,987
16,887
20,558
30,832
36,681
51,371
62,850
78,631
106,260
102,772
—
—
—
144
165
295
106
182
910
666
648
—
—
—
—
—
—
(86)
(114)
(163)
(188)
(270)
— (1,140)
(107)
(416)
(268)
(2,897)
(95)
(4,422) (17,644)
(3,827)
(2,630)
ferred share dividends
327
1,353
677
—
—
544
Add: Preferred unit
distributions
Add: Expense on dilutive
share-based
compensation
Add: Repurchase of pre-
ferred units in excess
of recorded book value
Add: Cumulative effect
of accounting change
Numerator for diluted
—
—
—
—
61
2,240
2,287
2,287
1,049
—
—
—
—
—
—
—
327
10
382
—
263
— 11,224
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
FFO per share
$ 15,517 $ 30,498 $ 37,351 $ 43,001 $ 52,854 $ 61,268 $ 76,248 $ 88,801 $ 98,937 $ 125,309 $ 150,401
Denominator for diluted
EPS
19,237
22,574
19,213
21,623
24,547
28,021
34,982
38,997
43,262
47,630
48,865
— 4,883
9,652
9,437
9,282
8,932
8,726
8,702
8,511
8,296
8,107
Weighted average com-
mon units
Assumed conversion of
weighted average con-
vertible preferred
shares
Assumed conversion of
weighted average con-
vertible preferred units
Dilutive effect of share-
based compensation
awards
Denominator for diluted
449
1,845
918
—
— 1,197
—
—
70
2,371
2,421
2,421
1,101
—
—
—
384
43
221
—
—
—
—
—
—
—
—
—
—
—
—
FFO per share
19,686
29,372
32,154
33,481
36,634
39,294
43,929
47,699
51,773
55,926
56,972
Diluted EPS
Diluted FFO per share
$ 0.47 $ 0.66 $ 0.59 $ 0.63 $ 0.56 $ 0.27 $ 0.54 $ 0.63 $ 0.69 $
$ 0.79 $ 1.04 $ 1.16 $ 1.28 $ 1.44 $ 1.56 $ 1.74 $ 1.86 $ 1.91 $
0.39 $
2.24 $
0.87
2.64
Corporate Office Properties Trust & Subsidiaries 2008 ANNUAL REPORT Page 88
—
—
—
—
corporate information
EXECUTIVE OFFICERS
Randall M. Griffin
President and Chief Executive Officer
Roger A. Waesche, Jr.
Executive Vice President and
Chief Operating Officer
Stephen E. Riffee
Executive Vice President and
Chief Financial Officer
Karen M. Singer
Senior Vice President, General
Counsel and Secretary
SERVICE COMPANY
EXECUTIVE OFFICER
Wayne H. Lingafelter
President, COPT Development &
Construction Services, LLC
EXECUTIVE OFFICES
Corporate Office Properties Trust
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: (443) 285-5400
Facsimile: (443) 285-7650
REGISTRAR AND
TRANSFER AGENT
Shareholders with questions concerning
stock certificates, account information,
dividend payments or stock transfers
should contact our transfer agent:
Wells Fargo Bank, N.A.
Shareowner Services
161 North Concord Exchange
South St. Paul, Minnesota 55075
Toll-free: (800) 468-9716
www.wellsfargo.com/shareownerservices
LEGAL COUNSEL
Morgan, Lewis & Bockius
1701 Market Street
Philadelphia, Pennsylvania 19103
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 East Pratt Street, Suite 1900
Baltimore, Maryland 21202
board of trustees
DIVIDEND REINVESTMENT PLAN
Registered shareholders may reinvest
dividends through the Company’s
dividend reinvestment plan. For more
information, please contact Wells
Fargo Shareowner Services at (800)
468-9716.
ANNUAL MEETING
The annual meeting of the shareholders
will be held at 9:30 a.m. on Thursday,
May 14, 2009, at the corporate head-
quarters of Corporate Office Properties
Trust at 6711 Columbia Gateway Drive,
Suite 300, Columbia, Maryland 21046.
INVESTOR RELATIONS
For help with questions about the
Company, or for additional corporate
information, please contact:
Mary Ellen Fowler
Senior Vice President and Treasurer
Corporate Office Properties Trust
6711 Columbia Gateway Drive,
Suite 300
Columbia, Maryland 21046
Telephone: (443) 285-5450
Facsimile: (443) 285-7640
Email: ir@copt.com
SHAREHOLDER INFORMATION
As of March 16, 2009, the Company
had approximately 54,367,000
outstanding common shares owned
by approximately 670 shareholders of
record. The number of shareholders
does not include the number of persons
whose shares are held in nominee or
“street name” accounts through brokers
or clearing agencies.
COMMON AND
PREFERRED SHARES
The common and preferred shares
of Corporate Office Properties Trust
are traded on the New York Stock
Exchange. Common shares are traded
under the symbol OFC, and preferred
shares are traded under the symbols
OFCPrG, OFCPrH or OFCPrJ.
.
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WEBSITE
For additional information on the
Company, visit our website at
www.copt.com.
FORWARD-LOOKING
INFORMATION
This report contains forward-looking
information based upon the Company’s
current best judgment and expecta-
tions. Actual results could vary from
those presented herein. The risks and
uncertainties associated with the for-
ward-looking information include the
strength of the commercial office real
estate market in which the Company
operates, competitive market condi-
tions, general economic growth, inter-
est rates and capital market conditions.
For further information, please refer
to the Company’s filings with the
Securities and Exchange Commission.
CORPORATE GOVERNANCE
CERTIFICATION
The Company submitted to the New
York Stock Exchange in 2008 the
Annual CEO Certification required by
Section 303A.12 of the New York Stock
Exchange corporate governance rules.
SARBANES-OXLEY ACT
SECTION 302 CERTIFICATION
The Company filed with the Securities
and Exchange Commission, as an
exhibit to its Form 10-K for the
year ended December 31, 2008, the
Sarbanes-Oxley Act Section 302 certi-
fication regarding the quality of the
Company’s public disclosure.
(top photo, l to r)
Jay H. Shidler
Chairman of the Board
Managing Partner,
The Shidler Group
Steven D. Kesler
Chief Financial Officer
CRP Operations, LLC
Kenneth D. Wethe
Principal
Wethe & Associates
Randall M. Griffin
President and
Chief Executive Officer
Corporate Office Properties Trust
(bottom photo, l to r)
Clay W. Hamlin, III
Vice Chairman of the Board
Kenneth S. Sweet, Jr.
Managing Partner
Gordon Stuart Associates
Douglas M. Firstenberg
Founding Principal
Stonebridge Associates, Inc.
Thomas F. Brady
Executive Vice President,
Corporate Strategy
Constellation Energy
Robert L. Denton
Managing Partner
The Shidler Group
The Strength of
Our Relationships
A Decade of Leadership in Performance
Annual Report 2008 10 Year Anniversary
6711 Columbia Gateway Drive, Columbia, Maryland 21046 443-285-5400
www.copt.com