(cid:86) Annual Report 2012 Letter to Shareholders “Luck is when preparation meets opportunity.” (cid:59)(cid:79)(cid:80)(cid:90)(cid:3)(cid:84)(cid:86)(cid:75)(cid:80)(cid:196)(cid:76)(cid:75)(cid:3)(cid:88)(cid:92)(cid:86)(cid:91)(cid:76)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:58)(cid:76)(cid:85)(cid:76)(cid:74)(cid:72)(cid:19)(cid:3)(cid:72)(cid:3)(cid:196)(cid:89)(cid:90)(cid:91)(cid:20)(cid:74)(cid:76)(cid:85)(cid:91)(cid:92)(cid:89)(cid:96)(cid:3)(cid:57)(cid:86)(cid:84)(cid:72)(cid:85)(cid:3) (cid:87)(cid:79)(cid:80)(cid:83)(cid:86)(cid:90)(cid:86)(cid:87)(cid:79)(cid:76)(cid:89)(cid:19)(cid:3)(cid:76)(cid:87)(cid:80)(cid:91)(cid:86)(cid:84)(cid:80)(cid:97)(cid:76)(cid:90)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:90)(cid:91)(cid:89)(cid:86)(cid:85)(cid:78)(cid:3)(cid:96)(cid:76)(cid:72)(cid:89)(cid:3)(cid:42)(cid:54)(cid:55)(cid:59)(cid:3)(cid:76)(cid:95)(cid:87)(cid:76)(cid:89)(cid:80)(cid:76)(cid:85)(cid:74)(cid:76)(cid:75)(cid:3) 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(cid:54)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:75)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:83)(cid:76)(cid:72)(cid:90)(cid:80)(cid:85)(cid:78)(cid:3)(cid:77)(cid:89)(cid:86)(cid:85)(cid:91)(cid:19)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:3)(cid:94)(cid:72)(cid:90)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:73)(cid:76)(cid:90)(cid:91)(cid:3)(cid:96)(cid:76)(cid:72)(cid:89)(cid:3)(cid:80)(cid:85)(cid:3) (cid:91)(cid:79)(cid:76)(cid:3)(cid:42)(cid:86)(cid:84)(cid:87)(cid:72)(cid:85)(cid:96)(cid:187)(cid:90)(cid:3)(cid:79)(cid:80)(cid:90)(cid:91)(cid:86)(cid:89)(cid:96)(cid:21)(cid:3)(cid:62)(cid:76)(cid:3)(cid:73)(cid:76)(cid:78)(cid:72)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:96)(cid:76)(cid:72)(cid:89)(cid:3)(cid:91)(cid:89)(cid:72)(cid:74)(cid:82)(cid:80)(cid:85)(cid:78)(cid:3)(cid:27)(cid:23)(cid:23)(cid:19)(cid:23)(cid:23)(cid:23)(cid:3) square feet of potential demand for space at three of our (cid:75)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:87)(cid:89)(cid:86)(cid:81)(cid:76)(cid:74)(cid:91)(cid:90)(cid:33)(cid:3) (cid:139)(cid:3) (cid:59)(cid:79)(cid:76)(cid:3)(cid:53)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)(cid:41)(cid:92)(cid:90)(cid:80)(cid:85)(cid:76)(cid:90)(cid:90)(cid:3)(cid:55)(cid:72)(cid:89)(cid:82)(cid:19)(cid:3)(cid:94)(cid:79)(cid:80)(cid:74)(cid:79)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:76)(cid:90)(cid:3)(cid:45)(cid:91)(cid:21)(cid:3)(cid:52)(cid:76)(cid:72)(cid:75)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3) (cid:40)(cid:85)(cid:85)(cid:72)(cid:87)(cid:86)(cid:83)(cid:80)(cid:90)(cid:3)(cid:49)(cid:92)(cid:85)(cid:74)(cid:91)(cid:80)(cid:86)(cid:85)(cid:19)(cid:3)(cid:52)(cid:43) (cid:139)(cid:3) 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(cid:91)(cid:86)(cid:91)(cid:72)(cid:83)(cid:19)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:95)(cid:80)(cid:84)(cid:72)(cid:91)(cid:76)(cid:83)(cid:96)(cid:3)(cid:29)(cid:30)(cid:28)(cid:19)(cid:23)(cid:23)(cid:23)(cid:3)(cid:90)(cid:88)(cid:92)(cid:72)(cid:89)(cid:76)(cid:3)(cid:77)(cid:76)(cid:76)(cid:91)(cid:3)(cid:94)(cid:72)(cid:90)(cid:3)(cid:83)(cid:76)(cid:72)(cid:90)(cid:76)(cid:75)(cid:3)(cid:91)(cid:86)(cid:3)(cid:60)(cid:21)(cid:58)(cid:21)(cid:3) (cid:46)(cid:86)(cid:93)(cid:76)(cid:89)(cid:85)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:72)(cid:78)(cid:76)(cid:85)(cid:74)(cid:80)(cid:76)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:75)(cid:76)(cid:77)(cid:76)(cid:85)(cid:90)(cid:76)(cid:3)(cid:74)(cid:86)(cid:85)(cid:91)(cid:89)(cid:72)(cid:74)(cid:91)(cid:86)(cid:89)(cid:90)(cid:19)(cid:3)(cid:84)(cid:86)(cid:90)(cid:91)(cid:3)(cid:86)(cid:77)(cid:3)(cid:94)(cid:79)(cid:80)(cid:74)(cid:79)(cid:3) are engaged in defense information technology and national (cid:90)(cid:76)(cid:74)(cid:92)(cid:89)(cid:80)(cid:91)(cid:96)(cid:20)(cid:89)(cid:76)(cid:83)(cid:72)(cid:91)(cid:76)(cid:75)(cid:3)(cid:72)(cid:74)(cid:91)(cid:80)(cid:93)(cid:80)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:15)(cid:86)(cid:92)(cid:89)(cid:3)(cid:58)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:59)(cid:76)(cid:85)(cid:72)(cid:85)(cid:91)(cid:3)(cid:53)(cid:80)(cid:74)(cid:79)(cid:76)(cid:16)(cid:21)(cid:3) Roger A. Waesche, Jr. (cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:13)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:585)(cid:74)(cid:76)(cid:89) (cid:59)(cid:79)(cid:76)(cid:3)(cid:77)(cid:72)(cid:74)(cid:91)(cid:3)(cid:91)(cid:79)(cid:72)(cid:91)(cid:3)(cid:94)(cid:76)(cid:3)(cid:72)(cid:74)(cid:79)(cid:80)(cid:76)(cid:93)(cid:76)(cid:75)(cid:3)(cid:89)(cid:76)(cid:74)(cid:86)(cid:89)(cid:75)(cid:3)(cid:75)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:83)(cid:76)(cid:72)(cid:90)(cid:80)(cid:85)(cid:78)(cid:3)(cid:75)(cid:92)(cid:89)(cid:80)(cid:85)(cid:78)(cid:3) (cid:72)(cid:3)(cid:91)(cid:80)(cid:84)(cid:76)(cid:3)(cid:94)(cid:79)(cid:76)(cid:85)(cid:3)(cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:58)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:59)(cid:76)(cid:85)(cid:72)(cid:85)(cid:91)(cid:3)(cid:53)(cid:80)(cid:74)(cid:79)(cid:76)(cid:3)(cid:94)(cid:76)(cid:89)(cid:76)(cid:3) (cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:92)(cid:85)(cid:75)(cid:76)(cid:89)(cid:3)(cid:92)(cid:85)(cid:74)(cid:76)(cid:89)(cid:91)(cid:72)(cid:80)(cid:85)(cid:3)(cid:73)(cid:92)(cid:75)(cid:78)(cid:76)(cid:91)(cid:72)(cid:89)(cid:96)(cid:3)(cid:74)(cid:86)(cid:85)(cid:75)(cid:80)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90)(cid:3)(cid:93)(cid:72)(cid:83)(cid:80)(cid:75)(cid:72)(cid:91)(cid:76)(cid:90)(cid:3) (cid:86)(cid:92)(cid:89)(cid:3)(cid:75)(cid:76)(cid:74)(cid:80)(cid:90)(cid:80)(cid:86)(cid:85)(cid:3)(cid:91)(cid:86)(cid:3)(cid:74)(cid:86)(cid:85)(cid:74)(cid:76)(cid:85)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:73)(cid:92)(cid:90)(cid:80)(cid:85)(cid:76)(cid:90)(cid:90)(cid:3)(cid:72)(cid:89)(cid:86)(cid:92)(cid:85)(cid:75)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:80)(cid:85)(cid:78)(cid:3)(cid:91)(cid:79)(cid:80)(cid:90)(cid:3) specialized niche. The need for these tenants to establish or (cid:76)(cid:95)(cid:87)(cid:72)(cid:85)(cid:75)(cid:3)(cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:74)(cid:83)(cid:86)(cid:90)(cid:76)(cid:3)(cid:87)(cid:89)(cid:86)(cid:95)(cid:80)(cid:84)(cid:80)(cid:91)(cid:96)(cid:3)(cid:91)(cid:86)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:75)(cid:76)(cid:84)(cid:72)(cid:85)(cid:75)(cid:3)(cid:75)(cid:89)(cid:80)(cid:93)(cid:76)(cid:89)(cid:90)(cid:3) (cid:91)(cid:79)(cid:76)(cid:96)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:76)(cid:3)(cid:91)(cid:89)(cid:92)(cid:84)(cid:87)(cid:76)(cid:75)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:73)(cid:89)(cid:86)(cid:72)(cid:75)(cid:76)(cid:89)(cid:3)(cid:73)(cid:92)(cid:75)(cid:78)(cid:76)(cid:91)(cid:72)(cid:89)(cid:96)(cid:3)(cid:92)(cid:85)(cid:74)(cid:76)(cid:89)(cid:91)(cid:72)(cid:80)(cid:85)(cid:91)(cid:80)(cid:76)(cid:90)(cid:21)(cid:3)(cid:3) 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(cid:87)(cid:89)(cid:86)(cid:87)(cid:76)(cid:89)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:58)(cid:57)(cid:55)(cid:19)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:79)(cid:72)(cid:75)(cid:3)(cid:74)(cid:86)(cid:84)(cid:87)(cid:83)(cid:76)(cid:91)(cid:76)(cid:75)(cid:3)(cid:76)(cid:85)(cid:91)(cid:80)(cid:91)(cid:83)(cid:80)(cid:85)(cid:78)(cid:3)(cid:84)(cid:92)(cid:74)(cid:79)(cid:3)(cid:86)(cid:77)(cid:3) (cid:91)(cid:79)(cid:76)(cid:3)(cid:58)(cid:57)(cid:55)(cid:3)(cid:83)(cid:72)(cid:85)(cid:75)(cid:3)(cid:77)(cid:86)(cid:89)(cid:3)(cid:90)(cid:72)(cid:83)(cid:76)(cid:3)(cid:91)(cid:86)(cid:3)(cid:89)(cid:76)(cid:91)(cid:72)(cid:80)(cid:83)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:80)(cid:72)(cid:83)(cid:3)(cid:80)(cid:85)(cid:93)(cid:76)(cid:90)(cid:91)(cid:86)(cid:89)(cid:90)(cid:21)(cid:3)(cid:45)(cid:89)(cid:86)(cid:84)(cid:3) (cid:72)(cid:85)(cid:3)(cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:76)(cid:585)(cid:74)(cid:80)(cid:76)(cid:85)(cid:74)(cid:96)(cid:3)(cid:90)(cid:91)(cid:72)(cid:85)(cid:75)(cid:87)(cid:86)(cid:80)(cid:85)(cid:91)(cid:19)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:85)(cid:76)(cid:72)(cid:89)(cid:83)(cid:96)(cid:3)(cid:11)(cid:27)(cid:23)(cid:23)(cid:3)(cid:84)(cid:80)(cid:83)(cid:83)(cid:80)(cid:86)(cid:85)(cid:3) of disposition properties contained smaller tenants and, (cid:72)(cid:74)(cid:74)(cid:86)(cid:89)(cid:75)(cid:80)(cid:85)(cid:78)(cid:83)(cid:96)(cid:19)(cid:3)(cid:94)(cid:76)(cid:89)(cid:76)(cid:3)(cid:84)(cid:86)(cid:89)(cid:76)(cid:3)(cid:84)(cid:72)(cid:85)(cid:72)(cid:78)(cid:76)(cid:84)(cid:76)(cid:85)(cid:91)(cid:20)(cid:80)(cid:85)(cid:91)(cid:76)(cid:85)(cid:90)(cid:80)(cid:93)(cid:76)(cid:21)(cid:3)(cid:40)(cid:83)(cid:91)(cid:79)(cid:86)(cid:92)(cid:78)(cid:79)(cid:3)(cid:91)(cid:79)(cid:80)(cid:90)(cid:3) (cid:90)(cid:88)(cid:92)(cid:72)(cid:89)(cid:76)(cid:3)(cid:77)(cid:86)(cid:86)(cid:91)(cid:72)(cid:78)(cid:76)(cid:3)(cid:89)(cid:76)(cid:87)(cid:89)(cid:76)(cid:90)(cid:76)(cid:85)(cid:91)(cid:76)(cid:75)(cid:3)(cid:24)(cid:28)(cid:12)(cid:3)(cid:86)(cid:77)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:87)(cid:86)(cid:89)(cid:91)(cid:77)(cid:86)(cid:83)(cid:80)(cid:86)(cid:3)(cid:72)(cid:91)(cid:3) (cid:52)(cid:72)(cid:89)(cid:74)(cid:79)(cid:3)(cid:26)(cid:24)(cid:19)(cid:3)(cid:25)(cid:23)(cid:24)(cid:24)(cid:3)(cid:15)(cid:91)(cid:79)(cid:76)(cid:3)(cid:83)(cid:72)(cid:90)(cid:91)(cid:3)(cid:88)(cid:92)(cid:72)(cid:89)(cid:91)(cid:76)(cid:89)(cid:3)(cid:94)(cid:76)(cid:3)(cid:89)(cid:76)(cid:87)(cid:86)(cid:89)(cid:91)(cid:76)(cid:75)(cid:3)(cid:73)(cid:76)(cid:77)(cid:86)(cid:89)(cid:76)(cid:3)(cid:83)(cid:72)(cid:92)(cid:85)(cid:74)(cid:79)(cid:80)(cid:85)(cid:78)(cid:3) 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(cid:72)(cid:85)(cid:75)(cid:3)(cid:91)(cid:79)(cid:76)(cid:89)(cid:76)(cid:77)(cid:86)(cid:89)(cid:76)(cid:3)(cid:76)(cid:72)(cid:89)(cid:85)(cid:80)(cid:85)(cid:78)(cid:90)(cid:3)(cid:88)(cid:92)(cid:72)(cid:83)(cid:80)(cid:91)(cid:96)(cid:3)(cid:73)(cid:96)(cid:3)(cid:80)(cid:85)(cid:74)(cid:89)(cid:76)(cid:72)(cid:90)(cid:80)(cid:85)(cid:78)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:42)(cid:86)(cid:84)(cid:87)(cid:72)(cid:85)(cid:96)(cid:187)(cid:90)(cid:3) concentration of strategic properties, which are those that are (cid:72)(cid:75)(cid:81)(cid:72)(cid:74)(cid:76)(cid:85)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:78)(cid:86)(cid:93)(cid:76)(cid:89)(cid:85)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:75)(cid:76)(cid:84)(cid:72)(cid:85)(cid:75)(cid:3)(cid:75)(cid:89)(cid:80)(cid:93)(cid:76)(cid:89)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:22)(cid:86)(cid:89)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:83)(cid:76)(cid:72)(cid:90)(cid:76)(cid:75)(cid:3) (cid:87)(cid:89)(cid:80)(cid:84)(cid:72)(cid:89)(cid:80)(cid:83)(cid:96)(cid:3)(cid:91)(cid:86)(cid:3)(cid:58)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:59)(cid:76)(cid:85)(cid:72)(cid:85)(cid:91)(cid:90)(cid:21)(cid:3)(cid:58)(cid:80)(cid:85)(cid:74)(cid:76)(cid:3)(cid:74)(cid:86)(cid:84)(cid:84)(cid:76)(cid:85)(cid:74)(cid:80)(cid:85)(cid:78)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:58)(cid:57)(cid:55)(cid:19) the Company has increased its percentage of annual rental continued on inside back cover (cid:44)(cid:41)(cid:48)(cid:59)(cid:43)(cid:40)(cid:3)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:31)(cid:21)(cid:29)(cid:95)(cid:3)(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:24)(cid:3)(cid:91)(cid:86)(cid:3)(cid:30)(cid:21)(cid:24)(cid:95)(cid:3)(cid:77)(cid:86)(cid:89)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:21)(cid:3)(cid:41)(cid:96)(cid:3)(cid:80)(cid:84)(cid:87)(cid:89)(cid:86)(cid:93)(cid:80)(cid:85)(cid:78)(cid:3) (cid:72)(cid:83)(cid:83)(cid:3)(cid:86)(cid:77)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:82)(cid:76)(cid:96)(cid:3)(cid:83)(cid:76)(cid:93)(cid:76)(cid:89)(cid:72)(cid:78)(cid:76)(cid:3)(cid:84)(cid:76)(cid:91)(cid:89)(cid:80)(cid:74)(cid:90)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:73)(cid:76)(cid:83)(cid:80)(cid:76)(cid:93)(cid:76)(cid:3)(cid:91)(cid:79)(cid:72)(cid:91)(cid:3)(cid:94)(cid:76)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3) 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(cid:54)(cid:92)(cid:89)(cid:3)(cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:90)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:72)(cid:83)(cid:94)(cid:72)(cid:96)(cid:90)(cid:3)(cid:74)(cid:89)(cid:80)(cid:91)(cid:80)(cid:74)(cid:72)(cid:83)(cid:3)(cid:91)(cid:86)(cid:3)(cid:92)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:75)(cid:76)(cid:83)(cid:80)(cid:93)(cid:76)(cid:89)(cid:80)(cid:85)(cid:78)(cid:3) (cid:76)(cid:95)(cid:74)(cid:76)(cid:87)(cid:91)(cid:80)(cid:86)(cid:85)(cid:72)(cid:83)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:80)(cid:74)(cid:76)(cid:3)(cid:91)(cid:86)(cid:3)(cid:91)(cid:79)(cid:76)(cid:84)(cid:3)(cid:80)(cid:90)(cid:3)(cid:81)(cid:92)(cid:90)(cid:91)(cid:3)(cid:72)(cid:90)(cid:3)(cid:80)(cid:84)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:21)(cid:3)(cid:62)(cid:76)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3) 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(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:21)(cid:3)(cid:59)(cid:79)(cid:80)(cid:90)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:75)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:85)(cid:80)(cid:85)(cid:91)(cid:79)(cid:3)(cid:74)(cid:86)(cid:85)(cid:90)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:96)(cid:76)(cid:72)(cid:89)(cid:3)(cid:42)(cid:54)(cid:55)(cid:59)(cid:3)(cid:79)(cid:72)(cid:90)(cid:3) (cid:73)(cid:76)(cid:76)(cid:85)(cid:3)(cid:79)(cid:86)(cid:85)(cid:86)(cid:89)(cid:76)(cid:75)(cid:3)(cid:94)(cid:80)(cid:91)(cid:79)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:79)(cid:80)(cid:78)(cid:79)(cid:76)(cid:90)(cid:91)(cid:3)(cid:72)(cid:94)(cid:72)(cid:89)(cid:75)(cid:3)(cid:77)(cid:86)(cid:89)(cid:3)(cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:80)(cid:74)(cid:76)(cid:3) in the real estate industry. In 2012, we also continued our (cid:74)(cid:86)(cid:84)(cid:84)(cid:80)(cid:91)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:75)(cid:76)(cid:90)(cid:80)(cid:78)(cid:85)(cid:80)(cid:85)(cid:78)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:73)(cid:92)(cid:80)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:3)(cid:72)(cid:83)(cid:83)(cid:3)(cid:86)(cid:77)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:86)(cid:585)(cid:74)(cid:76)(cid:3) (cid:73)(cid:92)(cid:80)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:51)(cid:44)(cid:44)(cid:43)(cid:3)(cid:15)(cid:51)(cid:76)(cid:72)(cid:75)(cid:76)(cid:89)(cid:90)(cid:79)(cid:80)(cid:87)(cid:3)(cid:80)(cid:85)(cid:3)(cid:44)(cid:85)(cid:76)(cid:89)(cid:78)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:44)(cid:85)(cid:93)(cid:80)(cid:89)(cid:86)(cid:85)(cid:84)(cid:76)(cid:85)(cid:91)(cid:72)(cid:83)(cid:3) (cid:43)(cid:76)(cid:90)(cid:80)(cid:78)(cid:85)(cid:16)(cid:3)(cid:58)(cid:80)(cid:83)(cid:93)(cid:76)(cid:89)(cid:3)(cid:74)(cid:76)(cid:89)(cid:91)(cid:80)(cid:196)(cid:74)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:3)(cid:86)(cid:89)(cid:3)(cid:79)(cid:80)(cid:78)(cid:79)(cid:76)(cid:89)(cid:21)(cid:3)(cid:62)(cid:76)(cid:3)(cid:85)(cid:86)(cid:94)(cid:3)(cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:26)(cid:30)(cid:3)(cid:51)(cid:44)(cid:44)(cid:43)(cid:20) (cid:74)(cid:76)(cid:89)(cid:91)(cid:80)(cid:196)(cid:76)(cid:75)(cid:3)(cid:73)(cid:92)(cid:80)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:74)(cid:86)(cid:85)(cid:90)(cid:91)(cid:89)(cid:92)(cid:74)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:31)(cid:3) (cid:84)(cid:86)(cid:89)(cid:76)(cid:3)(cid:91)(cid:79)(cid:72)(cid:91)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:89)(cid:76)(cid:78)(cid:80)(cid:90)(cid:91)(cid:76)(cid:89)(cid:76)(cid:75)(cid:21)(cid:3)(cid:51)(cid:72)(cid:90)(cid:91)(cid:83)(cid:96)(cid:19)(cid:3)(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:74)(cid:86)(cid:85)(cid:91)(cid:80)(cid:85)(cid:92)(cid:76)(cid:75)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3) commitment of being a leading contributor in the communities (cid:94)(cid:79)(cid:76)(cid:89)(cid:76)(cid:3)(cid:94)(cid:76)(cid:3)(cid:83)(cid:80)(cid:93)(cid:76)(cid:19)(cid:3)(cid:94)(cid:86)(cid:89)(cid:82)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:90)(cid:76)(cid:89)(cid:93)(cid:76)(cid:3)(cid:73)(cid:96)(cid:3)(cid:78)(cid:80)(cid:93)(cid:80)(cid:85)(cid:78)(cid:3)(cid:91)(cid:86)(cid:3)(cid:86)(cid:93)(cid:76)(cid:89)(cid:3)(cid:24)(cid:25)(cid:28)(cid:3)(cid:74)(cid:79)(cid:72)(cid:89)(cid:80)(cid:91)(cid:72)(cid:73)(cid:83)(cid:76)(cid:3) (cid:86)(cid:89)(cid:78)(cid:72)(cid:85)(cid:80)(cid:97)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:90)(cid:80)(cid:95)(cid:3)(cid:90)(cid:91)(cid:72)(cid:91)(cid:76)(cid:90)(cid:19)(cid:3)(cid:94)(cid:80)(cid:91)(cid:79)(cid:3)(cid:85)(cid:86)(cid:91)(cid:76)(cid:94)(cid:86)(cid:89)(cid:91)(cid:79)(cid:96)(cid:3)(cid:76)(cid:584)(cid:86)(cid:89)(cid:91)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:90)(cid:92)(cid:87)(cid:87)(cid:86)(cid:89)(cid:91)(cid:3) our troops through such programs as Wounded Warriors, Fisher House, Military Heroes, Hope for the Warriors and (cid:58)(cid:86)(cid:83)(cid:75)(cid:80)(cid:76)(cid:89)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:45)(cid:72)(cid:84)(cid:80)(cid:83)(cid:96)(cid:3)(cid:40)(cid:90)(cid:90)(cid:80)(cid:90)(cid:91)(cid:72)(cid:85)(cid:74)(cid:76)(cid:3)(cid:42)(cid:76)(cid:85)(cid:91)(cid:76)(cid:89)(cid:90)(cid:21)(cid:3)(cid:62)(cid:76)(cid:3)(cid:72)(cid:83)(cid:90)(cid:86)(cid:3)(cid:87)(cid:89)(cid:86)(cid:93)(cid:80)(cid:75)(cid:76)(cid:75)(cid:3) (cid:90)(cid:80)(cid:78)(cid:85)(cid:80)(cid:196)(cid:74)(cid:72)(cid:85)(cid:91)(cid:3)(cid:90)(cid:92)(cid:87)(cid:87)(cid:86)(cid:89)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:24)(cid:23)(cid:3)(cid:72)(cid:89)(cid:76)(cid:72)(cid:3)(cid:77)(cid:86)(cid:86)(cid:75)(cid:3)(cid:73)(cid:72)(cid:85)(cid:82)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:196)(cid:93)(cid:76)(cid:3)(cid:90)(cid:91)(cid:72)(cid:91)(cid:76)(cid:90)(cid:21) (cid:48)(cid:85)(cid:3)(cid:90)(cid:92)(cid:84)(cid:84)(cid:72)(cid:89)(cid:96)(cid:19)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:80)(cid:85)(cid:80)(cid:91)(cid:80)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:90)(cid:3)(cid:94)(cid:76)(cid:3)(cid:72)(cid:74)(cid:74)(cid:86)(cid:84)(cid:87)(cid:83)(cid:80)(cid:90)(cid:79)(cid:76)(cid:75)(cid:3)(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:3) (cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:90)(cid:91)(cid:89)(cid:76)(cid:85)(cid:78)(cid:91)(cid:79)(cid:76)(cid:85)(cid:76)(cid:75)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:87)(cid:83)(cid:72)(cid:91)(cid:77)(cid:86)(cid:89)(cid:84)(cid:19)(cid:3)(cid:73)(cid:92)(cid:91)(cid:3)(cid:94)(cid:76)(cid:3)(cid:90)(cid:91)(cid:80)(cid:83)(cid:83)(cid:3)(cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:84)(cid:86)(cid:89)(cid:76)(cid:3)(cid:91)(cid:86)(cid:3)(cid:75)(cid:86)(cid:21)(cid:3) (cid:48)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:26)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:76)(cid:95)(cid:87)(cid:76)(cid:74)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:196)(cid:85)(cid:80)(cid:90)(cid:79)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:80)(cid:85)(cid:80)(cid:91)(cid:80)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:90)(cid:3)(cid:94)(cid:76)(cid:3)(cid:90)(cid:91)(cid:72)(cid:89)(cid:91)(cid:76)(cid:75)(cid:3) (cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:24)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:74)(cid:86)(cid:84)(cid:87)(cid:83)(cid:76)(cid:91)(cid:76)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:89)(cid:76)(cid:90)(cid:76)(cid:91)(cid:3)(cid:86)(cid:77)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:42)(cid:86)(cid:84)(cid:87)(cid:72)(cid:85)(cid:96)(cid:187)(cid:90)(cid:3)(cid:87)(cid:86)(cid:89)(cid:91)(cid:77)(cid:86)(cid:83)(cid:80)(cid:86)(cid:3) so that we are in a position to grow earnings from a smaller (cid:73)(cid:92)(cid:91)(cid:3)(cid:90)(cid:91)(cid:89)(cid:86)(cid:85)(cid:78)(cid:76)(cid:89)(cid:3)(cid:73)(cid:72)(cid:90)(cid:76)(cid:21)(cid:3)(cid:60)(cid:85)(cid:91)(cid:80)(cid:83)(cid:3)(cid:91)(cid:79)(cid:76)(cid:89)(cid:76)(cid:3)(cid:80)(cid:90)(cid:3)(cid:72)(cid:3)(cid:83)(cid:86)(cid:85)(cid:78)(cid:20)(cid:91)(cid:76)(cid:89)(cid:84)(cid:3)(cid:90)(cid:86)(cid:83)(cid:92)(cid:91)(cid:80)(cid:86)(cid:85)(cid:3)(cid:91)(cid:86)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3) broader federal budgetary issues currently being debated, we (cid:75)(cid:86)(cid:3)(cid:85)(cid:86)(cid:91)(cid:3)(cid:76)(cid:95)(cid:87)(cid:76)(cid:74)(cid:91)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:73)(cid:92)(cid:90)(cid:80)(cid:85)(cid:76)(cid:90)(cid:90)(cid:3)(cid:91)(cid:86)(cid:3)(cid:78)(cid:76)(cid:91)(cid:3)(cid:72)(cid:85)(cid:96)(cid:3)(cid:76)(cid:72)(cid:90)(cid:80)(cid:76)(cid:89)(cid:21)(cid:3)(cid:51)(cid:76)(cid:72)(cid:90)(cid:80)(cid:85)(cid:78)(cid:3)(cid:80)(cid:90)(cid:3)(cid:83)(cid:80)(cid:82)(cid:76)(cid:83)(cid:96)(cid:3) (cid:91)(cid:86)(cid:3)(cid:89)(cid:76)(cid:84)(cid:72)(cid:80)(cid:85)(cid:3)(cid:74)(cid:79)(cid:72)(cid:83)(cid:83)(cid:76)(cid:85)(cid:78)(cid:80)(cid:85)(cid:78)(cid:19)(cid:3)(cid:76)(cid:90)(cid:87)(cid:76)(cid:74)(cid:80)(cid:72)(cid:83)(cid:83)(cid:96)(cid:3)(cid:94)(cid:79)(cid:80)(cid:83)(cid:76)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:60)(cid:21)(cid:58)(cid:21)(cid:3)(cid:76)(cid:74)(cid:86)(cid:85)(cid:86)(cid:84)(cid:80)(cid:74)(cid:3) (cid:89)(cid:76)(cid:74)(cid:86)(cid:93)(cid:76)(cid:89)(cid:96)(cid:3)(cid:89)(cid:76)(cid:84)(cid:72)(cid:80)(cid:85)(cid:90)(cid:3)(cid:91)(cid:76)(cid:87)(cid:80)(cid:75)(cid:21)(cid:3)(cid:47)(cid:86)(cid:94)(cid:76)(cid:93)(cid:76)(cid:89)(cid:19)(cid:3)(cid:72)(cid:90)(cid:3)(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:74)(cid:86)(cid:85)(cid:196)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3) that 2013 will present us with ample opportunity because the intelligence aspects of national security are and will remain top (cid:87)(cid:89)(cid:80)(cid:86)(cid:89)(cid:80)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:77)(cid:86)(cid:89)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:43)(cid:76)(cid:87)(cid:72)(cid:89)(cid:91)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:86)(cid:77)(cid:3)(cid:43)(cid:76)(cid:77)(cid:76)(cid:85)(cid:90)(cid:76)(cid:21)(cid:3)(cid:58)(cid:86)(cid:3)(cid:80)(cid:85)(cid:3)(cid:25)(cid:23)(cid:24)(cid:26)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:94)(cid:80)(cid:83)(cid:83)(cid:3) (cid:90)(cid:91)(cid:72)(cid:96)(cid:3)(cid:77)(cid:86)(cid:74)(cid:92)(cid:90)(cid:76)(cid:75)(cid:3)(cid:86)(cid:85)(cid:3)(cid:94)(cid:79)(cid:72)(cid:91)(cid:3)(cid:94)(cid:76)(cid:3)(cid:74)(cid:72)(cid:85)(cid:3)(cid:74)(cid:86)(cid:85)(cid:91)(cid:89)(cid:86)(cid:83)(cid:21)(cid:3)(cid:62)(cid:76)(cid:3)(cid:94)(cid:80)(cid:83)(cid:83)(cid:3)(cid:196)(cid:85)(cid:80)(cid:90)(cid:79)(cid:3)(cid:94)(cid:79)(cid:72)(cid:91)(cid:3)(cid:94)(cid:76)(cid:3) (cid:90)(cid:91)(cid:72)(cid:89)(cid:91)(cid:76)(cid:75)(cid:19)(cid:3)(cid:94)(cid:86)(cid:89)(cid:82)(cid:3)(cid:79)(cid:72)(cid:89)(cid:75)(cid:3)(cid:91)(cid:86)(cid:3)(cid:74)(cid:72)(cid:87)(cid:91)(cid:92)(cid:89)(cid:76)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:75)(cid:76)(cid:84)(cid:72)(cid:85)(cid:75)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:90)(cid:19)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3) position the Company for growth. (cid:59)(cid:79)(cid:72)(cid:85)(cid:82)(cid:3)(cid:96)(cid:86)(cid:92)(cid:3)(cid:77)(cid:86)(cid:89)(cid:3)(cid:96)(cid:86)(cid:92)(cid:89)(cid:3)(cid:77)(cid:72)(cid:80)(cid:91)(cid:79)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:74)(cid:86)(cid:85)(cid:91)(cid:80)(cid:85)(cid:92)(cid:76)(cid:75)(cid:3)(cid:74)(cid:86)(cid:85)(cid:196)(cid:75)(cid:76)(cid:85)(cid:74)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3)(cid:42)(cid:54)(cid:55)(cid:59)(cid:19) Roger A. Waesche, Jr. (cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:13)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:585)(cid:74)(cid:76)(cid:89) (cid:89)(cid:76)(cid:93)(cid:76)(cid:85)(cid:92)(cid:76)(cid:90)(cid:3)(cid:75)(cid:76)(cid:89)(cid:80)(cid:93)(cid:76)(cid:75)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:58)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:59)(cid:76)(cid:85)(cid:72)(cid:85)(cid:91)(cid:3)(cid:55)(cid:89)(cid:86)(cid:87)(cid:76)(cid:89)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:28)(cid:32)(cid:12)(cid:3) (cid:72)(cid:91)(cid:3)(cid:52)(cid:72)(cid:89)(cid:74)(cid:79)(cid:3)(cid:26)(cid:24)(cid:19)(cid:3)(cid:25)(cid:23)(cid:24)(cid:24)(cid:19)(cid:3)(cid:91)(cid:86)(cid:3)(cid:30)(cid:23)(cid:12)(cid:3)(cid:72)(cid:91)(cid:3)(cid:43)(cid:76)(cid:74)(cid:76)(cid:84)(cid:73)(cid:76)(cid:89)(cid:3)(cid:26)(cid:24)(cid:19)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:21)(cid:3)(cid:62)(cid:79)(cid:76)(cid:85)(cid:3)(cid:94)(cid:76)(cid:3) (cid:90)(cid:76)(cid:83)(cid:83)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:24)(cid:30)(cid:3)(cid:86)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:87)(cid:89)(cid:86)(cid:87)(cid:76)(cid:89)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:74)(cid:92)(cid:89)(cid:89)(cid:76)(cid:85)(cid:91)(cid:83)(cid:96)(cid:3)(cid:79)(cid:76)(cid:83)(cid:75)(cid:20)(cid:77)(cid:86)(cid:89)(cid:20)(cid:90)(cid:72)(cid:83)(cid:76)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3) (cid:87)(cid:89)(cid:86)(cid:81)(cid:76)(cid:74)(cid:91)(cid:3)(cid:80)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:46)(cid:89)(cid:76)(cid:72)(cid:91)(cid:76)(cid:89)(cid:3)(cid:55)(cid:79)(cid:80)(cid:83)(cid:72)(cid:75)(cid:76)(cid:83)(cid:87)(cid:79)(cid:80)(cid:72)(cid:19)(cid:3)(cid:55)(cid:76)(cid:85)(cid:85)(cid:90)(cid:96)(cid:83)(cid:93)(cid:72)(cid:85)(cid:80)(cid:72)(cid:19)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3) (cid:76)(cid:95)(cid:87)(cid:76)(cid:74)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:79)(cid:72)(cid:93)(cid:76)(cid:3)(cid:80)(cid:85)(cid:74)(cid:89)(cid:76)(cid:72)(cid:90)(cid:76)(cid:75)(cid:3)(cid:91)(cid:79)(cid:72)(cid:91)(cid:3)(cid:87)(cid:76)(cid:89)(cid:74)(cid:76)(cid:85)(cid:91)(cid:72)(cid:78)(cid:76)(cid:3)(cid:91)(cid:86)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:95)(cid:80)(cid:84)(cid:72)(cid:91)(cid:76)(cid:83)(cid:96)(cid:3)(cid:30)(cid:28)(cid:12)(cid:21)(cid:3) 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(cid:86)(cid:92)(cid:89)(cid:3)(cid:87)(cid:89)(cid:76)(cid:90)(cid:76)(cid:85)(cid:74)(cid:76)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:84)(cid:86)(cid:90)(cid:91)(cid:3)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:90)(cid:21)(cid:3)(cid:43)(cid:92)(cid:89)(cid:80)(cid:85)(cid:78)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3) (cid:89)(cid:76)(cid:74)(cid:96)(cid:74)(cid:83)(cid:76)(cid:75)(cid:3)(cid:90)(cid:72)(cid:83)(cid:76)(cid:3)(cid:87)(cid:89)(cid:86)(cid:74)(cid:76)(cid:76)(cid:75)(cid:90)(cid:3)(cid:80)(cid:85)(cid:91)(cid:86)(cid:3)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:75)(cid:76)(cid:93)(cid:76)(cid:83)(cid:86)(cid:87)(cid:84)(cid:76)(cid:85)(cid:91)(cid:3)(cid:87)(cid:89)(cid:86)(cid:81)(cid:76)(cid:74)(cid:91)(cid:90)(cid:3) (cid:94)(cid:80)(cid:91)(cid:79)(cid:3)(cid:93)(cid:80)(cid:90)(cid:80)(cid:73)(cid:83)(cid:76)(cid:3)(cid:75)(cid:76)(cid:84)(cid:72)(cid:85)(cid:75)(cid:19)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:94)(cid:79)(cid:76)(cid:89)(cid:76)(cid:3)(cid:94)(cid:76)(cid:3)(cid:73)(cid:76)(cid:83)(cid:80)(cid:76)(cid:93)(cid:76)(cid:3)(cid:94)(cid:76)(cid:3)(cid:94)(cid:80)(cid:83)(cid:83)(cid:3)(cid:90)(cid:76)(cid:76)(cid:3)(cid:83)(cid:86)(cid:85)(cid:78)(cid:20) (cid:91)(cid:76)(cid:89)(cid:84)(cid:3)(cid:75)(cid:76)(cid:84)(cid:72)(cid:85)(cid:75)(cid:3)(cid:86)(cid:85)(cid:74)(cid:76)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:45)(cid:76)(cid:75)(cid:76)(cid:89)(cid:72)(cid:83)(cid:3)(cid:73)(cid:92)(cid:75)(cid:78)(cid:76)(cid:91)(cid:3)(cid:80)(cid:90)(cid:90)(cid:92)(cid:76)(cid:90)(cid:3)(cid:72)(cid:89)(cid:76)(cid:3)(cid:89)(cid:76)(cid:90)(cid:86)(cid:83)(cid:93)(cid:76)(cid:75)(cid:21)(cid:3) We also deployed sale proceeds into acquiring one operating 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(cid:80)(cid:85)(cid:3)(cid:91)(cid:79)(cid:72)(cid:91)(cid:3)(cid:90)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:19)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:80)(cid:90)(cid:3)(cid:24)(cid:23)(cid:23)(cid:12)(cid:3)(cid:83)(cid:76)(cid:72)(cid:90)(cid:76)(cid:75)(cid:3)(cid:91)(cid:86)(cid:3)(cid:72)(cid:85)(cid:3)(cid:76)(cid:95)(cid:80)(cid:90)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3) (cid:74)(cid:92)(cid:90)(cid:91)(cid:86)(cid:84)(cid:76)(cid:89)(cid:3)(cid:80)(cid:85)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:58)(cid:91)(cid:89)(cid:72)(cid:91)(cid:76)(cid:78)(cid:80)(cid:74)(cid:3)(cid:59)(cid:76)(cid:85)(cid:72)(cid:85)(cid:91)(cid:3)(cid:53)(cid:80)(cid:74)(cid:79)(cid:76)(cid:21)(cid:3) (cid:43)(cid:92)(cid:89)(cid:80)(cid:85)(cid:78)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:76)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:76)(cid:75)(cid:3)(cid:90)(cid:76)(cid:93)(cid:76)(cid:89)(cid:72)(cid:83)(cid:3)(cid:80)(cid:85)(cid:80)(cid:91)(cid:80)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:90)(cid:3)(cid:75)(cid:76)(cid:90)(cid:80)(cid:78)(cid:85)(cid:76)(cid:75)(cid:3)(cid:91)(cid:86)(cid:3) (cid:80)(cid:84)(cid:87)(cid:89)(cid:86)(cid:93)(cid:76)(cid:3)(cid:73)(cid:86)(cid:91)(cid:79)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:73)(cid:72)(cid:83)(cid:72)(cid:85)(cid:74)(cid:76)(cid:3)(cid:90)(cid:79)(cid:76)(cid:76)(cid:91)(cid:3)(cid:197)(cid:76)(cid:95)(cid:80)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:74)(cid:72)(cid:87)(cid:80)(cid:91)(cid:72)(cid:83)(cid:3)(cid:90)(cid:91)(cid:89)(cid:92)(cid:74)(cid:91)(cid:92)(cid:89)(cid:76)(cid:21)(cid:3) (cid:62)(cid:80)(cid:91)(cid:79)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:74)(cid:72)(cid:87)(cid:80)(cid:91)(cid:72)(cid:83)(cid:3)(cid:94)(cid:76)(cid:3)(cid:89)(cid:72)(cid:80)(cid:90)(cid:76)(cid:75)(cid:3)(cid:80)(cid:85)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:75)(cid:76)(cid:73)(cid:91)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:76)(cid:88)(cid:92)(cid:80)(cid:91)(cid:96)(cid:3)(cid:84)(cid:72)(cid:89)(cid:82)(cid:76)(cid:91)(cid:90)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3) with proceeds from asset sales, we decreased our total debt (cid:86)(cid:92)(cid:91)(cid:90)(cid:91)(cid:72)(cid:85)(cid:75)(cid:80)(cid:85)(cid:78)(cid:3)(cid:73)(cid:96)(cid:3)(cid:86)(cid:93)(cid:76)(cid:89)(cid:3)(cid:11)(cid:27)(cid:23)(cid:23)(cid:3)(cid:84)(cid:80)(cid:83)(cid:83)(cid:80)(cid:86)(cid:85)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:89)(cid:76)(cid:75)(cid:76)(cid:76)(cid:84)(cid:76)(cid:75)(cid:3)(cid:11)(cid:28)(cid:28)(cid:3)(cid:84)(cid:80)(cid:83)(cid:83)(cid:80)(cid:86)(cid:85)(cid:3)(cid:86)(cid:77)(cid:3) (cid:31)(cid:12)(cid:3)(cid:96)(cid:80)(cid:76)(cid:83)(cid:75)(cid:80)(cid:85)(cid:78)(cid:3)(cid:87)(cid:89)(cid:76)(cid:77)(cid:76)(cid:89)(cid:89)(cid:76)(cid:75)(cid:3)(cid:90)(cid:91)(cid:86)(cid:74)(cid:82)(cid:21)(cid:3)(cid:40)(cid:90)(cid:3)(cid:72)(cid:3)(cid:89)(cid:76)(cid:90)(cid:92)(cid:83)(cid:91)(cid:19)(cid:3)(cid:94)(cid:76)(cid:3)(cid:83)(cid:86)(cid:94)(cid:76)(cid:89)(cid:76)(cid:75)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:75)(cid:76)(cid:73)(cid:91)(cid:20) (cid:91)(cid:86)(cid:20)(cid:78)(cid:89)(cid:86)(cid:90)(cid:90)(cid:3)(cid:72)(cid:90)(cid:90)(cid:76)(cid:91)(cid:3)(cid:93)(cid:72)(cid:83)(cid:92)(cid:76)(cid:3)(cid:89)(cid:72)(cid:91)(cid:80)(cid:86)(cid:3)(cid:77)(cid:89)(cid:86)(cid:84)(cid:3)(cid:27)(cid:32)(cid:21)(cid:31)(cid:12)(cid:3)(cid:72)(cid:91)(cid:3)(cid:91)(cid:79)(cid:76)(cid:3)(cid:73)(cid:76)(cid:78)(cid:80)(cid:85)(cid:85)(cid:80)(cid:85)(cid:78)(cid:3)(cid:86)(cid:77)(cid:3)(cid:25)(cid:23)(cid:24)(cid:25)(cid:3) (cid:91)(cid:86)(cid:3)(cid:27)(cid:25)(cid:21)(cid:30)(cid:12)(cid:3)(cid:73)(cid:96)(cid:3)(cid:96)(cid:76)(cid:72)(cid:89)(cid:20)(cid:76)(cid:85)(cid:75)(cid:19)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:80)(cid:84)(cid:87)(cid:89)(cid:86)(cid:93)(cid:76)(cid:75)(cid:3)(cid:86)(cid:92)(cid:89)(cid:3)(cid:75)(cid:76)(cid:73)(cid:91)(cid:3)(cid:91)(cid:86)(cid:3)(cid:72)(cid:75)(cid:81)(cid:92)(cid:90)(cid:91)(cid:76)(cid:75)(cid:3) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark one) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-14023 Corporate Office Properties Trust (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 6711 Columbia Gateway Drive, Suite 300, Columbia, MD (Address of principal executive offices) 23-2947217 (IRS Employer Identification No.) 21046 (Zip Code) Registrant’s telephone number, including area code: (443) 285-5400 ________________________________________ Securities registered pursuant to Section 12(b) of the Act: (Title of Each Class) (Name of Exchange on Which Registered) (Title of Each Class) (Name of Exchange on Which Registered Common Shares of beneficial interest, $0.01 par value Series H Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value Series J Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value Series L Cumulative Redeemable Preferred Shares of beneficial interest, $0.01 par value New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during No No the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was approximately $1.7 billion, as calculated using No the closing price of the common shares of beneficial interest on the New York Stock Exchange and our outstanding shares as of June 29, 2012. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of the registrant's outstanding common shares of beneficial interest, $0.01 par value. At January 28, 2013, 81,106,909 of the registrant’s common shares of beneficial interest were outstanding. Portions of the annual shareholders’ report of the registrant for the year ended December 31, 2012 are incorporated by reference into Parts I and II of this Form 10- K and portions of the proxy statement of the registrant for its 2013 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III of this Form 10-K. Table of Contents Form 10-K PART I BUSINESS ITEM 1. ITEM 1A RISK FACTORS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES ITEM 3. ITEM 4. MINE SAFETY DISCLOSURES LEGAL PROCEEDINGS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND SELECTED FINANCIAL DATA RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES SIGNATURES 2 PAGE 4 7 16 17 21 22 22 24 26 53 54 54 54 55 55 55 55 55 55 55 61 FORWARD-LOOKING STATEMENTS This Form 10-K contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations, estimates and projections about future events and financial trends affecting the financial condition and operations of our business. Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to: • • • • • • • • • • • • general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values; adverse changes in the real estate markets, including, among other things, increased competition with other companies; governmental actions and initiatives, including risks associated with the impact of a government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers; our ability to borrow on favorable terms; risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated; our ability to sell properties included in our Strategic Reallocation Plan; risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives; changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses; our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships; the dilutive effects of issuing additional common shares; our ability to achieve projected results; and environmental requirements. For further information on factors that could affect the company and the statements contained herein, you should refer to the section below entitled “Item 1A. Risk Factors.” We undertake no obligation to update or supplement forward-looking statements. 3 Item 1. Business OUR COMPANY PART I General. We are an office real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of December 31, 2012, our investments in real estate included the following: • • • • 208 operating office properties totaling 18.8 million square feet that were 88% occupied; 13 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.7 million square feet upon completion, including two partially operational properties included above; land held or under pre-construction totaling 1,694 acres (including 561 acres controlled but not owned) that we believe are potentially developable into approximately 19.3 million square feet; and a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts. We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), a Delaware limited partnership, of which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). The Operating Partnership also owns subsidiaries that provide real estate services such as property management, construction and development services primarily for our properties but also for third parties. Interests in our Operating Partnership are in the form of common and preferred units. As of December 31, 2012, we owned 95% of the outstanding common units and 97% of the outstanding preferred units in our Operating Partnership. The remaining common and preferred units in our Operating Partnership were owned by third parties, which included certain members of our Board of Trustees. We believe that we are organized and have operated in a manner that satisfies the requirements for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and we intend to continue to operate in such a manner. Provided we continue to qualify for taxation as a REIT, we generally will not be subject to Federal income tax on our taxable income that is distributed to our shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute to its shareholders at least 90% of its annual taxable income (excluding net capital gains). Our executive offices are located at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046 and our telephone number is (443) 285-5400. Our Internet address is www.copt.com. We make available on our Internet website free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably possible after we file such material with the Securities and Exchange Commission (the “SEC”). In addition, we have made available on our Internet website under the heading “Corporate Governance” the charters for our Board of Trustees' Audit, Nominating and Corporate Governance, Compensation and Investment Committees, as well as our Corporate Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Financial Officers. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics and Code of Ethics for Financial Officers within four business days after any such amendments or waivers. The information on our Internet site is not part of this report. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. This Internet website can be accessed at www.sec.gov. The public may also read and copy paper filings that we have made with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. 4 Significant 2012 Developments During 2012, we: • • • • • • • • • • • • disposed of 35 operating properties totaling 2.3 million square feet and non-operating properties for aggregate transaction values totaling $313.6 million. The $291 million in net proceeds from these sales were used primarily to pay down our Revolving Credit Facility; approved a plan to dispose of our office properties and developable land in Greater Philadelphia, Pennsylvania within the next four years because the properties no longer meet our strategic investment criteria; acquired for $48.3 million a property in Herndon, Virginia totaling 202,000 square feet that was 100% leased; placed into service an aggregate of 371,000 square feet in four newly constructed office properties; issued 6.9 million Series L Cumulative Preferred Shares (the “Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after June 27, 2017. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes; redeemed all of our Series G Preferred Shares of beneficial interest (the “Series G Preferred Shares”) at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption; completed a public offering of 8.6 million common shares of beneficial interest (“common shares”) at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses; established an at-the-market (“ATM”) stock offering program under which we may, from time to time, offer and sell common shares in “at the market” stock offerings having an aggregate gross sales price of up to $150.0 million; entered into unsecured term loan agreements, under which we borrowed $370 million in the aggregate. The net proceeds from these borrowings were used to pay down our Revolving Credit Facility; exercised our right to reduce the lenders’ aggregate commitment under our unsecured revolving credit facility from $1.0 billion to $800 million, with the ability, subject to certain conditions, for us to increase the lenders’ aggregate commitment to $1.3 billion; finished the period with our portfolio of office properties 87.8% occupied and our Same Office Properties 89.1% occupied; and completed the transition of Roger A. Waesche, Jr. as our President and Chief Executive Officer following the retirement of Randall M. Griffin effective March 31, 2012. Business and Growth Strategies Our primary objectives are to achieve sustainable long-term growth in results of operations and to maximize long-term shareholder value. This section sets forth key components of our business and growth strategies that we have in place to support these objectives. Business Strategies Customer Strategy: We focus on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. These tenants’ missions generally pertain more to knowledge-based activities (such as cyber security, research and development and other highly technical defense and security areas) than to force structure (troops) and weapon system production. A high percentage of our revenue is concentrated in office and data center properties supporting this strategy, and we expect to further increase this concentration level through our: • • • • • properties’ (existing buildings and land held for future development) proximity to defense installations and other knowledge-based government demand drivers, and our willingness to expand to new locations with similar proximities; strong relationships with tenants engaged in knowledge-based defense and security activities; depth of collective team knowledge, experience and capabilities in developing, operating and securing office properties and single user data centers that meet the United States Government’s Force Protection requirements; record for providing service that exceeds customer expectations both in terms of the quality of the space we provide and our level of responsiveness to their needs. We have won the CEL & Associates, Inc. award for quality service and tenant satisfaction among nationwide office operators in the large owner category every year since 2004. We believe that operating with such an emphasis on service enables us to be the landlord of choice with high quality customers and contributes to high levels of customer loyalty and retention; and continued future investment focused on properties for United States Government agencies and defense contractors. 5 Market Strategy: In order to support our customer strategy, we focus on owning properties located near defense installations and other knowledge-based government demand drivers. We also focus on owning properties in targeted markets or submarkets in the Greater Washington, DC/Baltimore region with strong growth attributes. The growth attributes we look for in selecting these markets or submarkets include, among others: (1) proximity to large demand drivers; (2) strong demographics; (3) attractiveness to high quality tenants; (4) continued potential for growth and stability in economic down cycles; and (5) future acquisition and development opportunities. We typically focus on owning and operating office properties in large business parks located outside of central business districts. We believe that such parks generally attract long-term, high-quality tenants seeking to attract and retain quality work forces because they are typically situated along major transportation routes with easy access to support services, amenities and residential communities. Capital Strategy: Our capital strategy is aimed at maintaining a flexible capital structure in order to facilitate growth and performance in the face of differing market conditions in the most cost-effective manner by: • • using debt comprised primarily of fixed-rate debt (including the effect of interest rate swaps) from banks and institutional lenders along with debt available from public debt markets, such as our exchangeable senior notes; using equity raised through issuances of common and preferred shares of beneficial interest, issuances of common and preferred units in our Operating Partnership and, to a lesser extent, joint venture structures for certain investments; • managing our debt by monitoring, among other things: (1) our debt levels relative to our overall capital structure; (2) the relationship of certain measures of earnings to certain financing cost requirements (commonly referred to as coverage ratios); (3) the relationship of our variable-rate debt to our total debt; and (4) the timing of debt maturities to ensure that maturities in any year do not exceed levels that we believe we can refinance; using proceeds from sales under our disposition strategy to fund our investment activities, including our development pipeline, and to reduce overall debt; and continuously evaluating the ability of our capital resources to accommodate our plans for future growth. • • Growth Strategies Property Development and Acquisition Strategy: We pursue property development and acquisition opportunities for properties that fit our customer and market strategies. As a result, the focus of our development and acquisition activities includes properties that are either: (1) located near defense installations and other knowledge-based government demand drivers; or (2) located in markets or submarkets in the Greater Washington, DC/Baltimore region that we believe meet the criteria set forth above in our market strategy. We may also develop or acquire properties that do not align with our customer or market strategies but which we believe provide opportunity for favorable returns on investment given the associated risks. We pursue development activities as market conditions and leasing opportunities support favorable risk-adjusted returns on investment. We typically seek to make acquisitions at attractive yields and below replacement cost, or that otherwise meet our strategic objectives. We also seek to increase operating cash flow of certain acquisitions by repositioning the properties and capitalizing on existing below market leases and expansion opportunities. Disposition Strategy: We seek to dispose of properties and other investments that no longer meet our strategic objectives in order to remain aligned with such objectives, maximize our return on invested capital and be better positioned for long term growth. Internal Growth Strategy: We aggressively manage our portfolio to maximize the operating value and performance of each property through: (1) proactive property management and leasing; (2) achieving operating efficiencies through increasing economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; and (3) renewing tenant leases and re-tenanting at increased rents where market conditions permit. We also aim to develop and operate our properties in a manner that minimizes adverse impact on the environment by: (1) constructing new buildings designed to use resources with a higher level of efficiency and lower impact on human health and the environment during their life cycles than conventional buildings through our participation in the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) program; (2) retrofitting select existing office properties to operate more efficiently; and (3) registering our property portfolio in Energy Star, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that focuses on protecting the environment through energy efficient products and practices. Industry Segments We operate in two primary industries: commercial office properties and our wholesale data center. We classify our properties containing data center space as commercial office real estate when tenants significantly fund the data center 6 infrastructure costs. At December 31, 2012, our commercial office real estate operations were in geographical segments, as set forth below: Baltimore/Washington Corridor (generally defined as the Maryland counties of Howard and Anne Arundel); Northern Virginia (defined as Fairfax County, Virginia); San Antonio, Texas; • • • • Washington, DC - Capitol Riverfront; • • • • • St. Mary’s & King George Counties (in Maryland and Virginia, respectively); Greater Baltimore, Maryland (generally defined as the Maryland counties of Baltimore and Harford and Baltimore City); Suburban Maryland (defined as the Maryland counties of Montgomery and Prince George’s); Colorado Springs, Colorado; and Greater Philadelphia, Pennsylvania (in Blue Bell, Pennsylvania). As of December 31, 2012, 173 of our office properties, or 82% of our square feet in operations, were located in the Greater Washington, DC/Baltimore region, which includes all the segments set forth above except for San Antonio, Colorado Springs and Greater Philadelphia. Our wholesale data center, which is comprised of one property in Manassas, Virginia, is reported as a separate segment. For information relating to our segments, you should refer to Note 16 to our consolidated financial statements, which is included in a separate section at the end of this Annual Report on Form 10-K beginning on page F-1. Employees As of December 31, 2012, we had 384 employees, none of whom were parties to collective bargaining agreements. We believe that our relations with our employees are good. Competition The commercial real estate market is highly competitive. Numerous commercial properties compete with our properties for tenants. Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rents than are acceptable to us. We also compete with our own tenants, many of whom have the right to sublease their space. The competitive environment for leasing is affected considerably by a number of factors including, among other things, changes in economic factors and supply of and demand for space. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meeting our short-term capital needs. We compete for the acquisition of commercial properties with many entities, including other publicly-traded commercial REITs. Many of our competitors for such acquisitions have substantially greater financial resources than ours. In addition, our competitors may be willing to accept lower returns on their investments. If our competitors prevent us from buying properties that we have targeted for acquisition, we may not be able to meet our property acquisition goals. We also compete with many entities, including other publicly-traded commercial REITs, for capital. This competition could adversely affect our ability to raise capital we may need to fulfill our capital strategy. In addition, we also compete with other sellers of commercial properties for a limited number of buyers of properties. This competition could adversely affect our ability to complete property dispositions under existing or future disposition plans. Item 1A. Risk Factors Set forth below are risks and uncertainties relating to our business and the ownership of our securities. You should carefully consider each of these risks and uncertainties and all of the information in this Annual Report on Form 10-K and its Exhibits, including our consolidated financial statements and notes thereto for the year ended December 31, 2012, which are included in a separate section at the end of this report beginning on page F-1. Our performance and value are subject to risks associated with our properties and with the real estate industry. Real estate investments are subject to various risks and fluctuations in value and demand, many of which are beyond our control. Our economic performance and the value of our real estate assets may decline due to conditions in the general economy and the real estate business which, in turn, could have an adverse effect on our financial position, results of 7 operations, cash flows and ability to make expected distributions to our shareholders. These conditions include, but are not limited to: • • • • • • • • • • • • • • downturns in national, regional and local economic environments, including increases in the unemployment rate and inflation or deflation; competition from other properties; deteriorating local real estate market conditions, such as oversupply, reduction in demand and decreasing rental rates; declining real estate valuations; increasing vacancies and the need to periodically repair, renovate and re-lease space; adverse developments concerning our tenants, which could affect our ability to collect rents and execute lease renewals; government actions and initiatives, including risks associated with the impact of government shutdowns and budgetary reductions or impasses, such as a reduction of rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers; increasing operating costs, including insurance expenses, utilities, real estate taxes and other expenses, much of which we may not be able to pass through to tenants; increasing interest rates and unavailability of financing on acceptable terms or at all; trends in office real estate that may adversely affect future demand, including telecommuting and flexible workplaces that increase the population density per square foot; adverse changes in taxation or zoning laws; potential inability to secure adequate insurance; adverse consequences resulting from civil disturbances, natural disasters, terrorist acts or acts of war; and potential liability under environmental or other laws or regulations. We may suffer adverse consequences as a result of adverse economic conditions. Our business may be affected by adverse economic conditions in the United States economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the impact of high unemployment and constrained credit. Adverse economic conditions could increase the likelihood of tenants encountering financial difficulties, including bankruptcy, insolvency or general downturn of business, and as a result could increase the likelihood of tenants defaulting in their lease obligations to us. Such conditions also could increase the likelihood of our being unsuccessful in renewing tenants, renewing tenants on terms less favorable to us or being unable to lease newly constructed properties. In addition, such conditions could increase the level of risk that we may not be able to obtain new financing for development activities, acquisitions, refinancing of existing debt or other capital requirements at reasonable terms, if at all. As a result, adverse economic conditions could collectively have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We may suffer adverse consequences as a result of our reliance on rental revenues for our income. We earn revenue from renting our properties. Our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This means that our costs will not necessarily decline and may increase even if our revenues decline. For new tenants or upon lease expiration for existing tenants, we generally must make improvements and pay other leasing costs for which we may not receive increased rents. We also make building-related capital improvements for which tenants may not reimburse us. If our properties do not generate revenue sufficient to meet our operating expenses and capital costs, we may have to borrow additional amounts to cover these costs. In such circumstances, we would likely have lower profits or possibly incur losses. We may also find in such circumstances that we are unable to borrow to cover such costs, in which case our operations could be adversely affected. Moreover, there may be less or no cash available for distributions to our shareholders. In addition, the competitive environment for leasing is affected considerably by a number of factors including, among other things, changes due to economic factors such as supply and demand. These factors may make it difficult for us to lease existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meet our short-term capital needs. We rely on the ability of our tenants to pay rent and would be harmed by their inability to do so. Our performance depends on the ability of our tenants to fulfill their lease obligations by paying their rental payments in a timely manner. If one or more of our major tenants, or a number of our smaller tenants, were to experience financial difficulties, including bankruptcy, insolvency, government shutdown, or general downturn of business, there could be an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. 8 We may be adversely affected by developments concerning some of our major tenants and sector concentrations, including shutdowns of the United States Government and actual, or potential, reductions in government spending targeting United States Government agencies and defense contractors engaged in knowledge-based activities. As of December 31, 2012, our 20 largest tenants accounted for 64.5% of the total annualized rental revenue of our office properties, and the four largest of these tenants accounted for 63.4% of that portion. We computed the annualized rental revenue by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in our portfolio of office properties as of December 31, 2012. Information regarding our four largest tenants is set forth below: Tenant Annualized Rental Revenue at December 31, 2012 (in thousands) Percentage of Total Annualized Rental Revenue of Office Properties Number of Leases United States of America Northrop Grumman Corporation (1) Booz Allen Hamilton, Inc. Computer Sciences Corporation (1) $ 111,745 29,061 25,598 22,321 24.2% 6.3% 5.5% 4.8% 63 12 10 7 (1) Includes affiliated organizations and agencies and predecessor companies. Most of our leases with the United States Government provide for a series of one-year terms or provide for early termination rights. The United States Government may terminate its leases if, among other reasons, the United States Congress fails to provide funding. If any of our four largest tenants fail to make rental payments to us, including as a result of a government shutdown, or if the United States Government elects to terminate some or all of its leases and the space cannot be re-leased on satisfactory terms, there would be an adverse effect on our financial performance and ability to make distributions to our shareholders. As of December 31, 2012, 70.0% of the total annualized rental revenue of our office properties held for long-term investment was from properties located near defense installations and other knowledge-based government demand drivers, or that were otherwise at least 50% occupied by United States Government agencies or defense contractors. We expect to further increase our reliance on United States Government agencies and defense contractors, most of whom are engaged in knowledge- based defense and security activities, for revenue. A reduction in government spending targeting these activities could affect the ability of these tenants to fulfill lease obligations, decrease the likelihood that these tenants will renew their leases or enter into new leases and limit our future growth from these sectors. Moreover, uncertainty regarding the potential for future reduction in government spending targeting these activities could also decrease or delay leasing activity from tenants engaged in these activities. The Budget Control Act passed in 2011, which imposed caps on the Federal budget in order to achieve targeted spending levels over the 2013-2021 fiscal years, has fueled further uncertainty regarding future government spending reductions. A reduction in government spending targeting knowledge-based defense and security activities and/or uncertainty regarding the potential for future spending reductions could have an adverse effect on our results of operations, financial condition, cash flows and ability to make distributions to our shareholders. We may be unable to successfully execute plans to dispose of properties. In 2011, we implemented our Strategic Reallocation Plan to dispose of office properties and land that are no longer closely aligned with our strategy. In 2012, our Board of Trustees also approved a plan by management to shorten the holding period for office properties and developable land in Greater Philadelphia, Pennsylvania because the properties no longer meet our strategic investment criteria. Our failure to successfully execute these and other future disposition plans could adversely affect our ability to effectively execute our business strategy, which in turn could affect our financial position, results of operations, cash flows and ability to make expected distributions to shareholders. We may suffer adverse consequences due to our inexperience in developing, managing and leasing wholesale data centers. We have significant experience in developing, managing and leasing single user data center space. However, we do not have the same depth and length of experience in relation to wholesale data centers, having acquired our wholesale data center in 2010 and having made limited progress leasing that center through December 31, 2012. This may increase the likelihood of us being unsuccessful in executing our plans with respect to our existing wholesale data center or any such centers that we may acquire or develop in the future. If we are unsuccessful in executing our wholesale data center plans, it could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. 9 Most of our properties are geographically concentrated in the Mid-Atlantic region, particularly in the Greater Washington, DC/Baltimore region, or in particular office parks. We may suffer economic harm in the event of a decline in the real estate market or general economic conditions in those regions or parks. Most of our properties are located in the Mid-Atlantic region of the United States and, as of December 31, 2012, our properties located in the Greater Washington, DC/Baltimore region accounted for a combined 83.6% of our total annualized rental revenue from office properties. Our properties are also often concentrated in office parks in which we own most of the properties. Consequently, we do not have a broad geographic distribution of our properties. As a result, a decline in the real estate market or general economic conditions in the Mid-Atlantic region, the Greater Washington, DC/Baltimore region or the office parks in which our properties are located could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We would suffer economic harm if we were unable to renew our leases on favorable terms. When leases expire, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant vacates a property, we can expect to experience a vacancy for some period of time, as well as incur higher leasing costs than we would likely incur if a tenant renews. As a result, our financial performance and ability to make expected distributions to our shareholders could be adversely affected if we experience a high volume of tenant departures at the end of their lease terms. We may be adversely affected by trends in the office real estate industry. Some businesses are rapidly evolving to increasingly permit employee telecommuting, flexible work schedules, open workplaces and teleconferencing. These practices enable businesses to reduce their space requirements. A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations, each of which could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We may encounter a decline in the value of our real estate. The value of our real estate could be adversely affected by general economic and market conditions connected to a specific property, a market or submarket, a broader economic region or the office real estate industry. Examples of such conditions include a broader economic recession, declining demand and decreases in market rental rates and/or market values of real estate assets. If our real estate assets decline in value, it could result in our recognition of impairment losses. Moreover, a decline in the value of our real estate could adversely affect the amount of borrowings available to us under credit facilities and other loans, which could, in turn, adversely affect our cash flows and financial condition. We may not be able to compete successfully with other entities that operate in our industry. The commercial real estate market is highly competitive. We compete for the purchase of commercial property with many entities, including other publicly traded commercial REITs. Many of our competitors have substantially greater financial resources than we do. If our competitors prevent us from buying properties that we target for acquisition, we may not be able to meet our property acquisition goals. Moreover, numerous commercial properties compete for tenants with our properties. Some of the properties competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to accept lower rates than are acceptable to us. Competition for property acquisitions, or for tenants for properties that we own, could have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We are dependent on external sources of capital for future growth. Because we are a REIT, we must distribute at least 90% of our annual taxable income to our shareholders. Due to this requirement, we are not able to significantly fund our acquisition, construction and development activities using cash flow from operations. Therefore, our ability to fund these activities is dependent on our ability to access capital funded by third parties. Such capital could be in the form of new debt, equity issuances of common shares, preferred shares, common and preferred units in our Operating Partnership or joint venture funding. These capital sources may not be available on favorable terms or at all. Moreover, additional debt financing may substantially increase our leverage and subject us to covenants that restrict management’s flexibility in directing our operations, and additional equity offerings may result in substantial dilution of our shareholders’ interests. Our inability to obtain capital when needed could have a material adverse effect on our ability to expand our business and fund other cash requirements. We use our Revolving Credit Facility to initially finance much of our investing and financing activities. We also use other credit facilities to fund a significant portion of our construction activities. Our lenders under these and other facilities could, for financial hardship or other reasons, fail to honor their commitments to fund our requests for borrowings under these facilities. In the event that one or more lenders under these facilities are not able or willing to fund a borrowing request, it would adversely affect our ability to access borrowing capacity under these facilities, which would in turn adversely affect our financial condition, cash flows and ability to make expected distributions to our shareholders. 10 We may be unable to successfully execute our plans to acquire existing commercial real estate properties. We intend to acquire existing commercial real estate properties to the extent that suitable acquisitions can be made on advantageous terms. Acquisitions of commercial properties entail risks, such as the risks that we may not be in a position, or have the opportunity in the future, to make suitable property acquisitions on advantageous terms and/or that such acquisitions will fail to perform as expected. The failure of our acquisitions to perform as expected could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We may be exposed to unknown liabilities from acquired properties. We may acquire properties that are subject to liabilities in situations where we have no recourse, or only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Examples of unknown liabilities with respect to acquired properties include, but are not limited to: • • • • liabilities for clean-up of disclosed or undisclosed environmental contamination; claims by tenants, vendors or other persons dealing with the former owners of the properties; liabilities incurred in the ordinary course of business; and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties. We may suffer economic harm as a result of making unsuccessful acquisitions in new markets. We may pursue selective acquisitions of properties in regions where we have not previously owned properties. These acquisitions may entail risks in addition to those we face in other acquisitions where we are familiar with the regions, such as the risk that we do not correctly anticipate conditions or trends in a new market and are therefore not able to operate the acquired property profitably. If this occurs, it could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We may be unable to execute our plans to develop and construct additional properties. Although the majority of our investments are in currently leased properties, we also develop, construct and redevelop properties, including some that are not fully pre-leased. When we develop, construct and redevelop properties, we assume the risk that actual costs will exceed our budgets, that we will experience conditions which delay or preclude project completion and that projected leasing will not occur, any of which could adversely affect our financial performance, results of operations and our ability to make distributions to our shareholders. In addition, we generally do not obtain construction financing commitments until the development stage of a project is complete and construction is about to commence. We may find that we are unable to obtain financing needed to continue with the construction activities for such projects. Our data centers may become obsolete. Data centers are much more expensive investments on a per square foot basis than office properties due to the level of infrastructure required to operate the centers. At the same time, technology, industry standards and service requirements for data centers are rapidly evolving and, as a result, the risk of investments we make in data centers becoming obsolete is higher than office properties. Our data centers may become obsolete due to the development of new systems to deliver power to, or eliminate heat from, the servers housed in the properties. Our data centers could also become obsolete from new server technology that requires less critical load and heat removal than our facilities are designed to provide. In addition, we may not be able to efficiently upgrade or change power and cooling systems to meet new demands or industry standards without incurring significant costs that we may not be able to pass on to our tenants. The obsolescence of our data centers could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. Certain of our properties containing data centers contain space not suitable for lease other than as data centers, which could make it difficult or impractical to reposition them for alternative use. Certain of our properties contain data center space, which is highly specialized space containing extensive electrical and mechanical systems that are designed uniquely to run and maintain banks of computer servers. As a result, in the event that we needed to reposition such data center space for another use, major renovations and expenditures could be required. Real estate investments are illiquid, and we may not be able to sell our properties on a timely basis when we determine it is appropriate to do so. Real estate investments can be difficult to sell and convert to cash quickly, especially if market conditions are not favorable. Such illiquidity could limit our ability to quickly change our portfolio of properties in response to changes in economic or other conditions. Moreover, under certain circumstances, the Internal Revenue Code imposes certain penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year. In addition, for certain of our properties that we acquired by issuing units in our Operating Partnership, we are restricted by agreements with the sellers of the properties for a certain period of time from entering into transactions (such 11 as the sale or refinancing of the acquired property) that will result in a taxable gain to the sellers without the seller’s consent. Due to these factors, we may be unable to sell a property at an advantageous time. We may suffer adverse effects as a result of the indebtedness that we carry and the terms and covenants that relate to this debt. Some of our properties are pledged by us to support repayment of indebtedness. In addition, we rely on borrowings to fund some or all of the costs of new property acquisitions, construction and development activities and other items. Our organizational documents do not limit the amount of indebtedness that we may incur. Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay distributions to our shareholders required to maintain our qualification as a REIT. We are also subject to the risks that: • • • we may not be able to refinance our existing indebtedness, or may refinance on terms that are less favorable to us than the terms of our existing indebtedness; in the event of our default under the terms of our Revolving Credit Facility, our Operating Partnership could be restricted from making cash distributions to us, which could result in reduced distributions to our shareholders or the need for us to incur additional debt to fund these distributions; and if we are unable to pay our debt service on time or are unable to comply with restrictive financial covenants in certain of our debt, our lenders could foreclose on our properties securing such debt and, in some cases, other properties and assets that we own. Some of our debt is cross-defaulted, which means that failure to pay interest or principal on the debt above a threshold value will create a default on certain of our other debt. In addition, some of our debt that is cross-defaulted also contains cross- collateralization provisions, which means that the collateral of the debt can also be used as collateral for certain of our other debt. Any foreclosure of our properties could result in loss of income and asset value that would negatively affect our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. In addition, if we are in default and the value of the properties securing a loan is less than the loan balance, we may be required to pay the resulting shortfall to the lender using other assets. If short-term interest rates were to rise, our debt service payments on debt with variable interest rates would increase, which would lower our net income and could decrease our distributions to our shareholders. We use interest rate swap agreements from time to time to reduce the impact of changes in interest rates. Decreases in interest rates would result in increased interest payments due under interest rate swap agreements in place and, in the event we decided to unwind such agreements, could result in our recognizing a loss and remitting a payment. We must refinance our debt in the future. As of December 31, 2012, our scheduled debt payments over the next five years, including maturities, were as of follows: Year Amount (1) (in thousands) 2013 2014 2015 2016 2017 $ 121,129 158,341 795,802 278,642 551,388 (1) Represents principal maturities only and therefore excludes net discounts of $8.6 million. Maturities include $17.5 million in 2013 and $411.1 million in 2015 that may each be extended for one year, subject to certain conditions. Our operations likely will not generate enough cash flow to repay some or all of this debt without additional borrowings, equity issuances and/or property sales. If we cannot refinance our debt, extend the repayment dates, or raise additional equity prior to the dates when our debt matures, we would default on our existing debt, which would have an adverse effect on our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We have certain distribution requirements that reduce cash available for other business purposes. As a REIT, we must distribute at least 90% of our annual taxable income (excluding capital gains), which limits the amount of cash we can retain for other business purposes, including amounts to fund acquisitions and development activity. Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period during which we report those items for distribution purposes, we may have to borrow funds to meet the 90% distribution requirement. 12 We may be unable to continue to make shareholder distributions at expected levels. We expect to make regular quarterly cash distributions to our shareholders. However, our ability to make such distributions depends on a number of factors, some of which are beyond our control. Some of our loan agreements contain provisions that could restrict future distributions. Our ability to make distributions at expected levels will also be dependent, in part, on other matters, including, but not limited to: • • • • • • • • • continued property occupancy and timely receipt of rent obligations; the amount of future capital expenditures and expenses relating to our properties; the level of leasing activity and future rental rates; the strength of the commercial real estate market; our ability to compete; our costs of compliance with environmental and other laws; our corporate overhead levels; our amount of uninsured losses; and our decision to reinvest in operations rather than distribute available cash. In addition, we can make distributions to the holders of our common shares only after we make preferential distributions to holders of our preferred shares. Our ability to pay dividends may be limited, and we cannot provide assurance that we will be able to pay dividends regularly. Because we conduct substantially all of our operations through our Operating Partnership, our ability to pay dividends will depend almost entirely on payments and distributions received on our interests in our Operating Partnership, the payment of which depends in turn on our ability to operate profitably and generate cash flow from our operations. We cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future. Additionally, the terms of some of the debt to which our Operating Partnership is a party limit its ability to make some types of payments and other distributions to us. This in turn limits our ability to make some types of payments, including payment of dividends on common or preferred shares, unless we meet certain financial tests or such payments or dividends are required to maintain our qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay dividends on our shares in one or more periods. Furthermore, any new shares of beneficial interest issued in capital-raising transactions will substantially increase the cash required to continue to pay cash dividends at current levels. Any common or preferred shares that may in the future be issued for financing acquisitions, share-based compensation arrangements or otherwise would have a similar effect. We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay distributions to shareholders. Our governing documents do not limit us from incurring additional indebtedness and other liabilities. As of December 31, 2012, we had $2.0 billion of indebtedness outstanding. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay distributions to shareholders. As a result, we may not have sufficient funds remaining to make expected distributions to our shareholders if we incur additional indebtedness. Our ability to pay distributions is further limited by the requirements of Maryland law. As a Maryland REIT, we may not under applicable Maryland law make a distribution if either of the following conditions exist after giving effect to the distribution: (1) the REIT would not be able to pay its debts as the debts become due in the usual course of business; or (2) the REIT's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the REIT were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Therefore, we may not be able to make expected distributions to our shareholders if either of the above described conditions exists after giving effect to the distribution. We may issue additional common or preferred shares that dilute our shareholders’ interests. We may issue additional common shares and preferred shares without shareholder approval. Similarly, we may cause the Operating Partnership to issue its common or preferred units for contributions of cash or property without approval by the limited partners of the Operating Partnership or our shareholders. Our existing shareholders’ interests could be diluted if such additional issuances were to occur. We may suffer economic harm as a result of the actions of our partners in real estate joint ventures and other investments. We invest in certain entities in which we are not the exclusive investor or principal decision maker. Investments in such entities may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that the other parties to these investments might become bankrupt or fail to fund their share of required capital contributions. Our partners in these entities may have economic, tax or other business interests or goals that are inconsistent 13 with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also lead to impasses, for example, as to whether to sell a property, because neither we nor the other parties to these investments may have full control over the entity. In addition, we may in certain circumstances be liable for the actions of the other parties to these investments. Each of these factors could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. We may elect to make additional cash outlays to protect our investment in loans we make that are subordinate to other loans. We have made and may in the future make loans under which we have a secured interest in the ownership of a property that is subordinate to other loans on the property. If a default were to occur under the terms of any such loans with us or under the first mortgage loans related to the properties on such loans, we may, in order to protect our investment, elect to either: (1) purchase the other loan; or (2) foreclose on the ownership interest in the property and repay the first mortgage loan, either of which could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. We may be subject to possible environmental liabilities. We are subject to various Federal, state and local environmental laws, including air and water quality, hazardous or toxic substances and health and safety. These laws can impose liability on current and prior property owners or operators for the costs of removal or remediation of hazardous substances released on a property, even if the property owner was not responsible for, or even aware of, the release of the hazardous substances. Costs resulting from environmental liability could be substantial. The presence of hazardous substances on our properties may also adversely affect occupancy and our ability to sell or borrow against those properties. In addition to the costs of government claims under environmental laws, private plaintiffs may bring claims for personal injury or other reasons. Additionally, various laws impose liability for the costs of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous substances at such a facility is potentially liable under such laws. These laws often impose liability on an entity even if the facility was not owned or operated by the entity. Although most of our properties have been subject to varying degrees of environmental assessment, many of these assessments are limited in scope and may not include or identify all potential environmental liabilities or risks associated with the property. Identification of new compliance concerns or undiscovered areas of contamination, changes in the extent or known scope of contamination, discovery of additional sites, human exposure to the contamination or changes in cleanup or compliance requirements could result in significant costs to us that could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. Terrorist attacks may adversely affect the value of our properties, our financial position and cash flows. We have significant investments in properties located in large metropolitan areas and near military installations. Future terrorist attacks could directly or indirectly damage our properties or cause losses that materially exceed our insurance coverage. After such an attack, tenants in these areas may choose to relocate their businesses to areas of the United States that may be perceived to be less likely targets of future terrorist activity, and fewer customers may choose to patronize businesses in these areas. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease space on less favorable terms. As a result, the occurrence of terrorist attacks could adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our shareholders. We may be subject to other possible liabilities that would adversely affect our financial position and cash flows. Our properties may be subject to other risks related to current or future laws, including laws benefiting disabled persons, state or local laws relating to zoning, construction, fire and life safety requirements and other matters. These laws may require significant property modifications in the future and could result in the levy of fines against us. In addition, although we believe that we adequately insure our properties, we are subject to the risk that our insurance may not cover all of the costs to restore a property that is damaged by a fire or other catastrophic events, including acts of war or, as mentioned above, terrorism. The occurrence of any of these events could have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. We may be subject to increased costs of insurance and limitations on coverage, particularly regarding acts of terrorism. Our portfolio of properties is insured for losses under our property, casualty and umbrella insurance policies through September 30, 2013. These policies include coverage for acts of terrorism. Future changes in the insurance industry’s risk assessment approach and pricing structure may increase the cost of insuring our properties and decrease the scope of insurance coverage, either of which could adversely affect our financial position and operating results. Most of our loan agreements contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs, or at all, in the future. In addition, if lenders insist on greater coverage than we are able to obtain, it could 14 adversely affect our ability to finance and/or refinance our properties and execute our growth strategies, which, in turn, would have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. Our business could be adversely affected by a negative audit by the United States Government. Agencies of the United States, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations, and standards. The United States Government also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the United States Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Our business could be adversely affected by security breaches through cyber attacks, cyber intrusions or otherwise. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our information technology networks and related systems. Our information technology networks and related systems are essential to our business operations. Despite our activities to maintain the security and integrity of our networks and related systems, there can be no absolute assurance that these activities will be effective. A security breach involving our networks and related systems could disrupt out operations in numerous ways that could ultimately have an adverse effect on our financial condition, results of operations, cash flows and ability to make expected distributions to our shareholders. Our ownership limits are important factors. Our Declaration of Trust limits ownership of our common shares by any single shareholder to 9.8% of the number of the outstanding common shares or 9.8% of the value of the outstanding common shares, whichever is more restrictive. Our Declaration of Trust also limits ownership by any single shareholder of our common and preferred shares in the aggregate to 9.8% of the aggregate value of the outstanding common and preferred shares. We call these restrictions the “Ownership Limit.” Our Declaration of Trust allows our Board of Trustees to exempt shareholders from the Ownership Limit. The Ownership Limit and the restrictions on ownership of our common shares may delay or prevent a transaction or a change of control that might involve a premium price for our common shares or otherwise be in the best interest of our shareholders. Our Declaration of Trust includes other provisions that may prevent or delay a change of control. Subject to the requirements of the New York Stock Exchange, our Board of Trustees has the authority, without shareholder approval, to issue additional securities on terms that could delay or prevent a change in control. In addition, our Board of Trustees has the authority to reclassify any of our unissued common shares into preferred shares. Our Board of Trustees may issue preferred shares with such preferences, rights, powers and restrictions as our Board of Trustees may determine, which could also delay or prevent a change in control. The Maryland business statutes impose potential restrictions that may discourage a change of control of our company. Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to shareholders. Resolutions adopted by our Board of Trustees and/or provisions of our bylaws exempt us from such laws, but our Board of Trustees can alter its resolutions or change our bylaws at any time to make these provisions applicable to us. Our failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds available to make distributions to our shareholders. We believe that since 1992 we have qualified for taxation as a REIT for Federal income tax purposes. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from certain sources that are specified in the REIT tax laws. We are also required to distribute to shareholders at least 90% of our REIT taxable income (excluding capital gains). The fact that we hold most of our assets through our Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service might make changes to the tax laws and regulations and the courts might issue new rulings that make it more difficult or impossible for us to remain qualified as a REIT. 15 If we fail to qualify as a REIT, we would be subject to Federal income tax at regular corporate rates. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify. If we fail to qualify as a REIT, we would have to pay significant income taxes and would therefore have less money available for investments or for distributions to our shareholders. In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital and would likely have a significant adverse effect on the value of our securities. We could face possible adverse changes in tax laws, which may result in an increase in our tax liability. From time to time changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. The shortfall in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income. These increased tax costs could adversely affect our financial condition and results of operations and the amount of cash available for payment of dividends. A number of factors could cause our security prices to decline. As is the case with any publicly-traded securities, certain factors outside of our control could influence the value of our common and preferred shares. These conditions include, but are not limited to: • market perception of REITs in general and office REITs in particular; • market perception regarding our major tenants and sector concentrations; • • • • • • market perception of our financial condition, performance, dividends and growth potential; and • the level of institutional investor interest in our Company; general economic and business conditions; prevailing interest rates; our financial performance; our underlying asset value; adverse changes in tax laws. We may experience significant losses and harm to our financial condition if financial institutions holding our cash and cash equivalents file for bankruptcy protection. We believe that we maintain our cash and cash equivalents with high quality financial institutions. We have not experienced any losses to date on our deposited cash. However, we may incur significant losses and harm to our financial condition in the future if any of these financial institutions files for bankruptcy protection. Certain of our Trustees have potential conflicts of interest. Certain members of our Board of Trustees own partnership units in our Operating Partnership. These individuals may have personal interests that conflict with the interests of our shareholders. For example, if our Operating Partnership sells or refinances certain of the properties that these Trustees contributed to the Operating Partnership, the Trustees could suffer adverse tax consequences. Their personal interests could conflict with our interests if such a sale or refinancing would be advantageous to us. We have certain policies in place that are designed to minimize conflicts of interest. We cannot, however, provide assurance that these policies will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that might fail to reflect fully the interests of all of our shareholders. Item 1B. Unresolved Staff Comments None 16 Item 2. Properties The following table provides certain information about our office property markets and submarkets as of December 31, 2012: Market/Submarket and Location Baltimore /Washington Corridor: Airport Square - Linthicum, MD Annapolis - Annapolis, MD Arundel Preserve - Hanover, MD BWI South - Hanover, MD Howard County Perimeter - Columbia, MD National Business Park - Annapolis Junction, MD UMBC - Catonsville, MD Subtotal / Average Northern Virginia: Dulles South - Chantilly, VA Herndon - Herndon, VA Merrifield - Falls Church, VA Route 28 South - Herndon, VA Springfield - Springfield, VA Tyson's Corner - McLean, VA Subtotal / Average San Antonio Washington DC-Capitol Riverfront St Mary's & King George Counties: King George County - Dahlgren, VA St. Mary's County - California, MD St. Mary's County - Lexington Park, MD Subtotal / Average Greater Baltimore: Baltimore City - Baltimore, MD Harford County - Aberdeen, MD Hunt Valley/RTE 83 Corridor - Timonium, MD White Marsh - White Marsh, MD Subtotal / Average Suburban Maryland: College Park - College Park, MD Lanham - Lanham, MD (4) Subtotal / Average Colorado Springs: Colorado Springs East - Colorado Springs, CO (5) Colorado Springs Northwest - Colorado Springs, CO I-25 North Corridor - Colorado Springs, CO (4) Subtotal / Average Number of Buildings Rentable Square Feet Occupancy (1) Annualized Rental Revenue (2) Annualized Rental Revenue per Occupied Square Foot (2)(3) 24 1 1 10 33 27 2 98 9 3 1 2 1 3 19 8 2 6 7 6 19 1 3 2 26 32 2 1 3 11 3 7 21 1,813,633 155,000 146,666 432,104 2,682,359 3,223,501 127,258 8,580,521 1,434,692 562,543 180,854 353,334 83,987 605,091 3,220,501 80.9 % $ 35,199,714 2,307,308 100.0 % 3,737,998 100.0 % 6,528,684 68.5 % 88.7 % 60,675,335 96.2 % 107,548,246 94.5 % 3,257,577 89.4% $219,254,862 91.0 % $ 37,724,293 16,856,436 95.9 % 3,059,085 46.0 % 8,182,182 91.4 % 100.0 % 2,944,123 19,378,891 88.8 % 89.2% $ 88,145,010 915,093 96.4% $ 29,159,572 360,326 89.0% $ 14,464,433 3,758,392 91.6 % $ 4,882,294 75.2 % 91.6 % 7,298,048 85.9% $ 15,938,734 93.4 % $ 14,932,204 3,296,026 37.9 % 5,570,833 100.0 % 78.0 % 16,612,279 78.6% $ 40,411,342 94.9 % $ 90.9 % 94.1% $ 7,267,194 569,503 7,836,697 80.1 % $ 12,375,054 5,389,696 83.0 % 71.4 % 7,219,269 77.8% $ 24,984,019 206,207 317,835 379,550 903,592 481,016 284,884 239,835 1,047,170 2,052,905 242,070 55,866 297,936 732,635 322,152 522,724 1,577,511 17 $23.98 14.89 25.49 22.05 25.49 34.68 27.09 $28.60 $28.88 31.24 36.75 25.33 35.05 36.08 $30.68 $33.04 $45.12 $19.89 20.42 20.99 $20.55 $33.22 30.54 23.23 20.34 $25.04 $31.65 11.21 $27.95 $21.09 20.16 19.33 $20.35 Market/Submarket and Location Number of Buildings Rentable Square Feet Occupancy (1) Annualized Rental Revenue (2) Annualized Rental Revenue per Occupied Square Foot (2)(3) Greater Philadelphia - Blue Bell, PA Other Region: Huntsville - Huntsville, AL Richmond Southwest - Richmond, VA Southwest Virginia - Lebanon, VA Subtotal / Average 3 1 1 1 3 488,741 100.0% $ 9,369,523 $19.17 138,466 193,000 102,842 434,308 83.2 % $ 100.0 % 100.0 % 3,136,582 5,449,908 3,705,802 94.6% $ 12,292,292 $27.24 28.24 36.03 $29.91 $27.92 Total /Average: 208 18,831,434 87.8% $461,856,484 (1) This percentage is based upon all rentable square feet under lease terms that were in effect as of December 31, 2012. (2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2012 multiplied by 12, plus the estimated annualized expense reimbursements under existing leases. 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 generally accepted accounting principles does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. (3) Annualized rental revenue per occupied square foot is a property’s annualized rental revenue divided by that property’s occupied square feet as of December 31, 2012. Our computation of annualized rental revenue excludes the effect of lease incentives. The annualized rent per occupied square foot, including the effect of lease incentives, for our total office portfolio and two largest regions follows: total office portfolio: $27.85; Baltimore/Washington Corridor: $28.52; and Northern Virginia: $30.55. (4) These properties were included in our Strategic Reallocation Plan and classified as held for sale as of December 31, 2012. (5) Nine of these properties were included in our Strategic Reallocation Plan and classified as held for sale as of December 31, 2012. 18 The following table provides certain information about our office properties that were under construction or redevelopment, or for which we were contractually committed to construct, as of December 31, 2012 (dollars in thousands): Property and Location Submarket Estimated Rentable Square Feet Upon Completion Percentage Leased Calendar Quarter of Anticipated Completion Costs Incurred to Date (1) Estimated Costs to Complete (1) Under Construction Baltimore/Washington Corridor: 7205 Riverwood Road Columbia, MD 7175 Riverwood Road Columbia, MD 312 Sentinel Way Annapolis Junction, MD 420 National Business Parkway Jessup, MD Subtotal/Average Northern Virginia: 7770 Backlick Road (Patriot Ridge) Springfield, VA Howard County Perimeter Howard County Perimeter National Business Park National Business Park 89,268 100 % 1Q 2013 $ 15,673 $ 7,117 25,939 100 % 3Q 2013 5,927 3,122 125,160 0 % 3Q 2014 16,366 20,287 137,322 0 % 2Q 2014 18,043 17,439 377,689 31 % Springfield 239,272 49 % 3Q 2013 $ $ $ $ $ $ $ 56,009 $ 47,965 58,143 $ 14,574 7,490 15,036 4,309 7,523 69,942 19,055 $ $ 37,133 3,890 1,396 20,281 3,052 21,761 4,530 3,701 28,033 153,984 $ $ 49,633 134,731 19,138 $ 2,278 Ashburn Crossing - DC-8 Ashburn 200,000 100 % 4Q 2013 Ashburn, VA Ashburn Crossing - DC-9 Ashburn 115,000 100 % 2Q 2015 Ashburn, VA Subtotal/Average Huntsville: 1000 Redstone Gateway Huntsville, AL 554,272 78 % Huntsville 121,105 100 % 1Q 2013 1100 Redstone Gateway Huntsville 121,347 100 % 1Q 2014 Huntsville, AL 1200 Redstone Gateway Huntsville 121,088 100 % 4Q 2013 Huntsville, AL 7200 Redstone Gateway Huntsville 61,434 0 % 4Q 2013 Huntsville, AL Subtotal/Average Total Under Construction Under Redevelopment Greater Philadelphia: 751 Arbor Way (Hillcrest I) Blue Bell, PA 721 Arbor Way (Hillcrest II) Blue Bell, PA Total Under Redevelopment Greater Philadelphia Greater Philadelphia 424,974 1,356,935 86 % 67% 113,297 51 % 1Q 2013 183,466 59 % 2Q 2014 14,076 17,019 296,763 56% $ 33,214 $ 19,297 (1) Includes land, construction, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable. 19 The following table provides certain information about our land held or under pre-construction as of December 31, 2012, including properties under ground lease to us: Market/Submarket and Location Strategic Land Baltimore/Washington Corridor: National Business Park Columbia Gateway Airport Square Arundel Preserve Subtotal Northern Virginia; Westfields Corporate Center Westfields Park Center Woodland Park Patriot Ridge Ashburn Crossing Subtotal San Antonio, Texas 8100 Potranco Road Northwest Crossroads Sentry Gateway Subtotal Huntsville, Alabama St. Mary’s & King George Counties Greater Baltimore Suburban Maryland Acres Estimated Developable Square Feet up to 186 22 5 84 297 23 33 5 11 10 82 9 31 38 78 443 44 49 49 1,792,000 520,000 84,000 1,150,000 3,546,000 400,000 400,000 225,000 739,000 120,000 1,884,000 125,000 375,000 658,000 1,158,000 4,173,000 109,000 1,340,000 510,000 Total strategic land held and pre-construction 1,042 12,720,000 Non-Strategic Land Baltimore/Washington Corridor Greater Baltimore Suburban Maryland Colorado Springs Greater Philadelphia, Pennsylvania Other (Charles County, MD) Total non-strategic land held 7 138 107 175 8 217 652 65,000 1,352,000 1,000,000 2,570,000 604,000 967,000 6,558,000 Total land held and pre-construction 1,694 19,278,000 The following table provides certain information about our wholesale data center property as of December 31, 2012 (dollars in thousands): Property and Location Year Built Gross Building Area Raised Floor Square Footage (1) Initial Stabilization Critical Load (in MWs) (2) Initial Stabilization Critical Load Leased MW Operational Costs Incurred to Date (3) Estimated Costs to Completion (3) 9651 Hornbaker Road - Manassas, VA 2010 233,000 100,000 18 22% 6 $207,785 $67,445 (1) Raised floor square footage is that portion of the gross building area in which tenants locate their computer servers. Raised floor area is considered to be the net rentable square footage. (2) Critical load is the power available for exclusive use of tenants in the property (expressed in terms of megawatts (“MWs”)). (3) Includes land, construction and leasing costs. 20 Lease Expirations The following table provides a summary schedule of the lease expirations for leases in place at our office properties as of December 31, 2012, assuming that none of the tenants exercise renewal options. This analysis includes the effect of early renewals completed on existing leases but excludes the effect of new tenant leases on 264,380 square feet executed but yet to commence as of December 31, 2012. Year of Lease Expiration (1) Number of Leases Expiring Square Footage of Leases Expiring Percentage of Total Occupied Square Feet Annualized Rental Revenue of Expiring Leases (2) Percentage of Total Annualized Rental Revenue Expiring (2) Total Annualized Rental Revenue of Expiring Leases Per Occupied Square Foot (in thousands) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 146 101 112 79 96 45 35 33 20 12 6 2 4 2,442,746 2,221,075 2,737,514 1,637,241 1,842,182 1,250,397 1,024,008 1,294,803 561,641 793,969 149,308 29,528 556,372 14.8 % $ 13.4 % 16.6 % 9.9 % 11.1 % 7.6 % 6.2 % 7.8 % 3.4 % 4.8 % 0.9 % 0.2 % 3.4 % Total/Weighted Average 691 16,540,784 100.0 % $ 71,083 63,401 72,790 43,799 49,748 32,563 29,610 35,590 15,855 23,235 2,868 802 20,512 461,856 15.4% $ 13.7% 15.8% 9.5% 10.8% 7.1% 6.4% 7.7% 3.4% 5.0% 0.6% 0.2% 4.4% 100.0% $ 29.10 28.54 26.59 26.75 27.01 26.04 28.92 27.49 28.23 29.26 19.21 27.15 36.87 27.92 With regard to leases expiring in 2013, we believe that the weighted average annualized rental revenue per occupied square foot for such leases at December 31, 2012 was, on average, approximately 5% to 8% higher than estimated current market contractual rents for the related space, with specific results varying by market. The following table provides a summary schedule of the lease expirations for leases in place at our wholesale data center property as of December 31, 2012: Year of Lease Expiration Number of Leases Expiring Raised Floor Square Footage Expiring Critical Load Leased (in megawatts) Critical Load Used (in megawatts) 2019 2020 2022 Total/Weighted Average 1 1 1 3 7,172 19,023 5,604 31,799 1 2 1 4 1.00 2.00 0.25 3.25 Annualized Rental Revenue of Expiring Leases (2) (in thousands) $ $ 2,098 4,232 391 6,721 (1) Most of our leases with the United States Government provide for consecutive one-year terms or provide for early termination rights. All of the leasing statistics set forth above assumed that the United States Government will remain in the space that it leases through the end of the respective arrangements, without ending consecutive one-year leases prematurely or exercising early termination rights. We reported the statistics in this manner because we manage our leasing activities using these same assumptions and believe these assumptions to be probable. (2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2012 multiplied by 12, plus the estimated annualized expense reimbursements under existing office leases. Our computation of annualized rental revenue excludes the effect of lease incentives, although the effect of this exclusion is generally not material. Item 3. Legal Proceedings We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company (other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance). 21 Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases 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: 2011 First Quarter Second Quarter Third Quarter Fourth Quarter 2012 First Quarter Second Quarter Third Quarter Fourth Quarter Price Range Low $33.83 $30.63 $21.75 $19.35 High $36.90 $36.79 $32.07 $25.96 Price Range Low $20.58 $21.13 $21.36 $23.22 High $25.48 $24.05 $25.61 $26.12 Dividends Per Share $0.4125 $0.4125 $0.4125 $0.4125 Dividends Per Share $0.2750 $0.2750 $0.2750 $0.2750 The number of holders of record of our common shares was 608 as of December 31, 2012. 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 pay dividends at the discretion of our Board of Trustees. Our ability to pay cash dividends will be dependent upon: (1) the cash flow generated from our operations; (2) cash generated or used by our financing and investing activities; and (3) the annual distribution requirements under the REIT provisions 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, as well as by limitations imposed by state law. In addition, we are prohibited from paying cash dividends in excess of the amount necessary for us to qualify for taxation as a REIT if a default or event of default exists pursuant to the terms of our Revolving Credit Facility; this restriction does not currently limit our ability to pay dividends, and we do not believe that this restriction is reasonably likely to limit our ability to pay future dividends because we expect to comply with the terms of our Revolving Credit Facility. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended December 31, 2012, 139,696 of the Operating Partnership's common units were exchanged for 139,696 common shares in accordance with the Operating Partnership's Second Amended and Restated Limited Partnership Agreement, as amended. The issuance of these common shares was effected in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. 22 Common Shares Performance Graph The graph and the table set forth below assume $100 was invested on December 31, 2007 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”): Index Corporate Office Properties Trust S&P 500 NAREIT All Equity REIT Index 12/31/07 100.00 100.00 100.00 12/31/08 101.77 63.00 62.27 Period Ended 12/31/09 127.51 79.68 79.70 12/31/10 126.90 91.68 101.98 12/31/11 82.21 93.61 110.42 12/31/12 101.24 108.59 132.18 23 Item 6. Selected Financial Data The following table sets forth summary financial data as of and for each of the years ended December 31, 2008 through 2012. 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. Corporate Office Properties Trust and Subsidiaries (in thousands, except per share data and number of properties) Revenues Revenues from real estate operations (1) Construction contract and other service revenues Total revenues Expenses Property operating expenses (1)(2)(3) Depreciation and amortization associated with real estate operations (1) Construction contract and other service expenses Impairment losses General, administrative and leasing expenses (3)(4) Business development expenses and land carry costs (2) Total operating expenses Operating income Interest expense (1) Interest and other income (Loss) gain on early extinguishment of debt Loss on interest rate derivatives Income (loss) from continuing operations before equity in (loss) income of unconsolidated entities and income taxes Equity in (loss) income of unconsolidated entities Income tax (expense) benefit (4) Income (loss) from continuing operations Discontinued operations (1)(2)(3)(5) Income (loss) before gain on sales of real estate Gain on sales of real estate, net of income taxes (1)(6) Net income (loss) Net loss (income) attributable to noncontrolling interests (4) Net income (loss) attributable to Corporate Office Properties Trust Preferred share dividends Issuance costs associated with redeemed preferred shares (7) Net (loss) income attributable to Corporate Office Properties Trust common shareholders Basic earnings per common share (8) (Loss) income from continuing operations Net (loss) income Diluted earnings per common share (8) (Loss) income from continuing operations Net (loss) income 2012 2011 2010 2009 2008 $ 454,171 73,836 528,007 $ 428,496 84,345 512,841 $ 387,559 104,675 492,234 $ 349,463 343,087 692,550 $ 326,223 188,385 514,608 167,161 162,397 146,617 123,769 109,967 113,480 70,576 43,214 31,900 5,711 432,042 95,965 (94,624) 7,172 (943) — 7,570 (546) (381) 6,643 13,677 20,320 21 20,341 636 20,977 (20,844) (1,827) 113,111 81,639 83,478 30,314 6,122 477,061 35,780 (98,222) 5,603 (1,639) (29,805) (88,283) (331) 6,710 (81,904) (48,404) (130,308) 2,732 (127,576) 8,148 (119,428) (16,102) — 97,897 102,302 — 28,501 6,403 381,720 110,514 (95,729) 9,568 — — 24,353 1,376 (108) 25,621 17,054 42,675 2,829 45,504 (2,744) 42,760 (16,102) — $ $ $ $ $ (1,694) $ (135,530) $ 26,658 (0.21) $ (0.03) $ (1.31) $ (1.97) $ (0.21) $ (0.03) $ (1.31) $ (1.97) $ 0.17 0.43 0.17 0.43 $ $ $ $ $ 81,446 336,519 — 27,877 5,259 574,870 117,680 (76,718) 5,164 — — 46,126 (941) (196) 44,989 16,310 61,299 — 61,299 (4,970) 56,329 (16,102) — 40,227 0.44 0.70 0.44 0.70 75,264 184,142 — 28,739 2,206 400,318 114,290 (79,542) 2,070 8,101 — 44,919 (147) (201) 44,571 15,655 60,226 1,090 61,316 (7,351) 53,965 (16,102) — 37,863 0.50 0.77 0.49 0.76 $ $ $ $ $ Weighted average common shares outstanding – basic Weighted average common shares outstanding – diluted 73,454 73,454 69,382 69,382 59,611 59,944 55,930 56,407 48,132 48,820 24 Balance Sheet Data (as of year end): Total properties, net Total assets (4) Debt Total liabilities (4) Redeemable noncontrolling interest (4) Total equity (4)(9) Other Financial Data (for the year ended): Cash flows provided by (used in): Operating activities Investing activities Financing activities Numerator for diluted EPS (4) Diluted funds from operations (4)(9) Diluted funds from operations per share (4)(9) Cash dividends declared per common share Property Data (as of year end): Number of properties owned (10) Total rentable square feet owned (10) 2012 2011 2010 2009 2008 $ 3,163,044 $ 3,653,759 $ 2,019,168 $ 2,206,962 10,298 $ $ 1,436,499 $ 3,352,975 $ 3,863,555 $ 2,426,303 $ 2,648,748 8,908 $ $ 1,205,899 $ 3,445,455 $ 3,844,517 $ 2,323,681 $ 2,521,379 9,000 $ $ 1,323,138 $ 3,029,900 $ 3,380,022 $ 2,053,841 $ 2,259,390 $ $ 1,120,632 $ 2,778,466 $ 3,114,239 $ 1,856,751 $ 2,031,816 — $ 1,082,423 — $ $ $ $ 156,436 194,817 103,701 152,143 191,838 $ $ 13,744 $ (200,547) $ $ $ $ $ 180,892 $ $ (260,387) $ (479,167) $ (349,076) $ (290,822) 92,067 37,135 143,592 2.52 1.425 $ (2,163) $ (136,567) $ $ $ $ 324,571 25,587 148,645 2.30 1.61 155,746 39,217 152,626 2.46 1.53 165,720 2.13 1.10 53,062 0.72 1.65 $ $ $ $ $ $ $ $ $ $ $ $ $ 208 18,831 238 20,514 256 20,432 253 19,543 240 18,559 (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) Certain prior period amounts pertaining to expenses on properties not in operations have been reclassified to conform with the current presentation, as described in Note 2 to our consolidated financial statements in the section entitled “Reclassifications.” These reclassifications did not affect consolidated net income or shareholders’ equity. (3) Certain prior period amounts pertaining to costs expensed in connection with marketing space for lease to prospective tenants have been reclassified to conform with the current presentation, as described in Note 2 to our consolidated financial statements in the section entitled “Reclassifications.” These reclassifications did not affect consolidated net income or shareholders’ equity. (4) Certain amounts as of, and for the year ended, December 31, 2011 were revised in connection with errors identified in 2012 described in Note 2 to our Consolidated Financial Statements in the section entitled “Revisions.” These revisions affected consolidated net income and shareholders’ equity. (5) Includes income derived from three operating properties disposed in 2008, three operating properties disposed in 2010, 23 operating properties disposed in 2011, 35 operating properties disposed in 2012 and 17 operating properties classified as held for sale at December 31, 2012 (see Note 17 to our consolidated financial statements). (6) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations. (7) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized upon the redemption of the Series G preferred shares of beneficial interest in 2012. (8) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust. (9) 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." (10) Amounts reported reflect only operating office properties. 25 Item 7. Management's Discussion and 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,” “could,” “believe,” “anticipate,” “expect,” “estimate,” “plan” or other comparable terminology. Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations, estimates and projections reflected in such forward-looking statements are based on reasonable assumptions at the time made, we can give no assurance that these expectations, estimates and projections will be achieved. Future events and actual results may differ materially from those discussed in the forward-looking statements. Important factors that may affect these expectations, estimates and projections include, but are not limited to: • • • • • • • • • • • • general economic and business conditions, which will, among other things, affect office property and data center demand and rents, tenant creditworthiness, interest rates, financing availability and property values; adverse changes in the real estate markets, including, among other things, increased competition with other companies; governmental actions and initiatives, including risks associated with the impact of a government shutdown or budgetary reductions or impasses, such as a reduction in rental revenues, non-renewal of leases and/or a curtailment of demand for additional space by our strategic customers; our ability to borrow on favorable terms; risks of real estate acquisition and development activities, including, among other things, risks that development projects may not be completed on schedule, that tenants may not take occupancy or pay rent or that development or operating costs may be greater than anticipated; our ability to sell properties included in our Strategic Reallocation Plan; risks of investing through joint venture structures, including risks that our joint venture partners may not fulfill their financial obligations as investors or may take actions that are inconsistent with our objectives; changes in our plans for properties or views of market economic conditions or failure to obtain development rights, either of which could result in recognition of significant impairment losses; our ability to satisfy and operate effectively under Federal income tax rules relating to real estate investment trusts and partnerships; the dilutive effects of issuing additional common shares; our ability to achieve projected results; and environmental requirements. We undertake no obligation to update or supplement forward-looking statements. Overview We are an office real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. 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: property operating costs, such as real estate taxes, utilities and repairs and maintenance; and depreciation and amortization associated with our operating properties. Most of our profitability from real estate operations depends on our ability to maintain high levels of occupancy and increase rents, which is affected by a number of factors, including, among other things, our tenants’ ability to fulfill their lease obligations and their continuing space needs based on, among other things, employment levels, business confidence, competition and general economic conditions of the markets in which we operate. Our strategy for operations and growth focuses on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. These tenants’ missions generally pertain more to knowledge-based activities (such as cyber security, research and development and other highly technical defense and security areas) than to force structure (troops) and weapon system 26 production. As a result of this strategy, a large concentration of our revenue is derived from several large tenants. As of December 31, 2012, 64.5% of our annualized rental revenue (as defined below) from office properties was from our 20 largest tenants, 40.9% from our four largest tenants and 24.2% from our largest tenant, the United States Government. In addition, as of December 31, 2012, 70.0% of the total annualized rental revenue of our office properties held for long-term investment was from properties located near defense installations and other knowledge-based government demand drivers (referred to elsewhere as “Strategic Demand Drivers”), or that were otherwise at least 50% leased by United States Government agencies or defense contractors; we refer to these properties herein as “Strategic Tenant Properties.” We made significant progress in 2012 under the Strategic Reallocation Plan that we launched in 2011, which entails the disposition by the end of 2013 of approximately $562.0 million in office properties and land no longer closely aligned with our strategy, and use of the proceeds to invest in Strategic Tenant Properties, to repay borrowings and for general corporate purposes. In 2012, we completed dispositions of 35 operating properties totaling 2.3 million square feet and non-operating properties for aggregate transaction values totaling $313.6 million. Aggregate dispositions since implementation of the Strategic Reallocation Plan total $390.3 million, including 58 operating properties totaling 3.2 million square feet. We used most of the proceeds from these sales to pay down our Revolving Credit Facility. In 2012, we also approved a plan for the future disposition of our office properties and developable land in Greater Philadelphia, Pennsylvania because the properties no longer meet our strategic investment criteria; we expect this disposition to occur in the next four years. Our operations in recent years have been hindered by continuing delays in Federal budget approvals and mounting uncertainty regarding the potential for future reductions in government spending targeting defense, as well as the otherwise challenging economic conditions in the United States. Furthermore, the Budget Control Act passed in 2011, which imposed caps on the Federal budget in order to achieve targeted spending levels over the 2013-2021 fiscal years, currently requires that $110 billion be sequestered from the United States Government’s funding levels for the 2013 fiscal year, approximately 50% of which could come from defense; this action could feasibly begin to occur as early as March 2013, although we believe that such sequestrations could be further deferred, reduced or eliminated if reduction levels are agreed to in the 2013 Federal budget. This defense spending uncertainty has delayed our progress in leasing existing properties and new construction proximate to Strategic Demand Drivers. In addition, the otherwise challenging economic conditions have prompted certain operations to consolidate and businesses to close, downsize their space requirements or cancel or delay expansion plans in our regions, placing downward pressure on occupancy and rental rates. Despite these challenges, our office property portfolio’s occupancy improved to 87.8% as of December 31, 2012, a 1.6% increase over year end 2011. We also successfully completed 3.3 million square feet of leasing, including 1.2 million of construction and redevelopment space. The improvement in our portfolio’s occupancy was attributable primarily to an improvement in occupancy of our Same Office Properties (defined below) to 89.1% at December 31, 2012 (up from 88.3% at December 31, 2011) and our dispositions in 2012 of lower occupancy properties under the Strategic Reallocation Plan. Our properties proximate to Strategic Demand Drivers were 92.1% occupied at December 31, 2012, notably stronger than our other properties, which were 84.4% occupied. We believe that the continuing Federal budget discussions will eventually lead to modest additional reductions in defense spending. However, if such reductions were to occur, we continue to believe that our properties’ proximate to Strategic Demand Drivers will not be significantly affected, and could position us for future growth, for reasons that include the following: • • • we expect defense spending reductions, should they occur, will be targeted more towards force structure (troops) and weapon system production than towards the knowledge-based activities of most of our tenants, which we believe are considered increasingly critical to our national security; in 2011, Federal agencies completed their relocation to the following government installations that serve as demand drivers to our portfolio of Strategic Tenant Properties primarily in connection with mandates by the Base Realignment and Closure Commission of the United States Congress (“BRAC”): Fort George G. Meade (which also houses the recently-formed United States Cyber Command), Redstone Arsenal, Fort Belvoir, San Antonio and Aberdeen Proving Ground; the shifting of jobs by defense contractors supporting these agencies that we believe still needs to occur has been delayed by the defense spending uncertainty; if defense construction spending is cut, government demand to lease space in our business parks could possibly increase if the government decides to lease space instead of build it. We believe that the outlook for our properties proximate to Strategic Demand Drivers would be hindered more by an extended period of uncertainty regarding future defense spending reductions than by the actual spending reductions. 27 The relative contribution to our operations by properties not proximate to Strategic Demand Drivers has decreased due to our property dispositions in 2011 and 2012, and we expect that trend to continue as we complete the Strategic Reallocation Plan. Nevertheless, our market strategy is to continue to own these types of properties in targeted markets or submarkets in the Greater Washington, DC/Baltimore region with strong growth attributes. These properties tend to be more subject to general market conditions that have been affected by the slow economic recovery. As a result, we expect a longer road to recovery to pre-recession occupancy levels for these properties. Our capital strategy is aimed at maintaining a flexible capital structure, and we believe that we significantly improved our balance sheet and expanded our access to capital in 2012 not only through our execution of the Strategic Reallocation Plan but also by: • • • • • issuing 6.9 million Series L Cumulative Preferred Shares (the “Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. These shares are nonvoting, redeemable for cash at $25.00 per share at our option on or after June 27, 2017 and accrue dividends equal to 7.375% of the liquidation preference. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes; redeeming all of our Series G Preferred Shares of beneficial interest (the “Series G Preferred Shares”) at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. These shares accrued dividends equal to 8.0% of the liquidation preference; completing a public offering of 8.6 million common shares at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses, and using the proceeds to pay down our Revolving Credit Facility and for general corporate purposes; entering into unsecured term loan agreements, under which we borrowed $370 million in the aggregate. The net proceeds from these borrowings were used to pay down our Revolving Credit Facility; and established an at-the-market (“ATM”) stock offering program under which we may, from time to time, offer and sell common shares in “at the market” stock offerings having an aggregate gross sales price of up to $150.0 million. These activities contributed towards our: improving the relationship of our outstanding debt relative to both assets and adjusted earnings before interest expense, income taxes, depreciation, amortization (“adjusted EBITDA,” which we define below); improving the relationship of our interest expense to adjusted EBITDA; and paying down our Revolving Credit Facility to zero by the end of 2012, providing significant liquidity and flexibility for future investing and financing activities. Our 2012 investing activities grew our portfolio’s concentration in Strategic Tenant Properties through the dispositions of nonstrategic properties discussed above and by: • • placing into service an aggregate of 371,000 square feet in four newly constructed properties proximate to Strategic Demand Drivers that were 45.8% leased as of December 31, 2012; and acquiring for $48.3 million a property in Herndon, Virginia totaling 202,000 square feet that was 100% leased to a defense contractor. We discuss significant factors contributing to changes in our net income attributable to common shareholders and diluted earnings per share over the last three years in the section below entitled “Results of Operations.” In addition, the section below entitled “Liquidity and Capital Resources” includes discussions of, among other things: • • • how we expect to generate cash for short and long-term capital needs; our off-balance sheet arrangements in place that are reasonably likely to affect our financial condition; and our commitments and contingencies. 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 on Form 10-K. 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. Our computation of annualized rental revenue excludes the effect of lease incentives, although the effect of this exclusion is generally not material. 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 generally accepted accounting principles in the United States of America (“GAAP”) does contain such fluctuations. We find the measure particularly useful for leasing, tenant, segment and industry analysis. 28 Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with 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 summary of certain aspects of those accounting policies involving estimates and assumptions that (1) require our most difficult, subjective or complex judgments in accounting for uncertain matters or matters that are susceptible to change and (2) materially affect our reported operating performance or financial condition. 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. As described further in Note 2 to our Consolidated Financial Statements in the section entitled “Revisions,” during 2012, we identified errors in the consolidated financial statements pertaining to our: • recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012; over-accrual of incentive compensation cost for the year ended December 31, 2011; • • misapplication of accounting guidance requiring that we recognize loss allocations to a noncontrolling interest holder in a consolidated real estate joint venture associated with decreases in such holder’s claim on the book value of the joint venture’s assets, despite the fact that the real estate held by the joint venture was under development and the joint venture had no underlying losses under GAAP; and reporting for a noncontrolling interest in a consolidated real estate joint venture for which the holder of such interest possesses the right of requiring us to acquire the interest at fair value. • With respect to the errors described in the first two bullets above, we assessed the materiality of these errors on the financial statements in connection with previously filed periodic reports and concluded at such time that the errors were not material to any prior annual or interim periods. In assessing the cumulative effect of all such errors, we have since concluded that a correction of the errors in 2012 could be considered material to our 2012 net income. Accordingly, the consolidated financial statements as of, and for the year ended, December 31, 2011 included in the Annual Report on Form 10-K were revised. For each of the calendar quarters from January 1, 2011 through September 30, 2011, amounts included in Note 20 to the consolidated financial statements pertaining to such periods have been revised, and we will revise the financial statements in future filings including such periods. Acquisitions of Properties When we acquire properties, we allocate the purchase price 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 Properties.” Our process for determining the allocation to these components requires many estimates and assumptions, including 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) 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; and (4) allocation of the if-vacant value between land and building. A change in any of the above key assumptions, which are subjective, can materially change not only the presentation of acquired properties in our consolidated financial statements but also our 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 consolidated balance sheets; the amount of costs assigned to individual properties in multiple property acquisitions; and the amount of gain recognized in our consolidated statements of operations should we determine that the fair value of the acquisition exceeds its cost; where the amortization of the components appear over time in our consolidated statements of operations. Allocations to above- and below-market leases are amortized into rental revenue, whereas allocations to most of the other tangible and intangible assets 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 the timing over which the items are recognized as revenue or expense in our consolidated statements of operations. For example, for allocations to the as-if vacant value, the land portion is not depreciated and the building portion is depreciated 29 over a longer period of time than the other components (generally 40 years). Allocations to above- and below-market leases, in-place lease value and tenant relationship value are amortized over significantly shorter timeframes, and if individual tenants' leases are terminated early, any unamortized amounts remaining associated with those tenants are written off 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 properties. Impairment of Long-Lived Assets We assess each of our operating properties for impairment quarterly using cash flow projections and estimated fair values that we derive for each of the properties. We update the leasing and other assumptions used in these projections regularly, paying particular attention to properties that have experienced chronic vacancy or face significant market challenges. We review our plans and intentions for our development projects and land parcels quarterly. Each quarter, we also review the reasonableness of changes in our estimated operating property fair values from amounts estimated in the prior quarter. If events or changes in circumstances indicate that the carrying values of certain operating properties, properties in development or land held for future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods. If the analysis indicates that the carrying value of a tested property is not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans. Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. Estimated cash flows used in such analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future rental rates, occupancies for the tested property and comparable properties, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from third party sources such as CoStar Group and real estate leasing and brokerage firms and our direct experience with the properties and their markets. Determining the appropriate capitalization or yield rate also requires significant judgment and is typically based on many factors, including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Changes in the estimated future cash flows due to changes in our plans for a property, views of market and economic conditions and/or our ability to obtain development rights could result in recognition of impairment losses which could be substantial. Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Accordingly, decisions 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 negotiations 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. Applicable accounting guidance requires us to recognize minimum rental payments on a straight-line basis over the terms of each lease and to assess the lease terms 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 for a number of our leases, based on the factors above, that the United States Government's exercise of all of those renewal options is reasonably assured. Changes in these assessments could result in the write-off of any recorded assets associated with straight-line rental revenue and acceleration of depreciation and amortization expense associated with costs we have incurred related to these leases. 30 Revenue Recognition on Tenant Improvements Most of our leases involve some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets. If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over the shorter of the useful life of the assets or the term of the lease and recognize any payments from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease. Our determination of whether improvements are landlord assets or tenant assets also may affect when we commence revenue recognition in connection with a lease. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors that may require subjective or complex judgments, including: whether the improvements are unique to the tenant or reusable by other tenants; whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease term; and whether the economic substance of the lease terms is properly reflected. Collectability of Accounts and Deferred Rent Receivable Allowances for doubtful accounts and deferred rent receivable are established based on quarterly analyses of the risk of loss on specific accounts. The analyses place particular emphasis on past-due accounts and consider information such as the nature and age of the receivables, the payment history of the tenants, the financial condition of the tenants and our assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations. Our estimate of the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on tenants. Accounting Method for Investments We 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 use the consolidation method when we own most of the outstanding voting interests in an entity and can control its operations. 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, this applies to entities for which 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 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 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 cash flows of the entity. We must consider both our and our partner's ability to participate in the management of the entity’s operations and 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 their effect on 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. Accounting for Interest Rate Derivatives We use interest rate derivatives to hedge the cash flows associated with interest rates on debt, including forecasted borrowings. When we designate a derivative as a cash flow hedge, we defer the effective portion of changes in its fair value to the accumulated other comprehensive income (loss) section of shareholders' equity and recognize the ineffective portion of changes in fair value of derivatives in earnings. If and when a derivative ceases to qualify as a cash flow hedge, we reclassify the associated accumulated other comprehensive income (loss) to net earnings (loss). Our accounting for derivatives requires that we make judgments in determining the nature of the derivatives and their effectiveness as hedges, including ones regarding the likelihood that a forecasted transaction will take place. Therefore, these judgments could materially affect our consolidated financial statements. 31 Concentration of Operations Customer Concentration of Property Operations The table below sets forth the 20 largest tenants in our portfolio of office properties based on percentage of annualized rental revenue: Tenant United States of America Northrop Grumman Corporation (1) Booz Allen Hamilton, Inc. Computer Sciences Corporation (1) General Dynamics Corporation (1) CareFirst, Inc. The MITRE Corporation ITT Exelis (1) The Aerospace Corporation (1) Wells Fargo & Company (1) Kratos Defense & Security Solution, Inc. (1) L-3 Communications Holdings, Inc. (1) The Boeing Company (1) AT&T Corporation (1) Raytheon Company (1) Ciena Corporation Science Applications International Corporation (1) Lockheed Martin Corporation The Johns Hopkins Institutions (1) Unisys Corporation Comcast Corporation (1) Merck & Co., Inc. (1) First Mariner Bank (1) Subtotal of 20 largest tenants All remaining tenants Total Percentage of Annualized Rental Revenue of Office Properties for 20 Largest Tenants as of December 31, 2011 2010 2012 24.2% 6.3% 5.5% 4.8% 3.6% 1.9% 1.9% 1.7% 1.7% 1.7% 1.5% 1.4% 1.4% 1.2% 1.1% 1.0% 1.0% 0.8% 0.8% 0.8% N/A N/A N/A 64.5% 35.5% 100.0% 22.2% 6.9% 5.1% 4.8% 1.5% 1.6% 1.8% 1.7% 1.7% 1.7% 1.4% 1.6% 1.3% 1.2% 1.0% 1.1% 0.9% N/A 0.8% 0.8% 1.2% N/A N/A 60.3% 39.7% 100.0% 21.6% 7.2% 4.7% 4.1% 1.0% 1.7% 1.8% 1.8% 1.7% 1.6% 1.4% 1.6% 1.3% 1.2% N/A 1.0% N/A N/A 0.8% 0.9% 1.3% 0.6% 0.6% 57.9% 42.1% 100.0% (1) Includes affiliated organizations and agencies and predecessor companies. The United States Government’s concentration increased each of the last two years in large part due to it taking occupancy of a significant portion of our newly-constructed square feet placed into service and our significant dispositions of properties in which it was not a tenant. Our Strategic Tenant Properties accounted for 70.0% of our annualized rental revenue from office properties held for long- term investment at December 31, 2012. We believe that we are well positioned for future growth in the concentration of our revenue derived from customers in these sectors, as discussed further in the section in Item 1 to this Annual Report on Form 10- K entitled “Business and Growth Strategies.” 32 Geographic Concentration of Property Operations The table below sets forth the regional allocation of our annualized rental revenue of office properties as of the end of the last three calendar years: Region Baltimore/Washington Corridor Northern Virginia San Antonio Washington, DC - Capitol Riverfront St. Mary’s and King George Counties Greater Baltimore Suburban Maryland Colorado Springs Greater Philadelphia Other Percentage of Annualized Rental Revenue of Office Properties as of December 31, 2011 2010 2012 47.5% 19.1% 6.3% 3.1% 3.4% 8.8% 1.7% 5.4% 2.0% 2.7% 100.0% 45.6% 16.0% 5.8% 3.0% 3.4% 12.6% 4.1% 5.1% 1.7% 2.7% 100.0% 44.1% 16.4% 5.7% 3.4% 2.9% 14.9% 3.9% 5.2% 1.5% 2.0% 100.0% 2012 2010 Number of Office Properties as of December 31, 2011 111 17 9 2 19 46 8 21 2 3 238 98 19 8 2 19 32 3 21 3 3 208 112 17 8 2 18 66 8 21 2 2 256 The most significant changes in our regional allocations set forth above were due to newly-constructed properties placed into service and our significant dispositions of properties in the Greater Baltimore and Suburban Maryland regions. Occupancy and Leasing Office Properties The tables below set forth occupancy information pertaining to our portfolio of operating office properties: Occupancy rates at period end Total Baltimore/Washington Corridor Northern Virginia San Antonio Washington, DC - Capitol Riverfront St. Mary’s and King George Counties Greater Baltimore Suburban Maryland Colorado Springs Greater Philadelphia Other December 31, 2011 2010 2012 87.8% 89.4% 89.2% 96.4% 89.0% 85.9% 78.6% 94.1% 77.8% 100.0% 94.6% 86.2% 87.9% 84.8% 90.7% 91.6% 87.3% 84.5% 79.6% 74.9% 99.7% 100.0% 87.6% 88.1% 91.9% 100.0% 98.5% 86.8% 85.0% 76.5% 76.2% 100.0% 100.0% Average contractual annual rental rate per square foot at year end (1) $ 27.92 $ 26.59 $ 25.58 (1) Includes estimated expense reimbursements. 33 December 31, 2011 Square feet vacated upon lease expiration (1) Occupancy of previously vacated space in connection with new lease (2) Square feet constructed or redeveloped Acquisition Dispositions Other changes December 31, 2012 Rentable Square Feet Occupied Square Feet (in thousands) 20,514 — — 425 202 (2,302) (8) 18,831 17,685 (782) 717 548 202 (1,833) 4 16,541 (1) Includes lease terminations and space reductions occurring in connection with lease renewals. (2) Excludes occupancy of vacant square feet acquired or developed. Please refer to the section above entitled “Overview” for discussion regarding our leasing activity in 2012 and our expectations regarding the future outlook. As the table above reflects, much of the increase in our total occupancy from 2011 to 2012 was attributable to our disposition of properties with lower occupancy rates. Occupancy of our Same Office Properties was 89.1% at December 31, 2012, up slightly from 88.3% at December 31, 2011. In 2012, we completed 3.3 million square feet of leasing, including 1.2 million of construction and redevelopment space. Our construction leasing was highlighted by: Strategic Demand Driver leasing of 363,000 square feet in three properties proximate to Redstone Arsenal in Huntsville (our first construction leasing in that region) and 115,000 square feet in Riverwood Corporate Park in the Baltimore/Washington Corridor; and 315,000 square feet in two properties on land we acquired in Ashburn, Virginia, a market we were targeting to add to our Northern Virginia holdings. At December 31, 2012, we had 1.4 million square feet under construction that was 67% leased. In 2012, we renewed 64.3% of the square footage of our lease expirations (including the effect of early renewals). The annualized rents of these renewals decreased on average by approximately 4.2% and revenue under GAAP increased on average by approximately 2.2% relative to the leases previously in place for the space; these leases had a weighted average lease term of approximately 3.3 years and the average estimated tenant improvements and lease costs associated with completing this leasing was approximately $6.35 per square foot. We believe that our continuing exposure to the challenging leasing environment described above in the section entitled “Overview” is mitigated to a certain extent by the generally long-term nature of our leases and the staggered timing of our future lease expirations. Our weighted average lease term for office properties at December 31, 2012 was approximately four years. The table below sets forth as of December 31, 2012 our scheduled lease expirations of office properties by region in terms of percentage of annualized rental revenue: Baltimore/Washington Corridor Northern Virginia San Antonio Washington, DC - Capitol Riverfront St. Mary’s and King George Counties Greater Baltimore Suburban Maryland Colorado Springs Greater Philadelphia Other Total Expiration of Annualized Rental Revenue of Office Properties 2013 11.2% 0.9% 0.0% 1.1% 0.8% 0.4% 0.3% 0.7% 0.0% 0.0% 2015 2014 7.8% 4.7% 4.5% 5.6% 0.0% 0.0% 0.3% 0.7% 1.1% 0.7% 1.0% 0.5% 0.0% 0.1% 0.5% 0.7% 0.6% 0.0% 0.0% 0.7% 15.4% 13.7% 15.8% 2017 2016 6.5% 5.6% 2.3% 1.1% 0.0% 0.0% 0.0% 0.4% 0.0% 0.3% 1.2% 1.4% 0.1% 0.0% 0.6% 0.6% 0.0% 0.0% 0.0% 0.0% 9.5% 10.8% Total Thereafter 47.5% 11.7% 19.1% 4.7% 6.3% 6.3% 3.1% 0.6% 3.4% 0.5% 8.8% 4.3% 1.7% 1.2% 5.4% 2.3% 2.0% 1.4% 2.0% 2.7% 34.9% 100.0% With regard to leases expiring in 2013, we believe that the weighted average annualized rental revenue per occupied square foot for such leases at December 31, 2012 was, on average, approximately 5% to 8% higher than estimated current market contractual rents for the related space, with specific results varying by market. 34 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 termination 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 consecutive one-year leases prematurely or exercising early termination rights. Wholesale Data Center Property Our wholesale data center property, which upon completion is expected to have a critical load of 18 megawatts, had six megawatts in operation at December 31, 2012, of which four were leased to tenants with further expansion rights of up to a combined five megawatts. This leasing includes our completion in 2012 of a new lease that provides for an initial commitment of one megawatt with further expansion rights for one additional megawatt, which was our first lease for the property since its acquisition in 2010. We expect that leasing of this property could continue to be slow, and expect, due to the long lease commencement lead time required for this type of property, that any new leasing completed in 2013 will contribute minimally to our income for that year. We plan to hold this property long-term. However, if our strategic plan for this property changes, we could recognize a significant impairment charge. Results of Operations We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure derived by subtracting property operating expenses from revenues from real estate operations. We view our NOI from real estate operations as comprising the following primary categories of operating properties: • • • • • • office properties owned and 100% operational throughout the two years being compared, excluding operating properties disposed or held for future disposition. 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 “Properties”; office properties acquired during the two years being compared; constructed office properties placed into service that were not 100% operational throughout the two years being compared; office properties held for sale as of December 31, 2012; office properties in the Greater Philadelphia region. In September 2012, we shortened the holding period for these properties because they no longer meet our strategic investment criteria; and property dispositions. You may refer to Note 17 of the consolidated financial statements for a summary of operating properties that were either disposed or classified as held for sale and therefore are included in discontinued operations. In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. We believe that operating income, as reported on our consolidated statements of operations, is the most directly comparable generally accepted accounting principles (“GAAP”) measure for both NOI from real estate operations and NOI from service operations. Since both of these measures exclude certain items includable in operating income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. 35 The table below reconciles NOI from real estate operations and NOI from service operations to operating income reported on our consolidated statement of operations: NOI from real estate operations NOI from service operations NOI from discontinued operations Depreciation and amortization associated with real estate operations Impairment losses General, administrative and leasing expenses Business development expenses and land carry costs Operating income 2012 For the Years Ended December 31, 2010 2011 (in thousands) $ 308,012 2,706 (41,913) $ 288,959 2,373 (48,017) $ 312,365 3,260 (25,355) (113,480) (43,214) (31,900) (5,711) 95,965 $ (113,111) (83,478) (30,314) (6,122) 35,780 $ (97,897) — (28,501) (6,403) $ 110,514 Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011 2012 For the Years Ended December 31, 2011 (in thousands) Variance Revenues Revenues from real estate operations Construction contract and other service revenues Total revenues Expenses Property operating expenses Depreciation and amortization associated with real estate operations Construction contract and other service expenses Impairment losses General, administrative and leasing expenses Business development expenses and land carry costs Total operating expenses Operating income Interest expense Interest and other income Loss on early extinguishment of debt Equity in loss of unconsolidated entities Income tax (expense) benefit Loss on interest rate derivatives Income (loss) from continuing operations Discontinued operations Gain on sales of real estate, net of income taxes Net income (loss) Net loss attributable to noncontrolling interests Preferred share dividends Issuance costs associated with redeemed preferred shares Net loss attributable to COPT common shareholders $ 454,171 73,836 528,007 $ 428,496 84,345 512,841 $ 25,675 (10,509) 15,166 167,161 113,480 70,576 43,214 31,900 5,711 432,042 95,965 (94,624) 7,172 (943) (546) (381) — 6,643 13,677 21 20,341 636 (20,844) (1,827) (1,694) $ (135,530) $ 162,397 113,111 81,639 83,478 30,314 6,122 477,061 35,780 (98,222) 5,603 (1,639) (331) 6,710 (29,805) (81,904) (48,404) 2,732 (127,576) 8,148 (16,102) — 4,764 369 (11,063) (40,264) 1,586 (411) (45,019) 60,185 3,598 1,569 696 (215) (7,091) 29,805 88,547 62,081 (2,711) 147,917 (7,512) (4,742) (1,827) 133,836 $ 36 NOI from Real Estate Operations Revenues Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other Property operating expenses Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other NOI from real estate operations Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other Same Office Properties rent statistics Average occupancy rate Average straight-line rent per occupied square foot (1) For the Years Ended December 31, 2011 (Dollars in thousands, except per square foot data) Variance 2012 $ $ $ 414,275 16,237 6,574 19,529 9,698 19,957 6,830 493,100 151,932 4,040 1,450 6,671 2,562 9,057 5,023 180,735 262,343 12,197 5,124 12,858 7,136 10,900 1,807 312,365 88.6% 23.57 $ $ $ 404,617 8,593 1,368 18,584 7,458 50,149 5,063 495,832 150,198 1,791 227 6,292 1,402 24,448 3,462 187,820 254,419 6,802 1,141 12,292 6,056 25,701 1,601 308,012 89.1% 23.35 $ $ $ 9,658 7,644 5,206 945 2,240 (30,192) 1,767 (2,732) 1,734 2,249 1,223 379 1,160 (15,391) 1,561 (7,085) 7,924 5,395 3,983 566 1,080 (14,801) 206 4,353 -0.5% 0.22 (1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the years set forth above. The increase in revenues from our Same Office Properties was attributable to a $4.5 million increase in rental revenue (including $967,000 in connection with lease terminations) and a $5.2 million increase in tenant recoveries and other real estate operations revenue (most of which pertained to an increase in directly reimbursable expenses). The increase in property operating expenses from our Same Office Properties was primarily due to increases in expenses directly reimbursable from tenants, offset in part by decreases in snow removal and utility expenses resulting from a milder winter and spring in the Mid- Atlantic region. Our Same Office Properties pool for purposes of comparing 2012 and 2011 consisted of 177 office properties, comprising 84.0% of our operating office square footage as of December 31, 2012. This pool of properties included the following changes from the pool used for purposes of comparing 2011 and 2010: the addition of four properties acquired and fully operational by January 1, 2011; and five properties placed in service and 100% operational by January 1, 2011. Operating office properties disposed, held for sale or otherwise no longer held for long-term investment (currently our Greater Philadelphia properties) by December 31, 2012 were also excluded from all presented Same Office Property pools. 37 NOI from Service Operations Construction contract and other service revenues Construction contract and other service expenses NOI from service operations Variance For the Years Ended December 31, 2011 2012 (in thousands) $ 84,345 81,639 2,706 $ (10,509) (11,063) 554 $ 73,836 70,576 3,260 $ $ $ Construction contract and other service revenue and expenses decreased due primarily to a lower volume of construction activity in connection with one large construction contract that was nearing completion. 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). Service operations are an ancillary component of our overall operations that should contribute little operating income relative to our real estate operations. Impairment Losses We recognized the impairment losses described below in the current and prior years: • • • • • in September 2012, our Board of Trustees approved a plan by Management to shorten the holding period for all of our office properties and developable land in Greater Philadelphia, Pennsylvania because the properties no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, in 2012, we recognized aggregate non-cash impairment losses of $46.1 million for the amounts by which the carrying values of the properties exceeded their respective estimated fair values; in connection primarily with the Strategic Reallocation Plan, we determined that the carrying amounts of certain properties identified for disposition (the “Impaired Properties”) will not likely be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, we recognized aggregate impairment losses for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values, plus any exit costs incurred, of: $19.0 million in 2012 ($23.7 million classified as discontinued operations and including $4.2 million in exit costs); and $122.5 million in 2011 ($67.5 million classified as discontinued operations and excluding $4.8 million in related income tax benefit); in connection with construction costs incurred on a property held for future development, we recognized an impairment loss of $1.9 million in 2012; on February 15 and 17, 2011, the United States Army (the “Army”) provided us disclosures regarding the past testing and use of tactical defoliants/herbicides at a property we owned, and subsequently disposed of, in Cascade, Maryland that was formerly an Army base known as Fort Ritchie (“Fort Ritchie”). Upon receipt of these disclosures, we commenced a review of our development plans and prospects for the property. We believed that these disclosures by the Army were likely to cause further delays in the resolution of certain litigation related to the property, and that they also increased the level of uncertainty as to our ultimate development rights at the property and future residential and commercial demand for the property. We analyzed various possible outcomes and resulting cash flows expected from the operations and ultimate disposition of the property. After determining that the carrying amount of the property was not likely to be recovered from those cash flows, we recognized a non-cash impairment loss of $27.7 million in March 2011 for the amount by which the carrying value of the property exceeded its estimated fair value; and $803,000 on goodwill associated with operating properties in 2011. The table below sets forth impairment losses (recoveries) recognized by property classification: Operating properties Non-operating properties Total For the Years Ended December 31, 2012 2011 (in thousands) $ $ 70,263 (3,353) 66,910 $ $ 70,512 80,509 151,021 38 The timely disposition of assets that no longer meet our strategic objectives is a key component of our strategy. Our identification of additional properties for disposition in future periods could result in our recognition of additional impairment losses in such periods. General, Administrative and Leasing Expenses In 2012, we incurred additional expenses in connection with certain staffing reductions made to adjust the size of the organization due in large part to our property dispositions. In 2011, certain of our executives voluntarily cancelled performance share units (“PSUs”) that were originally granted to them in 2010; we recognized a non-cash compensation charge of $1.2 million in 2011 in connection with these PSU cancellations, most of which was included in general, administrative and leasing expenses, and we will have no further compensation charges in the future in connection with the cancelled PSUs. We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing construction, development and redevelopment activities, and also capitalize such costs associated with internal-use software development. We also capitalize compensation costs associated with obtaining new tenant leases or extending existing tenants. Capitalized compensation and indirect costs were as follows: For the Years Ended December 31, 2012 2011 Construction, development, redevelopment, capital and tenant improvements Leasing Total $ $ $ (in thousands) 7,976 1,151 9,127 $ 10,394 1,259 11,653 The decrease in capitalized compensation and indirect costs from 2011 to 2012 was attributable in large part to a lower level of construction and development activity. Interest Expense The table below sets forth the components of our interest expense included in continuing operations: Interest on mortgage and other secured loans Interest on unsecured term loans Interest on Exchangeable Senior Notes Interest on Revolving Credit Facility Interest expense recognized on interest rate swaps Amortization of deferred financing costs Other interest Interest expense reclassified to discontinued operations Capitalized interest Total $ $ Variance For the Years Ended December 31, 2011 2012 (in thousands) 75,760 $ 2,914 20,267 10,158 4,600 6,596 1,406 (6,079) (17,400) 98,222 63,124 14,728 13,851 6,274 3,697 6,243 2,784 (2,174) (13,903) 94,624 $ (12,636) 11,814 (6,416) (3,884) (903) (353) 1,378 3,905 3,497 (3,598) $ $ The decrease in interest expense included the effect of a $132.8 million decrease in our average outstanding debt resulting primarily from our repayments of debt using proceeds from property dispositions and equity issuances. Capitalized interest decreased from 2011 to 2012 due primarily to a decrease in the average costs associated with active construction projects resulting from projects being completed and our being slower to start new projects prior to definitive leasing being in place. Loss on Interest Rate Swaps On April 5, 2011, we entered into two forward starting LIBOR swaps for an aggregate notional amount of $175 million designated as cash flow hedges of interest payments on ten-year, fixed-rate borrowings forecasted to occur between August 2011 and April 2012. After meeting with our Board of Trustees on December 21, 2011, we determined that we would pursue other financing options and concluded that the originally forecasted borrowings were expected not to occur. Accordingly, the swaps no longer qualified for hedge accounting and we recognized an aggregate loss of $29.8 million on these interest rate swaps in December 2011, most of which was reclassified from accumulated other comprehensive losses at the time 39 the swaps entered into on April 5, 2011 no longer qualified for hedge accounting. On January 5, 2012, we cash settled all of the forward starting swaps entered into on April 5, 2011 and December 22, 2011 for an aggregate of $29.7 million using borrowings from our Revolving Credit Facility. Discontinued Operations The increase in discontinued operations from 2011 to 2012 was due primarily to a $43.8 million decrease in impairment losses and a $16.1 million increase in gain on sales in the current period primarily in connection with the Strategic Reallocation Plan. Income Tax (Expense) Benefit The income tax benefit in 2011 was due primarily to a $4.8 million benefit on impairment losses recognized by our taxable REIT subsidiary in connection with the Strategic Reallocation Plan, most of which was recognized in the three months ended June 30, 2011. Preferred Share Dividends The increase in preferred share dividends was due to dividends on the newly issued Series L Preferred Shares, partially offset by the decrease in dividends attributable to the Series G Preferred Shares redeemed on August 2012. Issuance Costs Associated With Redeemed Preferred Shares In 2012, we recognized a $1.8 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series G Preferred Shares that were redeemed. Net Loss Attributable to Noncontrolling Interests Interests in our Operating Partnership are in the form of preferred and common units. The line entitled net loss attributable to noncontrolling interests includes primarily loss or income allocated to preferred and common units not owned by us. Income is allocated to noncontrolling preferred unitholders in an amount equal to the priority return from the Operating Partnership to which they are entitled. Income and losses are allocated to noncontrolling common unitholders based on 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. The net loss attributable to noncontrolling interests changed due primarily to the increase in net income available to allocate to noncontrolling holders of common units in the Operating Partnership primarily resulting from the reasons set forth above. 40 Comparison of the Year Ended December 31, 2011 to the Year Ended December 31, 2010 2011 For the Years Ended December 31, 2010 (in thousands) Variance Revenues Revenues from real estate operations Construction contract and other service revenues Total revenues Expenses Property operating expenses Depreciation and amortization associated with real estate operations Construction contract and other service expenses Impairment losses General, administrative and leasing expense Business development expenses and land carry costs Total operating expenses Operating income Interest expense Interest and other income Loss on interest rate derivatives Loss on early extinguishment of debt Equity in (loss) income of unconsolidated entities Income tax benefit (expense) (Loss) income from continuing operations Discontinued operations Gain on sales of real estate, net of income taxes Net (loss) income Net loss (income) attributable to noncontrolling interests Preferred share dividends Net (loss) income attributable to COPT common shareholders $ 428,496 84,345 512,841 $ 387,559 104,675 492,234 $ 40,937 (20,330) 20,607 162,397 113,111 81,639 83,478 30,314 6,122 477,061 35,780 (98,222) 5,603 (29,805) (1,639) (331) 6,710 (81,904) (48,404) 2,732 (127,576) 8,148 (16,102) $ (135,530) $ 146,617 97,897 102,302 — 28,501 6,403 381,720 110,514 (95,729) 9,568 — — 1,376 (108) 25,621 17,054 2,829 45,504 (2,744) (16,102) 26,658 15,780 15,214 (20,663) 83,478 1,813 (281) 95,341 (74,734) (2,493) (3,965) (29,805) (1,639) (1,707) 6,818 (107,525) (65,458) (97) (173,080) 10,892 — $ (162,188) 41 NOI from Real Estate Operations Revenues Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other Property operating expenses Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other NOI from real estate operations Same Office Properties Constructed office properties placed in service Acquired office properties Properties held for sale Greater Philadelphia properties Dispositions Other Same Office Properties rent statistics Average occupancy rate Average straight-line rent per occupied square foot (1) For the Years Ended December 31, 2010 (Dollars in thousands, except per square foot data) Variance 2011 $ $ $ 362,237 27,048 25,293 18,584 7,458 50,149 5,063 495,832 137,286 5,705 9,225 6,292 1,402 24,448 3,462 187,820 224,951 21,343 16,068 12,292 6,056 25,701 1,601 308,012 88.6% 22.50 $ $ $ 362,853 8,789 7,315 18,704 6,299 56,706 1,062 461,728 132,768 1,993 2,317 5,831 2,131 25,974 1,755 172,769 230,085 6,796 4,998 12,873 4,168 30,732 (693) 288,959 90.2% 22.26 $ $ $ (616) 18,259 17,978 (120) 1,159 (6,557) 4,001 34,104 4,518 3,712 6,908 461 (729) (1,526) 1,707 15,051 (5,134) 14,547 11,070 (581) 1,888 (5,031) 2,294 19,053 (1.6)% 0.24 (1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the nine month periods set forth above. As the table above indicates, our increase in NOI from real estate operations was attributable to the additions of properties through construction and acquisition activities. Our Same Office Properties for purposes of comparing 2011 and 2010 consisted of 168 office properties, comprising 70.8% of our operating office square footage as of December 31, 2011. With regard to changes in NOI from real estate operations attributable to Same Office Properties: • • • • • the decrease in revenues included the following: • a $2.3 million decrease in rental revenue attributable primarily to changes in occupancy and rental rates between the two years; and a $1.5 million decrease in net revenue from the early termination of leases; offset in part by a $3.2 million increase in tenant recoveries and other revenue due primarily to the increase in property operating expenses described below. the increase in property operating expenses included the following: • a $1.9 million increase in costs for asset and property management labor, much of which was due to an increase in the size of our employee base supporting certain properties; a $1.7 million increase in interior and other repairs and maintenance; 42 • • • a $1.5 million increase in heating and air conditioning repairs and maintenance that was predominantly attributable to an increase in heating and air conditioning systems utilization at a property in San Antonio; and a $1.0 million increase in cleaning services and related supplies due in large part to increased contract rates and increased space usage of leased space at certain properties; offset in part by a $3.5 million decrease in snow removal expenses due primarily to record snowfall in Maryland and Northern Virginia in 2010. NOI from Service Operations Construction contract and other service revenues Construction contract and other service expenses NOI from service operations Variance For the Years Ended December 31, 2010 2011 (in thousands) $ 104,675 102,302 2,373 $ (20,330) (20,663) 333 $ 84,345 81,639 2,706 $ $ $ As evidenced in the changes set forth above, construction contract and other service revenue and expenses decreased due primarily to a lower volume of construction activity in connection with one large construction contract that was nearing completion, although the change in NOI from service operations was not significant. Depreciation and Amortization Associated with Real Estate Operations Depreciation and amortization expense associated with real estate included in continuing operations increased due primarily to expense attributable to properties added into operations through construction and acquisition activities. General, Administrative and Leasing Expenses As described above, we recognized a non-cash compensation charge of $1.2 million in 2011 in connection with voluntary executive PSU cancellations, most of which was included in general, administrative and leasing expenses. Capitalized compensation and indirect costs were as follows: Construction, development, redevelopment, capital and tenant improvements Leasing Internal-use software development Total $ $ 10,394 1,259 — 11,653 $ $ 9,684 1,222 126 11,032 For the Years Ended December 31, 2011 2010 (in thousands) Impairment Losses We recognized impairment losses in 2011, as described above. 43 Interest Expense The table below sets forth the components of our interest expense included in continuing operations: Interest on mortgage and other secured loans Interest on Exchangeable Senior Notes Interest on Revolving Credit Facility Interest expense recognized on interest rate swaps Interest on unsecured term loans Amortization of deferred financing costs Other interest Interest expense reclassified to discontinued operations Capitalized interest Total For the Years Ended December 31, 2011 2010 Variance $ 75,760 20,267 10,158 4,600 2,914 6,596 1,406 (6,079) (17,400) $ 98,222 (in thousands) $ 82,635 19,348 5,923 3,689 — 5,871 1,186 (6,399) (16,524) $ 95,729 $ (6,875) 919 4,235 911 2,914 725 220 320 (876) 2,493 $ The increase in interest expense included the effect of a $181.4 million increase in our average outstanding debt resulting primarily from our financing of acquisition and construction activities. The table above reflects the effects of our repayments of secured debt and our maintaining a higher weighted average borrowing level on the Revolving Credit Facility in 2011. Loss on Interest Rate Swaps As described above, we recognized an aggregate loss of $29.8 million on certain forward starting interest rate swaps in December 2011, most of which was reclassified from accumulated other comprehensive losses. Interest and Other Income The decrease in interest and other income was due primarily to a decrease in gain recognized on our investment in common stock of The KEYW Holding Corporation (“KEYW”), an entity supporting the intelligence community's operations and transformation to Cyber Age mission by providing engineering services and integrated platforms that support the intelligence process. We used the equity method of accounting for our investment in KEYW common stock until the resignation of our Chief Executive Officer from the Board of Directors of KEYW effective July 1, 2011, at which time we began accounting for our investment in KEYW's common stock as a trading marketable equity security to be reported at fair value, with unrealized gains and losses recognized through earnings. Most of the decrease in gain was attributable to additional equity issued by KEYW in connection with its initial public offering of common stock in 2010; no similar event occurred in 2011. Income Tax Benefit (Expense) As described above, the income tax benefit in 2011 was due primarily to impairment losses recognized by our taxable REIT subsidiary in connection with the Strategic Reallocation Plan. Discontinued Operations The decrease in discontinued operations was due primarily to $67.5 million in impairment losses recognized in connection with the Strategic Reallocation Plan described above. Net Loss (Income) Attributable to Noncontrolling Interests The net loss (income) attributable to noncontrolling interests changed due primarily to the decrease in net income available to allocate to noncontrolling holders of common units in the Operating Partnership primarily resulting from the reasons set forth above. 44 Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) Interest Coverage Ratio and Adjusted EBITDA Fixed Charge Coverage Ratio Adjusted EBITDA is net (loss) income adjusted for the effects of interest expense, depreciation and amortization, impairment losses, gain on sales of properties, gain or loss on early extinguishment of debt, net gain on unconsolidated entities, operating property acquisition costs, loss on interest rate derivatives and income taxes. We believe that Adjusted EBITDA is a useful supplemental measure for assessing our un-levered performance. We believe that net (loss) income, as reported on our consolidated statements of operations, is the most directly comparable GAAP measure to Adjusted EBITDA. Adjusted EBITDA excludes items that are included in net income, including some that require cash outlays; we compensate for this limitation by using the measure simply as a supplemental measure that is considered alongside other GAAP and non-GAAP measures. 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. We use Adjusted EBITDA to calculate Adjusted EBITDA Interest Coverage Ratio and Adjusted EBITDA Fixed Charge Coverage Ratio. We calculate Adjusted EBITDA interest coverage by dividing Adjusted EBITDA by interest expense on continuing and discontinued operations (excluding amortization of deferred financing costs and amortization of debt discounts and premiums, net of amounts capitalized). We calculate Adjusted EBITDA fixed charge coverage ratio by dividing Adjusted EBITDA by the sum of: (1) interest expense on continuing and discontinued operations (excluding amortization of deferred financing costs and amortization of debt discounts and premiums, net of amounts capitalized); (2) dividends on preferred shares; and (3) distributions on preferred units in the Operating Partnership not owned by us. The tables below set forth the computation of our Adjusted EBITDA interest and fixed charge coverage ratios and reconciliations of Adjusted EBITDA to net income reported on our consolidated statements of operations: Net income (loss) Interest expense (1) Income tax expense (benefit) (2) Depreciation and amortization (1) Impairment losses (1) (Gain) loss on early extinguishment of debt (1) Gain on sales of operating properties Non-operating property sales Net gain on investments in unconsolidated entities included in interest and other income Operating property acquisition costs Loss on interest rate swaps Adjusted EBITDA Interest expense (1) Less: Amortization of deferred financing costs Less: Amortization of net debt discounts and premiums, net of amounts capitalized Denominator for Adjusted EBITDA interest coverage ratio Preferred share dividends Preferred distributions Denominator for Adjusted EBITDA fixed charge coverage ratio $ For the Years Ended December 31, 2010 2011 2012 (Dollars in thousands) 20,341 96,798 381 124,418 66,910 (793) (20,928) (33) $ (127,576) $ 45,504 102,128 119 125,819 — — (1,077) (2,840) 104,301 (6,710) 136,594 151,021 2,023 (4,811) (2,717) (3,589) 229 — $ 283,734 (1,820) 156 29,805 $ 280,266 (6,408) 3,424 — $ 266,669 $ 96,798 (6,243) (2,721) 87,834 20,844 660 $ 109,338 $ $ 104,301 (6,596) (4,680) 93,025 16,102 660 $ 109,787 $ $ 102,128 (5,871) (4,974) $ 91,283 16,102 660 $ 108,045 Adjusted EBITDA interest coverage ratio Adjusted EBITDA fixed charge coverage ratio 3.23x 2.60x 3.01x 2.55x 2.92x 2.47x (1) Includes amounts included in continuing operations and discontinued operations. (2) Includes income taxes on continuing operations and gains on sales of real estate. 45 Funds from Operations Funds from operations (“FFO”) is defined as net (loss) income computed using GAAP, excluding gains on sales of, and impairment losses on, previously depreciated operating properties, plus real estate-related depreciation and amortization. When multiple properties consisting of both operating and non-operating properties exist on a single tax parcel, we classify all of the gains on sales of, and impairment losses on, the tax parcel as all being for previously depreciated operating properties when most of the value of the parcel is associated with operating properties on the parcel. We believe that we use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains related to sales of, and impairment losses on, previously depreciated operating properties, net of related tax benefit, and excluding real estate- related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income is the most directly comparable GAAP measure to FFO. Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service. Basic FFO available to common share and common unit holders (“Basic FFO”) is FFO adjusted to subtract (1) preferred share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO. Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that the numerator for diluted EPS is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service. Diluted FFO, as adjusted for comparability is defined as Diluted FFO adjusted to exclude operating property acquisition costs, gains on sales of, and impairment losses on, properties other than previously depreciated operating properties, net of associated income tax, gain or loss on early extinguishment of debt, loss on interest rate swaps and issuance costs associated with redeemed preferred shares. We believe that the excluded items are not reflective of normal operations and, as a result, we believe that a measure that excludes these items is a useful supplemental measure in evaluating our operating performance. We believe that the numerator to diluted EPS is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO. 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. 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 46 earnings per share (“EPS”) in evaluating net income available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that 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); management compensates for these limitations in essentially the same manner as described above for Diluted FFO. Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability 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. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO. The computations for all of the above measures on a diluted basis assume the conversion of common units in our Operating Partnership but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period. We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the sum of (a) dividends on common shares and (b) distributions to holders of interests in the Operating Partnership and dividends on convertible preferred shares when such distributions and dividends are included in Diluted FFO divided by either (2) FFO, Diluted FFO or Diluted FFO, adjusted for comparability. 47 The tables appearing below and on the following page sets forth the computation of the above stated measures for the years ended December 31, 2008 through 2012 and provides reconciliations to the GAAP measures associated with such measures: Net income (loss) Add: Real estate-related depreciation and amortization Add: Depreciation and amortization on unconsolidated real estate entities allocable to COPT (1) Add: Impairment losses on previously depreciated operating properties Less: Gain on sales of previously depreciated operating properties, net of income taxes FFO Less: Noncontrolling interests-preferred units in the Operating Partnership Less: FFO allocable to other noncontrolling interests Less: Preferred share dividends Less: Issuance costs associated with redeemed preferred shares Basic and Diluted FFO allocable to restricted shares Basic and Diluted FFO Operating property acquisition costs Gain on sales of non-operating properties, net of income taxes Impairment (recoveries) losses on other properties Income tax expense on impairment recoveries (losses) on other properties Loss on interest rate derivatives (Gain) loss on early extinguishment of debt Issuance costs associated with redeemed preferred shares Diluted FFO, as adjusted for comparability Weighted average common shares Conversion of weighted average common units Weighted average common shares/units - Basic FFO Dilutive effect of share-based compensation awards Weighted average common shares/units - Diluted FFO For the Years Ended December 31, 2009 2010 2011 (Dollars and shares in thousands, except per share data) $ 45,504 123,243 $(127,576) 134,131 $ 61,299 109,386 $ 61,316 102,772 2008 2012 $ 20,341 121,937 346 492 70,263 70,512 631 — 640 — 648 — (20,928) 191,959 (4,811) 72,748 (1,077) 168,301 — 171,325 (2,630) 162,106 (660) (1,989) (20,844) (1,827) (919) $ 165,720 229 (33) (3,353) 673 — (793) 1,827 $ 164,270 73,454 4,235 77,689 53 77,742 (660) (1,887) (16,102) — (1,037) $ 53,062 156 (2,717) 80,509 (4,775) 29,805 2,023 — $ 158,063 69,382 4,355 73,737 111 73,848 (660) (1,370) (16,102) — (1,524) $ 148,645 3,424 (2,829) — (660) (308) (16,102) — (1,629) $ 152,626 1,967 — — — — — — — $ 149,240 — $ 154,593 59,611 4,608 64,219 333 64,552 55,930 5,717 61,647 477 62,124 (660) (442) (16,102) — (1,310) $ 143,592 — (988) — — — (8,026) — $ 134,578 48,132 8,107 56,239 688 56,927 Diluted FFO per share Diluted FFO per share, as adjusted for comparability $ $ 2.13 2.11 $ $ 0.72 2.14 $ $ 2.30 2.31 $ $ 2.46 2.49 $ $ 2.52 2.36 48 Numerator for diluted EPS Add: Income allocable to noncontrolling interests-common units in $ the Operating Partnership Add: Real estate-related depreciation and amortization Add: Depreciation and amortization of unconsolidated real estate entities Add: Impairment losses on previously depreciated operating properties Add: Numerator for diluted EPS allocable to restricted shares Less: Depreciation and amortization allocable to noncontrolling interests in other consolidated entities Less: Decrease in noncontrolling interests unrelated to earnings Less: Basic and diluted FFO allocable to restricted shares Less: Gain on sales of previously depreciated operating properties, net of income taxes Basic and Diluted FFO Operating property acquisition costs Gain on sales of non-operating properties, net of income taxes Impairment (recoveries) losses on other properties Income tax expense (benefit) on impairment (recoveries) losses on other properties Loss on interest rate derivatives (Gain) loss on early extinguishment of debt Issuance costs associated with redeemed preferred shares Diluted FFO, as adjusted for comparability 2012 For the Years Ended December 31, 2009 2010 2011 (Dollars and shares in thousands, except per share data) $ 25,587 $(136,567) $ 39,217 (2,163) 2008 $ 37,135 (87) (8,439) 121,937 346 134,131 492 2,116 123,243 631 4,495 109,386 640 6,519 102,772 648 70,263 469 (633) (2,565) (919) (20,928) $ 165,720 229 (33) (3,353) 673 — (793) 1,827 $ 164,270 70,512 1,037 (849) (1,407) (1,037) (4,811) $ 53,062 156 (2,717) 80,509 (4,775) 29,805 2,023 — $ 158,063 — 1,071 (1,402) — (1,524) — 1,010 (493) — (1,629) (1,077) $ 148,645 3,424 (2,829) — — $ 152,626 1,967 — — — — — — — $ 149,240 — $ 154,593 — 728 (270) — (1,310) (2,630) $ 143,592 — (988) — — — (8,026) — $ 134,578 Denominator for diluted EPS Weighted average common units Anti-dilutive EPS effect of share-based compensation awards Denominator for diluted FFO per share measures 73,454 4,235 53 77,742 69,382 4,355 111 73,848 59,944 4,608 — 64,552 56,407 5,717 — 62,124 48,820 8,107 — 56,927 Dividends on common shares Common unit distributions Numerator for diluted FFO payout ratio, adjusted for comparability FFO payout ratio Diluted FFO payout ratio Diluted FFO payout ratio, as adjusted for comparability $ 81,720 4,617 $ 86,337 $ 116,717 7,173 $ 123,890 $ 98,510 7,266 $ 105,776 $ 87,596 7,962 $ 95,558 $ 70,836 11,510 $ 82,346 45.0% 52.1% 52.6% 170.3% 233.5% 78.4% 62.8% 71.2% 70.9% 55.8% 62.6% 61.8% 50.8% 57.3% 61.2% 49 Property Additions The table below sets forth the major components of our additions to properties for 2012 and 2011: Construction, development and redevelopment (1) Acquisition of operating properties (2) Tenant improvements on operating properties (3) Capital improvements on operating properties Variance For the Years Ended December 31, 2011 2012 (in thousands) $ 240,360 26,887 47,147 16,572 $ 330,966 $ 165,523 33,684 22,068 26,827 $ 248,102 $ (74,837) 6,797 (25,079) 10,255 $ (82,864) (1) The decrease from 2011 to 2012 was attributable in large part to a slowing in the pace of new construction projects started since we were less inclined to commence construction on projects prior to definitive leasing prospects being in place than we were historically. Estimated remaining costs on existing construction projects totaled $134.7 million at December 31, 2012. We also have a significant pipeline of land, much of which we expect to use for the construction of new projects in the future, although the volume and pace of such new projects occurring will be dependent in large part on the leasing environment. (2) Excludes intangible assets and liabilities associated with such acquisition. Our level of future acquisitions will be dependent largely on our ability to identify strategic acquisition opportunities that meet our return criteria and our having sufficient capital available to complete such acquisitions. (3) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment. The decrease from 2011 to 2012 was due in large part to a decrease in leases executed on existing space in 2012 and 2011 including significant costs from leases executed in 2010. Cash Flows Net cash flow provided by operating activities increased $39.7 million from 2011 to 2012 due primarily to: an increase in cash flow received from real estate operations, which was affected by the timing of cash receipts; an increase in cash flow associated with the timing of cash flow from third-party construction projects; $19.0 million in proceeds in the current period from the sale of our KEYW common stock, including $5.1 million received from sales completed in 2011; and $17.3 million in previously accreted interest paid in the prior period in connection with our repurchase of exchangeable senior notes; offset in part by $29.7 million paid to cash settle interest rate swaps in the current period. Net cash flow provided by investing activities increased $274.1 million from 2011 to 2012 due mostly to a $211.0 million increase from sales of properties primarily in connection with the Strategic Reallocation Plan and lower levels of development spending. Net cash flow used in financing activities in 2012 was $200.5 million and included the following: • • • • • • • net repayments of debt of $395.0 million; proceeds from the issuance of common and preferred shares of $371.1 million; payments to redeem the Series G Preferred Shares of $55.0 million; and dividends and distributions of $114.1 million. Net cash flow provided by financing activities in 2011 was $103.7 million and included the following: net borrowings of $111.4 million; proceeds from the issuance of common shares of $147.8 million; and dividends and distributions of $138.6 million. Liquidity and Capital Resources Our primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and acquisitions. We expect to continue to use cash flow provided by operations as the primary source to meeting our short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, dividends to our shareholders, distributions to our noncontrolling interest holders of preferred and common units in the Operating Partnership and improvements to existing properties. We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. However, we expect to generate cash by selling properties included in the Strategic Reallocation Plan through 2013. 50 We have historically relied on fixed-rate, non-recourse mortgage loans from banks and institutional lenders for long-term financing and to restore availability on our Revolving Credit Facility. In recent years, we have relied more on unsecured bank loans and publicly issued, convertible unsecured debt for long-term financing. We also periodically access the public equity markets to raise capital by issuing common and/or preferred shares. We often use our Revolving Credit Facility to initially finance much of our investing activities. We then pay down the facility using proceeds from long-term borrowings, equity issuances and property sales. The lenders’ aggregate commitment under the facility is $800 million, with the ability for us to increase the lenders’ aggregate commitment to $1.3 billion, provided that there is no default under the facility and subject to the approval of the lenders. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement. The Revolving Credit Facility matures on September 1, 2014, and may be extended by one year at our option, provided that there is no default under the facility and we pay an extension fee of 0.20% of the total availability of the facility. As of December 31, 2012, the maximum borrowing capacity under this facility totaled $800.0 million, of which $792.3 million was available. We also have construction loan facilities that provide for aggregate borrowings of up to $123.8 million, $94.2 million of which was available at December 31, 2012 to fund future construction costs at specific projects. The following table summarizes our contractual obligations as of December 31, 2012 (in thousands): 2013 2014 2015 2016 2017 Thereafter Total For the Years Ending December 31, Contractual obligations (1) Debt (2) Balloon payments due upon maturity Scheduled principal payments Interest on debt (3) New construction and redevelopment obligations (4)(5) Third-party construction and development obligations (5)(6) Capital expenditures for operating properties (5)(7) Operating leases (8) Other purchase obligations (9) Total contractual cash obligations $ 111,289 9,840 83,414 $ 151,681 6,660 74,071 $ 790,254 5,548 57,850 $ 274,605 4,037 33,759 $ 550,610 778 7,436 $ 120,011 2,479 4,725 $ 1,998,450 29,342 261,255 54,937 10,000 46,180 2,430 — — — — — — — — 64,937 48,610 16,497 1,177 3,150 $ 326,484 5,000 1,162 2,029 $ 253,033 — 1,040 1,088 $ 855,780 — 978 565 $ 313,944 — 975 5 $ 559,804 — 81,700 98 $ 209,013 21,497 87,032 6,935 $ 2,518,058 (1) The contractual obligations set forth in this table generally exclude property operations 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 discount of $8.6 million. The balloon payment maturities include $17.5 million in 2013 and $411.1 million in 2015 that may each be extended for one year, subject to certain conditions. We expect to refinance the remainder of the balloon payments that are due in 2013 and 2014 using primarily a combination of borrowings under our credit facilities and by accessing the unsecured debt market and/or secured debt market. (3) Represents interest costs for debt at December 31, 2012 for the terms of such debt. For variable rate debt, the amounts reflected above used December 31, 2012 interest rates on variable rate debt in computing interest costs for the terms of such debt. (4) Represents contractual obligations pertaining to new construction and redevelopment activities. Construction and redevelopment activities underway or contractually committed at December 31, 2012 included the following: Activity Construction of new office properties Redevelopment of existing office properties Number of Properties 11 2 Square Feet (in thousands) 1,357 297 Estimated Remaining Costs (in millions) $ 134.7 19.3 Expected Year For Costs to be Incurred Through 2015 2014 (5) Due to the long-term nature of certain construction and development contracts and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable. (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 recurring and nonrecurring capital expenditures for our operating properties. We expect to finance these costs primarily 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. 51 We expect to spend more than $170.0 million on construction and development costs and approximately $50.0 million on improvements to operating properties (including the commitments set forth in the table above) in 2013. We expect to fund the construction and development costs and our debt maturities in 2013 using primarily a combination of borrowings under our Revolving Credit Facility and existing construction loan facilities. We expect to fund improvements to existing operating properties using cash flow from operations. Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of December 31, 2012, we were in compliance with these financial covenants. Off-Balance Sheet Arrangements During 2012, we owned an investment in an unconsolidated real estate joint venture into which we entered 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 real estate joint venture’s property operations and any required construction projects until January 1, 2013, at which time these responsibilities were assumed by a third party. This real estate joint venture 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 may receive returns in proportion to our investments in the joint venture. As part of our obligations under the joint venture arrangement, we entered into standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation, and springing guarantees of partnership debt in the event of a voluntary bankruptcy of the partnership). The maximum amount we could be required to pay under the guarantees is approximately $65 million. We were entitled to recover 20% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement so long as we continued to manage the properties; in connection with the transition of our property management responsibilities to a third party effective January 1, 2013, the percentage that we are entitled to recover increased to 80%. In October 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings. Management considered this event and estimates that the aggregate fair value of the guarantees would not exceed the amounts included in distributions received in excess of investment in unconsolidated real estate joint venture reported on the consolidated balance sheets. While we historically accounted for our investment in this joint venture using the equity method, we discontinued our application of the equity method effective October 2012 due to our having neither the obligation nor intent to support the joint venture. We had distributions in excess of our investment in this unconsolidated real estate joint venture of $6.4 million as of December 31, 2012 due to the following: our deferral of gain in a prior period on our initial contribution of property to the joint venture due to our guarantees described above; and our subsequent recognition of losses under the equity method in excess of our investment due to such guarantees and our continued intent to support the joint venture prior to October 2012. We recognized equity in the losses of this joint venture of $349,000 in 2012. We had no other material off-balance sheet arrangements during 2012. 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. Recent Accounting Pronouncements We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 related to the presentation of comprehensive income that requires us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted this guidance using retrospective application. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. Our adoption of this guidance did not affect our financial position, results of operations, cash flows or measurement of comprehensive income but did change the location of our disclosure pertaining to comprehensive income in our consolidated financial statements. 52 We adopted guidance issued by the FASB effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. In connection with our adoption of this guidance, we made an accounting policy election to use an exception provided for in the guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to continue to measure the fair value of groups of assets and liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure at the measurement date. Our adoption of this guidance did not affect our financial position, results of operations or cash flows but did result in additional disclosure pertaining to our fair value measurements. We adopted guidance issued by the FASB effective January 1, 2012 relating to the testing of goodwill for impairment that permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. This guidance eliminates the requirement to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Our adoption of this guidance did not materially affect our consolidated financial statements or disclosures. Item 7A. 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 other variable rate debt. Increases in interest rates can also result in increased interest expense when our fixed rate debt matures and needs to be refinanced. The following table sets forth as of December 31, 2012 our debt obligations and weighted average interest rates for fixed rate debt by expected maturity date (dollars in thousands): 2013 2014 2015 2016 2017 Thereafter Total For the Years Ending December 31, Long term debt: (1) Fixed rate debt (2) Weighted average interest rate Variable rate debt $ 101,866 $ 157,526 $ 347,848 $ 278,642 $ 301,388 $ 5.62% $ 19,263 $ 6.41% 815 4.67% 6.57% 5.54% $ 447,954 $ — $ 250,000 $ 120,000 $ 838,032 2,490 2.62% $1,189,760 5.64% (1) Maturities include $17.5 million in 2013 and $411.1 million in 2015 that may each be extended for one year, subject to certain conditions. (2) Represents principal maturities only and therefore excludes net discounts of $8.6 million. The fair value of our debt was $2.1 billion at December 31, 2012 and $2.4 billion at December 31, 2011. If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $63.0 million at December 31, 2012 and $77.5 million at December 31, 2011. 53 The following table sets forth information pertaining to interest rate swap contracts in place as of December 31, 2012 and 2011 and their respective fair values (dollars in thousands): $ Notional Amount 100,000 100,000 100,000 100,000 38,475 (1) 100,000 100,000 100,000 100,000 50,000 50,000 120,000 100,000 100,000 (2) 75,000 (2) 100,000 (2) 75,000 (2) Floating Rate Index Fixed Rate 0.6123% One-Month LIBOR 0.6100% One-Month LIBOR 0.8320% One-Month LIBOR 0.8320% One-Month LIBOR 3.8300% One-Month LIBOR + 2.25% 0.8055% One-Month LIBOR 0.8100% One-Month LIBOR 1.6730% One-Month LIBOR 1.7300% One-Month LIBOR 0.5025% One-Month LIBOR 0.5025% One-Month LIBOR 1.7600% One-Month LIBOR 1.9750% One-Month LIBOR 3.8415% Three-Month LIBOR 3.8450% Three-Month LIBOR 2.0525% Three-Month LIBOR-Reverse 2.0525% Three-Month LIBOR-Reverse Effective Date 1/3/2012 1/3/2012 1/3/2012 1/3/2012 11/2/2010 9/2/2014 9/2/2014 9/1/2015 9/1/2015 1/3/2011 1/3/2011 1/2/2009 1/1/2010 9/30/2011 9/30/2011 12/30/2011 12/30/2011 Expiration Date 9/1/2014 9/1/2014 9/1/2015 9/1/2015 11/2/2015 9/1/2016 9/1/2016 8/1/2019 8/1/2019 1/3/2012 1/3/2012 5/1/2012 5/1/2012 9/30/2021 9/30/2021 9/30/2021 9/30/2021 Fair Value at December 31, 2012 2011 $ $ (594) $ (591) (1,313) (1,313) (1,268) (263) (272) (154) (417) — — — — — — — — (6,185) $ 55 56 (66) (49) (1,054) — — — — (1) (1) (552) (532) (16,333) (12,275) 345 260 (30,147) (1) The notional amount of this instrument is scheduled to amortize to $36.2 million. (2) As described further in Note 11 to our consolidated financial statements, we cash settled these instruments, along with interest accrued thereon, for an aggregate of $29.7 million. Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $5.0 million in the 2012 and $3.8 million in 2011 if short-term interest rates were 1% higher. Item 8. Financial Statements and Supplementary Data This item is included in a separate section at the end of this report beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2012 were functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. I. Internal Control Over Financial Reporting (a) Management's Annual Report on Internal Control Over Financial Reporting Management's Annual Report on Internal Control Over Financial Reporting is included in a separate section at the end of this report on page F-2. (b) Report of Independent Registered Public Accounting Firm The Report of Independent Registered Public Accounting Firm is included in a separate section at the end of this report on page F-3. 54 (c) Change in Internal Control over Financial Reporting No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. PART III Items 10, 11, 12, 13 & 14. Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; and Principal Accountant Fees and Services For the information required by Item 10, Item 11, Item 12, Item 13 and Item 14, you should refer to our definitive proxy statement relating to the 2013 Annual Meeting of our Shareholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as exhibits to this Form 10-K: PART IV 1. Financial Statements. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K. 2. Financial Statement Schedule. See “Index to consolidated financial statements” on page F-1 of this Annual Report on Form 10-K. 3. See section below entitled “Exhibits.” (b) Exhibits. Refer to the Exhibit Index that follows. Unless otherwise noted, the file number of all documents incorporated by reference is 1-14023. 55 EXHIBIT NO. 3.1.1 3.1.2 3.1.3 3.1.4 3.1.5 3.1.6 3.1.7 3.1.8 3.1.9 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14 3.1.15 3.1.16 3.2.1 3.2.2 3.3 4.1 4.2 DESCRIPTION Amended and Restated Declaration of Trust of Registrant (filed with the Registrant’s Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). Articles of Amendment of Amended and Restated Declaration of Trust (filed on March 22, 2002 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). Articles of Amendment of Amended and Restated Declaration of Trust (filed with the Company’s Current Report on Form 8-K on December 29, 2004 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust Series B Cumulative Redeemable Preferred Shares, dated July 2, 1999 (filed with the Company’s Current Report on Form 8-K on July 7, 1999 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series B Cumulative Redeemable Preferred Shares (filed with the Company’s Current Report on Form 8-K on December 29, 2004 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series D Convertible Preferred Shares (filed with the Company’s Current Report on Form 8-K on December 29, 2004 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series E Cumulative Redeemable Preferred Shares, dated April 3, 2001 (filed with the Registrant’s Current Report on Form 8-K on April 4, 2001 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series F Cumulative Redeemable Preferred Shares, dated September 13, 2001 (filed with the Registrant’s Amended Current Report on Form 8-K on September 14, 2001 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series G Cumulative Redeemable Preferred Shares, dated August 6, 2003 (filed with the Registrant’s Registration Statement on Form 8-A on August 7, 2003 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series H Cumulative Redeemable Preferred Shares, dated December 11, 2003 (filed with the Company’s Current Report on Form 8-K on December 12, 2003 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series J Cumulative Redeemable Preferred Shares of Beneficial Interest (filed with the Company’s Current Report on Form 8-K dated July 19, 2006 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series K Cumulative Redeemable Convertible Preferred Shares of Beneficial Interest (filed with the Company’s Current Report on Form 8-K dated January 16, 2007 and incorporated herein by reference). Articles Supplementary of Corporate Office Properties Trust relating to the Series L Cumulative Preferred Shares of Beneficial Interest (filed with the Company’s Current Report on Form 8-K dated June 25, 2012 and incorporated herein by reference). Articles of Amendment of Amended and Restated Declaration of Trust (filed with the Company’s Current Report on Form 8-K dated May 28, 2008 and incorporated herein by reference). Articles of Amendment of Amended and Restated Declaration of Trust (filed with the Company’s Current Report on Form 8-K dated May 19, 2010 and incorporated herein by reference). Articles of Amendment of Amended and Restated Declaration of Trust (filed with the Company’s Current Report on Form 8-K dated June 19, 2012 and incorporated herein by reference). Bylaws of the Registrant, as amended and restated on December 3, 2009 (filed with the Company’s Current Report on Form 8-K dated December 9, 2009 and incorporated herein by reference). First Amendment to Amended and Restated Bylaws (filed with the Company’s Current Report on Form 8-K dated December 18, 2012 and incorporated herein by reference). Form of certificate for the Registrant's Common Shares of Beneficial Interest, $0.01 par value per share (filed with the Registrant's Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). Indenture, dated as of April 7, 2010, among Corporate Office Properties, L.P., as issuer, Corporate Office Properties Trust, as guarantor, and Wells Fargo Bank, National Association, as trustee (filed with the Company’s Current Report on Form 8-K dated April 16, 2010 and incorporated herein by reference). 4.25% Exchangeable Senior Note due 2030 of Corporate Office Properties, L.P. (filed with the Company’s Current Report on Form 8-K dated April 16, 2010 and incorporated herein by reference). 56 EXHIBIT NO. 10.1.1 10.1.2 10.1.3 10.1.4 10.1.5 10.1.6 10.1.7 10.1.8 10.1.9 10.1.10 10.1.11 10.1.12 10.1.13 10.1.14 10.1.15 10.1.16 10.1.17 10.1.18 10.1.19 DESCRIPTION Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 7, 1999 (filed on March 16, 2000 with the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). First Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 21, 1999 (filed on March 16, 2000 with the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). Second Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 21, 1999 (filed with the Company’s Post Effective Amendment No. 2 to Form S-3 dated November 1, 2000 (Registration Statement No. 333-71807) and incorporated herein by reference). Third Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated September 29, 2000 (filed with the Company’s Post Effective Amendment No. 2 to Form S-3 dated November 1, 2000 (Registration Statement No. 333-71807) and incorporated herein by reference). Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated November 27, 2000 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Fifth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated January 25, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Sixth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated April 3, 2001 (filed with the Company’s Current Report on Form 8-K dated April 4, 2001 and incorporated herein by reference). Seventh Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated August 30, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Eighth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated September 14, 2001 (filed with the Company’s Amended Current Report on Form 8-K dated September 14, 2001 and incorporated herein by reference). Ninth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated October 16, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10- K for the year ended December 31, 2002 and incorporated herein by reference). Tenth Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 29, 2001 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Eleventh Amendment to Second Amended and Restated Limited Partnership Agreement of the Operating Partnership, dated December 15, 2002 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Twelfth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated June 2, 2003 (filed on August 12, 2003 with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). Thirteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated August 11, 2003 (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Fourteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated December 18, 2003 (filed on March 11, 2004 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference). Fifteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated January 31, 2004 (filed on March 11, 2004 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference). Sixteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated April 15, 2004 (filed on May 7, 2004 with the Company’s Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference). Seventeenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated September 23, 2004 (filed with the Company’s Current Report on Form 8-K dated September 23, 2004 and incorporated herein by reference). Eighteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated April 18, 2005 (filed with the Company’s Form 8-K on April 22, 2005 and incorporated herein by reference). 57 EXHIBIT NO. 10.1.20 10.1.21 10.1.22 10.1.23 10.1.24 10.1.25 10.1.26 10.1.27 10.1.28 10.1.29 10.1.30 10.2.1* 10.2.2* 10.2.3* 10.3* 10.4.1* 10.4.2* 10.4.3* 10.4.4* DESCRIPTION Nineteenth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated July 8, 2005 (filed with the Company’s Current Report on Form 8-K on July 14, 2005 and incorporated herein by reference). Twentieth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated June 29, 2006 (filed with the Company’s Current Report on Form 8-K dated July 6, 2006 and incorporated herein by reference). Twenty-First Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated July 20, 2006 (filed with the Company’s Current Report on Form 8-K dated July 26, 2006 and incorporated herein by reference). Twenty-Second Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated January 9, 2007 (filed with the Company’s Current Report on Form 8-K dated January 16, 2007 and incorporated herein by reference). Twenty-Third Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated April 6, 2007 (filed with the Company’s Current Report on Form 8-K dated April 12, 2007 and incorporated herein by reference). Twenty-Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated November 2, 2007 (filed with the Company’s Current Report on Form 8-K dated November 5, 2007 and incorporated herein by reference). Twenty-Fifth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated December 31, 2008 (filed with the Company’s Current Report on Form 8-K dated January 5, 2009 and incorporated herein by reference). Twenty-Sixth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated March 4, 2010 (filed with the Company’s Current Report on Form 8-K dated March 10, 2010 and incorporated herein by reference). Twenty-Seventh Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated February 3, 2011 (filed with the Company’s Current Report on Form 8-K dated February 3, 2011 and incorporated herein by reference). Twenty-Eighth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated September 15, 2011 (filed with the Company’s Current Report on Form 8-K dated September 16, 2011 and incorporated herein by reference). Twenty-Ninth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office Properties, L.P., dated June 27, 2012 (filed with the Company’s Current Report on Form 8-K dated June 27, 2012 and incorporated herein by reference). Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed with the Registrant’s Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated herein by reference). Amendment No. 1 to Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed on August 13, 1999 with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference). Amendment No. 2 to Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed on March 22, 2002 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation Plan (filed with the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-87384) and incorporated herein by reference). Employment Agreement, dated July 13, 2005, between Corporate Office Properties, L.P. Corporate Office Properties Trust and Randall M. Griffin (filed with the Company’s Current Report on Form 8-K dated July 19, 2005 and incorporated herein by reference). Amendment to Employment Agreement, dated May 30, 2006, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Randall M. Griffin (filed with the Company’s Current Report on Form 8- K dated June 1, 2006 and incorporated herein by reference). Second Amendment to Employment Agreement, dated December 31, 2008, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Randall M. Griffin (filed with the Company’s Current Report on Form 8-K dated January 5, 2009 and incorporated herein by reference). Third Amendment to Employment Agreement, dated September 16, 2010, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Randall M. Griffin (filed on October 29, 2010 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference). 58 EXHIBIT NO. 10.5.1* 10.5.2* 10.5.3* 10.5.4* 10.5.5* 10.5.6* 10.5.7* 10.6.1* 10.6.2* 10.6.3* 10.6.4* 10.7.1* 10.7.2* 10.8.1* 10.9 10.10 DESCRIPTION Employment Agreement, dated September 12, 2002, between the Operating Partnership, COPT and Roger A. Waesche, Jr. (filed on March 27, 2003 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). Amendment to Employment Agreement, dated March 4, 2005, between the Operating Partnership, COPT and Roger A. Waesche, Jr. (filed on March 16, 2005 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference). Second Amendment to Employment Agreement, dated May 30, 2006, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Roger A. Waesche, Jr. (filed with the Company’s Current Report on Form 8-K dated June 1, 2006 and incorporated herein by reference). Third Amendment to Employment Agreement, dated July 31, 2006, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Roger A. Waesche, Jr. (filed with the Company’s Current Report on Form 8-K dated August 1, 2006 and incorporated herein by reference). Fourth Amendment to Employment Agreement, dated March 2, 2007, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Roger A. Waesche, Jr. (filed with the Company’s Annual Report on Form 10-K dated February 29, 2008 and incorporated herein by reference). Fifth Amendment to Employment Agreement, dated September 16, 2010, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Roger A. Waesche, Jr. (filed on October 29, 2010 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference). Sixth Amendment to Employment Agreement, dated December 12, 2012, between Corporate Office Properties, L.P., Corporate Office Properties Trust, and Roger A. Waesche, Jr. (filed herewith). Employment Agreement, dated July 31, 2006, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Stephen E. Riffee (filed with the Company’s Current Report on Form 8-K dated August 1, 2006 and incorporated herein by reference). First Amendment to Employment Agreement, dated December 31, 2008, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Stephen E. Riffee (filed with the Company’s Current Report on Form 8-K dated January 5, 2009 and incorporated herein by reference). Second Amendment to Employment Agreement, dated September 16, 2010, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Stephen E. Riffee (filed on October 29, 2010 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference). Employment Agreement, dated June 14, 2012, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Stephen E. Riffee (filed with the Company’s Current Report on Form 8-K dated June 19, 2012 and incorporated herein by reference). Employment Agreement, dated December 31, 2008, between Corporate Development Services, LLC, Corporate Office Properties Trust and Wayne Lingafelter (filed with the Company’s Annual Report on Form 8-K dated January 5, 2009 and incorporated herein by reference). First Amendment to Employment Agreement, dated September 16, 2010, between Corporate Development Services, LLC, Corporate Office Properties Trust and Wayne Lingafelter (filed on October 29, 2010 with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference). Employment Agreement, dated September 15, 2011, between Corporate Office Properties, L.P., Corporate Office Properties Trust and Stephen E. Budorick (filed with the Company’s Current Report on Form 8-K dated September 16, 2011 and incorporated herein by reference). Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain shareholders of the Company (filed on August 12, 1998 with the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). Registration Rights Agreement, dated January 25, 2001, for the benefit of Barony Trust Limited (filed on March 22, 2001 with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). 10.11.1* 10.11.2* Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation Plan (filed with the Company’s Current Report on Form 8-K dated December 10, 2008 and incorporated herein by reference). First Amendment to the Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation Plan dated December 4, 2008 (filed with the Company’s Current Report on Form 8-K dated December 10, 2008 and incorporated herein by reference). 59 EXHIBIT NO. 10.12.1* 10.12.2* 10.13 10.14 10.15 10.16 10.17 12.1 21.1 23.1 31.1 31.2 32.1 32.2 DESCRIPTION Corporate Office Properties Trust 2008 Omnibus Equity and Incentive Plan (included in Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 9, 2008 and incorporated herein by reference). Corporate Office Properties Trust Amended and Restated 2008 Omnibus Equity and Incentive Plan (included in Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 30, 2010 and incorporated herein by reference). Registration Rights Agreement, dated April 7, 2010, among Corporate Office Properties, L.P., Corporate Office Properties Trust, J.P. Morgan Securities Inc. and RBC Capital Markets Corporation (filed with the Company’s Current Report on Form 8-K dated April 16, 2010 and incorporated herein by reference). Common Stock Delivery Agreement, dated April 7, 2010, among Corporate Office Properties, L.P. and Corporate Office Properties Trust (filed with the Company’s Current Report on Form 8-K dated April 16, 2010 and incorporated herein by reference). Credit Agreement, dated as of September 1, 2011, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; J.P. Morgan Securities LLC; KeyBanc Capital Markets; KeyBank National Association; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Royal Bank of Canada; Wells Fargo Bank, National Association; Barclays Bank PLC; PNC Bank, National Association; Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s Current Report on Form 8-K/A dated September 1, 2011 and incorporated herein by reference). Term Loan Agreement, dated as of September 1, 2011, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; J.P. Morgan Securities LLC; KeyBanc Capital Markets; KeyBank National Association; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Royal Bank of Canada; Barclays Bank PLC; PNC Bank, National Association; Wells Fargo Bank, National Association; Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s Current Report on Form 8-K/A dated September 1, 2011 and incorporated herein by reference). Term Loan Agreement, dated as of February 14, 2012, by and among Corporate Office Properties, L.P.; Corporate Office Properties Trust; J.P. Morgan Securities LLC; KeyBanc Capital Markets; KeyBank National Association; JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Royal Bank of Canada; and Wells Fargo Bank, National Association (filed with the Company’s Quarter Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference). Statement regarding Computation of Earnings to Combined Fixed Charges and Preferred Share Dividends (filed herewith). Subsidiaries of Registrant (filed herewith). Consent of Independent Registered Public Accounting Firm (filed herewith). Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith). Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith). Certification of the Chief Executive Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith.) Certification of the Chief Financial Officer of Corporate Office Properties Trust required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith.) 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF XBRL Instance Document (furnished herewith). XBRL Taxonomy Extension Schema Document (furnished herewith). XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith). XBRL Extension Labels Linkbase (furnished herewith). XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith). XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith). * - Indicates a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (c) Not applicable. 60 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES Date: February 12, 2013 Date: February 12, 2013 CORPORATE OFFICE PROPERTIES TRUST /s/ Roger A. Waesche, Jr. Roger A. Waesche, Jr. President and Chief Executive Officer /s/ Stephen E. Riffee Stephen E. Riffee Executive Vice President and Chief Financial Officer By: By: 61 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signatures /s/ Jay H . Shidler (Jay H. Shidler) /s/ Clay W. Hamlin, III (Clay W. Hamlin, III) /s/ Roger A. Waesche, Jr. (Roger A. Waesche, Jr.) /s/ Stephen E. Riffee (Stephen E. Riffee) /s/ Gregory J. Thor (Gregory J. Thor) /s/ Thomas F. Brady (Thomas F. Brady) /s/ Robert L. Denton ( Robert L. Denton) /s/ Elizabeth A. Hight (Elizabeth A. Hight) /s/ David M. Jacobstein (David M. Jacobstein) /s/ Steven D. Kesler (Steven D. Kesler) /s/ Richard Szafranski (Richard Szafranski) /s/ Kenneth D. Wethe (Kenneth D. Wethe) Title Date Chairman of the Board and Trustee February 12, 2013 Vice Chairman of the Board and Trustee February 12, 2013 President and Chief Executive Officer and Trustee February 12, 2013 Executive Vice President and Chief Financial Officer (Principal Financial Officer) February 12, 2013 Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) February 12, 2013 February 12, 2013 February 12, 2013 February 12, 2013 February 12, 2013 February 12, 2013 February 12, 2013 February 12, 2013 Trustee Trustee Trustee Trustee Trustee Trustee Trustee 62 CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Management’s Report of Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2012 and 2011 Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 Notes to Consolidated Financial Statements FINANCIAL STATEMENT SCHEDULE Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2012 F-2 F-3 F-4 F-5 F-6 F-7 F-8 F-10 F-50 F-1 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 reporting as of December 31, 2012. 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 financial 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 prevention 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, 2012 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2012 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, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. F-2 Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholders of Corporate Office Properties Trust: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Corporate Office Properties Trust and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, 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 statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness 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, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards 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 reasonable 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 principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, 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. /s/ PricewaterhouseCoopers LLP Baltimore, MD February 12, 2013 F-3 Corporate Office Properties Trust and Subsidiaries Consolidated Balance Sheets (in thousands, except share data) Assets Properties, net: Operating properties, net Projects in development or held for future development Total properties, net Assets held for sale, net Cash and cash equivalents Restricted cash and marketable securities Accounts receivable (net of allowance for doubtful accounts of $4,694 and $3,546, respectively) Deferred rent receivable Intangible assets on real estate acquisitions, net Deferred leasing and financing costs, net Prepaid expenses and other assets Total assets Liabilities and equity Liabilities: Debt, net Accounts payable and accrued expenses Rents received in advance and security deposits Dividends and distributions payable Deferred revenue associated with operating leases Distributions received in excess of investment in unconsolidated real estate joint venture Interest rate derivatives Other liabilities Total liabilities Commitments and contingencies (Note 20) Redeemable noncontrolling interest Equity: Corporate Office Properties Trust’ s shareholders’ equity: Preferred Shares of beneficial interest at liquidation preference Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 80,952,986 at December 31, 2012 and 72,011,324 at December 31, 2011) Additional paid-in capital Cumulative distributions in excess of net income Accumulated other comprehensive loss Total Corporate Office Properties Trust’s shareholders’ equity Noncontrolling interests in subsidiaries: Common units in the Operating Partnership Preferred units in the Operating Partnership Other consolidated entities Noncontrolling interests in subsidiaries Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. F-4 December 31, 2012 2011 $ 2,597,666 565,378 3,163,044 140,229 10,594 21,557 19,247 85,802 75,879 59,952 77,455 $ 3,653,759 $ 2,714,056 638,919 3,352,975 116,616 5,559 36,232 26,032 86,856 89,120 66,515 83,650 $ 3,863,555 $ 2,019,168 97,922 27,632 28,698 11,995 6,420 6,185 8,942 2,206,962 $ 2,426,303 95,714 29,548 35,038 15,554 6,071 30,863 9,657 2,648,748 10,298 8,908 333,833 216,333 809 1,653,672 (617,455) (5,435) 1,365,424 720 1,451,078 (534,041) (1,733) 1,132,357 52,122 8,800 10,153 71,075 1,436,499 $ 3,653,759 55,183 8,800 9,559 73,542 1,205,899 $ 3,863,555 Corporate Office Properties Trust and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data) Revenues Rental revenue Tenant recoveries and other real estate operations revenue Construction contract and other service revenues Total revenues Expenses Property operating expenses Depreciation and amortization associated with real estate operations Construction contract and other service expenses Impairment losses General, administrative and leasing expenses Business development expenses and land carry costs Total operating expenses Operating income Interest expense Interest and other income Loss on early extinguishment of debt Loss on interest rate derivatives Income (loss) from continuing operations before equity in (loss) income of unconsolidated entities and income taxes Equity in (loss) income of unconsolidated entities Income tax (expense) benefit Income (loss) from continuing operations Discontinued operations Income (loss) before gain on sales of real estate Gain on sales of real estate, net of income taxes Net income (loss) Net loss (income) attributable to noncontrolling interests: Common units in the Operating Partnership Preferred units in the Operating Partnership Other consolidated entities Net income (loss) attributable to Corporate Office Properties Trust Preferred share dividends Issuance costs associated with redeemed preferred shares Net (loss) income attributable to Corporate Office Properties Trust common shareholders Net income (loss) attributable to Corporate Office Properties Trust: Income (loss) from continuing operations Discontinued operations, net Net income (loss) attributable to Corporate Office Properties Trust Basic earnings per common share (1) (Loss) income from continuing operations Discontinued operations Net (loss) income attributable to COPT common shareholders Diluted earnings per common share (1) (Loss) income from continuing operations Discontinued operations Net (loss) income attributable to COPT common shareholders For the Years Ended December 31, 2012 2011 2010 $ 367,654 86,517 73,836 528,007 $ 348,006 80,490 84,345 512,841 $ 316,038 71,521 104,675 492,234 167,161 113,480 70,576 43,214 31,900 5,711 432,042 95,965 (94,624) 7,172 (943) — 7,570 (546) (381) 6,643 13,677 20,320 21 20,341 87 (660) 1,209 20,977 (20,844) (1,827) 162,397 113,111 81,639 83,478 30,314 6,122 477,061 35,780 (98,222) 5,603 (1,639) (29,805) (88,283) (331) 6,710 (81,904) (48,404) (130,308) 2,732 (127,576) 8,439 (660) 369 (119,428) (16,102) — 146,617 97,897 102,302 — 28,501 6,403 381,720 110,514 (95,729) 9,568 — — 24,353 1,376 (108) 25,621 17,054 42,675 2,829 45,504 (2,116) (660) 32 42,760 (16,102) — $ $ $ $ $ $ $ (1,694) $ (135,530) $ 26,658 8,051 12,926 20,977 $ (73,884) $ (45,544) $ (119,428) $ 27,029 15,731 42,760 (0.21) $ 0.18 (0.03) $ (0.21) $ 0.18 (0.03) $ (1.31) $ (0.66) (1.97) $ (1.31) $ (0.66) (1.97) $ 0.17 0.26 0.43 0.17 0.26 0.43 (1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust. See accompanying notes to consolidated financial statements. F-5 Corporate Office Properties Trust and Subsidiaries Consolidated Statements of Comprehensive Income (in thousands) Net income (loss) Other comprehensive (loss) income Unrealized losses on interest rate derivatives Losses on interest rate derivatives included in net income (loss) Loss on interest rate derivatives upon discontinuing hedge accounting Other comprehensive (loss) income Comprehensive income (loss) Comprehensive loss (income) attributable to noncontrolling interests Comprehensive income (loss) attributable to COPT For the Years Ended December 31, 2012 20,341 $ 2011 $ (127,576) $ 2010 45,504 (7,676) 3,697 — (3,979) 16,362 (31,531) 4,601 28,430 1,500 (126,076) (5,473) 3,689 — (1,784) 43,720 961 17,323 8,132 $ (117,944) $ (2,591) 41,129 $ See accompanying notes to consolidated financial statements. F-6 Corporate Office Properties Trust and Subsidiaries Consolidated Statements of Equity (Dollars in thousands) Preferred Shares Common Shares Balance at December 31, 2009 (58,342,673 common shares outstanding) Issuance of 4.25% Exchangeable Senior Notes Conversion of common units to common shares (663,498 shares) Common shares issued to the public (7,475,000 shares) Exercise of share options (278,656 shares) Share-based compensation Restricted common share redemptions (105,215 shares) Adjustments to noncontrolling interests resulting from changes in Operating Partnership ownership Comprehensive income Dividends Distributions to owners of common and preferred units in the Operating Partnership Contributions from noncontrolling interests in other consolidated entities Acquisition of noncontrolling interests in other consolidated entities Balance at December 31, 2010 (66,931,582 common shares outstanding) Conversion of common units to common shares (100,939 shares) Common shares issued to the public (4,600,000 shares) Exercise of share options (191,264 shares) Share-based compensation Restricted common share redemptions (114,687 shares) Adjustments to noncontrolling interests resulting from changes in Operating Partnership ownership Comprehensive loss Dividends Distributions to owners of common and preferred units in the Operating Partnership Contributions from noncontrolling interests in other consolidated entities Distributions to noncontrolling interest in other consolidated entities Adjustment to arrive at fair value of noncontrolling interest Increase in tax benefit from share-based compensation Balance at December 31, 2011 (72,011,324 common shares outstanding) Conversion of common units to common shares (234,246 shares) Preferred shares issued to the public (6,900,000 shares) Common shares issued to the public (8,625,000 shares) Redemption of preferred shares (2,200,000 shares) Exercise of share options (61,624 shares) Share-based compensation Restricted common share redemptions (139,851 shares) Adjustments to noncontrolling interests resulting from changes in Operating Partnership ownership Comprehensive income Dividends Distributions to owners of common and preferred units in the Operating Partnership Distributions to noncontrolling interests in other consolidated entities Adjustment to arrive at fair value of noncontrolling interest Increase in tax benefit from share-based compensation Balance at December 31, 2012 (80,952,986 common shares outstanding) $ 216,333 — — — — — — — — — — — — 216,333 — — — — — — — — — — — — — 216,333 — 172,500 — (55,000) — — — — — — — — — — $ 333,833 $ $ 583 — 6 75 3 2 — — — — — — — 669 1 46 2 2 — — — — — — — — — 720 2 — 86 — — 1 — — — — — — — — 809 Additional Paid-in Capital $ 1,022,452 18,149 9,561 245,546 4,572 11,843 (3,913) (10,274) — — — — (2,344) 1,295,592 1,520 145,321 2,459 14,265 (3,990) (2,798) — — — (23) — (1,315) 47 1,451,078 2,812 (6,848) 204,610 1,827 928 11,183 (3,379) (4,627) — — — — (3,955) 43 $ 1,653,672 See accompanying notes to consolidated financial statements. Cumulative Distributions in Excess of Net Income Accumulated Other Comprehensive Loss Noncontrolling Interests $ $ (209,941) $ — — — — — — — 42,760 (114,613) — — — (281,794) — — — — — — (119,428) (132,819) — — — — — (534,041) — — — (1,827) — — — — 20,977 (102,564) — — — — (617,455) $ (1,907) $ — — — — — — — (2,256) — — — — (4,163) — — — — — — 2,430 — — — — — — (1,733) — — — — — — — — (3,702) — — — — — (5,435) $ 93,112 — (9,567) — — — — 10,274 3,216 — (7,926) 510 (2,118) 87,501 (1,521) — — — — 2,798 (7,671) — (7,833) 284 (16) — — 73,542 (2,814) — — — — — — 4,627 1,652 — (5,277) (655) — — 71,075 Total $ 1,120,632 18,149 — 245,621 4,575 11,845 (3,913) — 43,720 (114,613) (7,926) 510 (4,462) 1,314,138 — 145,367 2,461 14,267 (3,990) — (124,669) (132,819) (7,833) 261 (16) (1,315) 47 1,205,899 — 165,652 204,696 (55,000) 928 11,184 (3,379) — 18,927 (102,564) (5,277) (655) (3,955) 43 $ 1,436,499 F-7 Corporate Office Properties Trust and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Cash flows from operating activities Revenues from real estate operations received Construction contract and other service revenues received Property operating expenses paid Construction contract and other service expenses paid General, administrative, leasing, business development and land carry costs paid Interest expense paid Previously accreted interest expense paid Settlement of interest rate derivatives Proceeds from sale of trading marketable securities Exit costs on property dispositions Payments in connection with early extinguishment of debt Interest and other income received Income taxes paid Net cash provided by operating activities Cash flows from investing activities Purchases of and additions to properties Construction, development and redevelopment Acquisitions of operating properties Tenant improvements on operating properties Other capital improvements on operating properties Proceeds from sales of properties Proceeds from sale of equity method investment Mortgage and other loan receivables funded or acquired Mortgage and other loan receivables payments received Leasing costs paid Investment in unconsolidated entities Other Net cash provided by (used in) investing activities Cash flows from financing activities Proceeds from debt Revolving Credit Facility Other debt proceeds Repayments of debt Revolving Credit Facility Scheduled principal amortization Other debt repayments Deferred financing costs paid Net proceeds from issuance of preferred shares Net proceeds from issuance of common shares Redemption of preferred shares Acquisition of noncontrolling interests in consolidated entities Common share dividends paid Preferred share dividends paid Distributions paid to noncontrolling interests in the Operating Partnership Restricted share redemptions Other Net cash (used in) provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents Beginning of period End of period For the Years Ended December 31, 2012 2011 2010 $ 483,421 77,831 (174,683) (67,952) (22,904) (87,394) — (29,738) 18,975 (4,146) (2,637) 1,073 (8) 191,838 $ 476,762 88,433 (180,041) (94,140) (28,027) (93,715) (17,314) — — — (353) 698 (160) 152,143 $ 453,847 112,644 (173,625) (124,867) (23,969) (87,917) — — — — — 323 — 156,436 (165,275) (48,308) (27,103) (20,066) 290,603 — (14,232) 10,113 (13,278) (250) 1,540 13,744 (232,667) (32,856) (37,195) (16,906) 79,638 5,773 (23,377) 16,759 (15,997) (250) (3,309) (260,387) (303,064) (146,275) (20,826) (10,422) 27,576 — (5,588) 1,568 (14,403) (6,600) (1,133) (479,167) 329,000 403,117 1,180,000 456,206 663,000 359,912 (991,000) (11,684) (124,386) (3,371) 165,652 205,425 (55,000) — (89,161) (19,087) (5,828) (3,379) (845) (200,547) 5,035 (813,000) (13,755) (698,100) (13,113) — 147,828 — — (114,643) (16,102) (7,875) (3,990) 245 103,701 (4,543) (733,000) (13,996) (66,663) (8,570) — 250,196 — (4,462) (93,792) (16,102) (8,099) (3,913) 60 324,571 1,840 5,559 10,594 10,102 5,559 $ $ 8,262 10,102 $ See accompanying notes to consolidated financial statements. F-8 Corporate Office Properties Trust and Subsidiaries Consolidated Statements of Cash Flows (continued) (in thousands) Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and other amortization Impairment losses Loss on interest rate derivatives Settlement of previously accreted interest expense Amortization of deferred financing costs Increase in deferred rent receivable Amortization of net debt discounts Gain on sales of real estate Gain on equity method investment Share-based compensation (Gain) loss on early extinguishment of debt Other Changes in operating assets and liabilities: Decrease (increase) in accounts receivable Decrease (increase) in restricted cash and marketable securities Decrease (increase) in prepaid expenses and other assets Increase (decrease) in accounts payable, accrued expenses and other liabilities Decrease in rents received in advance and security deposits Decrease in interest rate derivatives in connection with cash settlement Net cash provided by operating activities Supplemental schedule of non-cash investing and financing activities: For the Years Ended December 31, 2012 2011 2010 $ 20,341 $ (127,576) $ 45,504 124,418 62,702 — — 6,243 (11,776) 3,155 (20,961) — 9,982 (3,430) (3,195) 136,594 151,021 29,805 (17,314) 6,596 (10,102) 5,540 (7,528) (2,452) 11,920 1,670 (314) 125,819 — — — 5,871 (5,706) 5,841 (3,917) (6,406) 11,845 — (3,872) 6,693 14,934 8,550 4,101 (1,916) (28,003) $ 191,838 (7,094) 2,160 (687) (18,041) (2,055) — $ 152,143 (1,680) (4,875) 8,674 (19,644) (1,018) — $ 156,436 (Decrease) increase in accrued capital improvements, leasing and other investing activity costs $ Increase in property, debt and other liabilities in connection with acquisitions $ Decrease in property in connection with surrender of property in settlement of debt $ $ Decrease in debt in connection with surrender of property in settlement of debt Increase in property and noncontrolling interests in connection with property contribution by a noncontrolling interest in a joint venture $ (1,227) $ — $ $ $ 12,042 16,304 11,719 3,040 $ $ — $ — $ 4,576 74,244 — — — $ — $ 9,000 Increase (decrease) in fair value of derivatives applied to AOCL and noncontrolling interests Dividends/distribution payable Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares Adjustments to noncontrolling interests resulting from changes in Operating Partnership ownership Increase in redeemable noncontrolling interest and decrease in shareholders’ equity in connection with adjustment to arrive at fair value of noncontrolling interest $ $ $ $ $ 4,040 28,698 2,814 4,627 3,955 $ $ $ $ $ 1,438 35,038 1,521 2,798 1,315 $ $ $ $ $ (1,846) 32,986 9,567 10,274 — See accompanying notes to consolidated financial statements. F-9 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements 1. Organization Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company,” “we” or “us”) is a fully- integrated and self-managed real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. As of December 31, 2012, our investments in real estate included the following: • • • • 208 operating office properties totaling 18.8 million square feet; 13 office properties under construction or redevelopment, or for which we were contractually committed to construct, that we estimate will total approximately 1.7 million square feet upon completion, including two partially operational properties included above; land held or under pre-construction totaling 1,694 acres (including 561 controlled but not owned) that we believe are potentially developable into approximately 19.3 million square feet; and a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts. We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), of 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, 2012 and 2011 follows: Common Units Series G Preferred Units Series H Preferred Units Series I Preferred Units Series J Preferred Units Series K Preferred Units Series L Preferred Units December 31, 2012 2011 94% 95% N/A 100% 100% 100% 0% 100% 100% 100% 100% N/A 100% 0% Three of our trustees also controlled, either directly or through ownership by other entities or family members, an additional 4% of the Operating Partnership’s common units (“common units”) as of December 31, 2012. In addition to owning real estate, the Operating Partnership also owns subsidiaries that provide real estate services such as property management and construction and development 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 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 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 discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity. F-10 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations. Revisions During 2012, we identified the following errors: • • • • the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012. The effect of this error was an overstatement of our income tax benefit and an understatement of our net loss for the year ended December 31, 2011 of $4.0 million. Based on an evaluation against our projected annual net income at that time, this error was previously reported as an out-of-period adjustment in the three months ended March 31, 2012; an over-accrual of incentive compensation cost, the effect of which was an overstatement of general and administrative expenses and an overstatement of net loss for the calendar quarter and year ended December 31, 2011 of $700,000. Based on an evaluation against our projected annual net income at that time, this error was previously reported as an out-of-period adjustment in the three months ended March 31, 2012; the misapplication of accounting guidance requiring that we recognize loss allocations to a noncontrolling interest holder in a consolidated real estate joint venture associated with decreases in such holder's claim on the book value of the joint venture’s assets, despite the fact that the real estate held by the joint venture was under development and the joint venture had no underlying losses. The effect of this error was an understatement of losses attributable to noncontrolling interests in other consolidated entities of $1.8 million for the nine months ended September 30, 2012 and $1.4 million for the year ended December 31, 2011; and the misapplication of accounting guidance pertaining to our reporting for a noncontrolling interest in a consolidated real estate joint venture formed in March 2010 for which the holder of such interest has the right to require us to acquire the interest at fair value. Accounting guidance requires that this noncontrolling interest be classified outside of permanent equity and reported at fair value as of the end of each reporting period, with changes in such fair value reported as equity transactions with no impact to net income or comprehensive income. This error resulted in an overstatement of equity and offsetting understatement of the line entitled “redeemable noncontrolling interest” in the mezzanine section of our consolidated balance sheet of $8.9 million as of December 31, 2011. This error had no effect on our consolidated statements of operations, including our reported net income (losses) or earnings per share. With respect to the errors in the first two bullets above, we assessed the materiality of these errors on the financial statements in connection with previously filed periodic reports, in accordance with ASC 250 (SEC’s Staff Accounting Bulletin No. 99, “Materiality”), and concluded at such time that the errors were not material to any prior annual or interim periods. In assessing the cumulative effect of all such errors, we have since concluded that correction of the errors in 2012 could be considered material to our 2012 net income. Accordingly, in accordance with ASC 250 (SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,”), the financial statements as of, and for the year ended, December 31, 2011 have been revised. We will revise amounts pertaining to each of the 2012 calendar quarters from January 1, 2012 through September 30, 2012 in future quarterly filings on Form 10- Q. The following are selected line items from our financial statements as of, and for the year ended, December 31, 2011 illustrating the affect of adjustments to revise the financial statements (the “As Previously Reported” columns include the effects of other reclassifications and retrospective changes in presentation discussed below)(in thousands): Prepaid expenses and other assets Accounts payable and accrued expenses Redeemable noncontrolling interest Additional paid-in capital Cumulative distributions in excess of net income Noncontrolling interests in common units in the Operating Partnership Noncontrolling interests in other consolidated entities Consolidated Balance Sheet as of December 31, 2011 As Previously Reported $ $ 87,619 96,425 — 1,452,393 (532,288) 55,281 18,559 F-11 Adjustment As Revised (3,969) $ (711) 8,908 (1,315) (1,753) 83,650 95,714 8,908 1,451,078 (534,041) (98) (9,000) 55,183 9,559 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) General, administrative and leasing expenses Income tax benefit Net loss Net loss attributable to noncontrolling interests in common units in the Operating Partnership Net (income) loss attributable to noncontrolling interests in other consolidated entities Net loss attributable to Corporate Office Properties Trust Net loss attributable to Corporate Office Properties Trust common shareholders Basic and diluted earnings per common share: Loss from continuing operations $ $ $ $ $ $ $ $ Net loss attributable to COPT common shareholders $ Reclassifications Consolidated Statements of Operations for the Year Ended December 31, 2011 As Previously Reported Adjustment As Revised $ 31,025 $ 10,679 (124,318) $ (711) $ (3,969) $ (3,258) $ 30,314 6,710 (127,576) 8,341 $ 98 (1,038) $ 1,407 $ $ 8,439 369 (117,675) $ (1,753) $ (119,428) (133,777) $ (1,753) $ (135,530) (1.29) $ (1.94) $ (0.02) $ (0.03) $ (1.31) (1.97) We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity. Included among these reclassifications are retrospective changes in the presentation of: • • • our preferred shares of beneficial interest; these shares are reported on our consolidated balance sheets at their liquidation preference value after having been reported at par value in our 2011 Annual Report on Form 10-K; costs expensed in connection with properties not in operations; these costs are included in the line on our consolidated statements of operations entitled “business development expenses and land carry costs,” after having been included in property operating expenses in our 2011 Annual Report on Form 10-K; and costs expensed in connection with marketing space for lease to prospective tenants; these costs are included in the line on our consolidated statements of operations entitled “general, administrative and leasing expenses,” after having been included in property operating expenses in our 2011 Annual Report on Form 10-K. Use of Estimates in the Preparation of Financial Statements We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions 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. 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 property acquisition costs, the determination of estimated useful lives of assets, the determination of lease terms, the evaluation of impairment of long-lived assets, the amount of revenue recognized relating to tenant improvements and the level of expense recognized in connection with share-based compensation. Actual results could differ from these and other estimates. Acquisitions of Properties Upon completion of property acquisitions, we allocate the purchase price to tangible and intangible assets and liabilities associated with such acquisitions based on our estimates of their fair values. We determine these fair values by using market F-12 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) data and independent appraisals available to us and making numerous estimates and assumptions. We allocate property acquisitions to the following components: • • • • • properties based on a valuation performed under the assumption that the property is vacant upon acquisition (the “if vacant value”). The if-vacant value is allocated between land and buildings or, in the case of properties under development, construction in progress. We also allocate additional amounts to properties for in-place tenant improvements based on our estimate of improvements per square foot provided under market leases that would be attributable to the remaining non- cancellable terms of the respective leases; above- 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: (1) the contractual amounts to be received pursuant to the in-place leases; and (2) 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. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining non-cancellable terms of the respective leases; in-place lease value based on our estimates of: (1) the present value of additional income to be realized as a result of leases being in place on the acquired properties; and (2) costs to execute similar leases. Our estimate of additional income to be realized includes carrying costs, such as real estate taxes, insurance and other operating expenses, and revenues 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 above- and below- market cost arrangements (such as real estate tax treaties or above- or below- market ground leases) based on the present value of the expected benefit from any such arrangements in place on the property at the time of acquisition. Properties We report properties to be developed or held and used in operations at our depreciated cost, reduced for impairment losses. The preconstruction stage of the development or redevelopment of an operating 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 capitalize interest expense, real estate taxes and direct and indirect project costs (including related compensation and other indirect costs) associated with properties, or portions thereof, undergoing construction, development and redevelopment activities. We continue to capitalize these costs while construction, development or redevelopment activities are underway until a property becomes “operational,” which occurs upon the earlier of when leases commence or one year after the cessation of major construction activities. When leases commence on portions of a newly-constructed or redeveloped property 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 the costs associated with the property between the portion that is operational and the portion under construction. We start depreciating newly-constructed and redeveloped properties as they become operational. Most of our leases involve some form of improvements to leased space. When we are required to provide improvements under the terms of a lease, we determine whether the improvements constitute landlord assets or tenant assets. We capitalize the cost of the improvements when we deem the improvements to be landlord assets. In determining whether improvements constitute landlord or tenant assets, we consider numerous factors, including: whether the improvements are unique to the tenant or reusable by other tenants; whether the tenant is permitted to alter or remove the improvements without our consent or without compensating us for any lost fair value; whether the ownership of the improvements remains with us or remains with the tenant at the end of the lease term; and whether the economic substance of the lease terms is properly reflected. We depreciate our fixed assets using the straight-line method over their estimated useful lives as follows: Buildings and building improvements Land improvements Tenant improvements on operating properties Equipment and personal property Estimated Useful Lives 10-40 years 10-20 years Related lease term 3-10 years F-13 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) We assess each of our operating properties for impairment quarterly using cash flow projections and estimated fair values that we derive for each of the properties. We update the leasing and other assumptions used in these projections regularly, paying particular attention to properties that have experienced chronic vacancy or face significant market challenges. We review our plans and intentions for our development projects and land parcels quarterly. Each quarter, we also review the reasonableness of changes in our estimated operating property fair values from amounts estimated in the prior quarter. If events or changes in circumstances indicate that the carrying values of certain operating properties, properties in development or land held for future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods. If the recovery analysis indicates that the carrying value of a tested property is not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans. Changes in holding periods may require us to recognize significant impairment losses. Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. Estimated cash flows used in such analyses are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future rental rates, occupancies for the tested property and comparable properties, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from third party sources such as CoStar Group and real estate leasing and brokerage firms and our direct experience with the properties and their markets. When we determine that a property is held for sale, we discontinue the recording of depreciation expense on the property and estimate the fair value, net of selling costs; if we then determine that the estimated fair value, net of selling costs, is less than the net book value of the property, we recognize an impairment loss equal to the difference and reduce the net book value of the property. 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 discontinued operations. 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 experienced 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. Investments in Marketable Securities We classify marketable securities as trading securities when we have the intent to sell such securities in the near term, and classify other marketable securities as available-for-sale securities. We determine the appropriate classification of investments in marketable securities at the acquisition date and re-evaluate the classification at each balance sheet date. We report investments in marketable securities classified as trading securities at fair value, with unrealized gains and losses recognized through earnings. We report investments in marketable securities classified as available-for-sale securities at fair value, with net F-14 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) unrealized gains or losses deferred to AOCL and realized gains and losses resulting from sales of such investments recognized through earnings. Accounts and Deferred Rents Receivable and Mortgage and Other Investing Receivables We maintain allowances for estimated losses resulting from the failure of our customers or borrowers to satisfy their payment obligations. We use judgment in estimating these allowances based primarily upon the payment history and credit status of the entities associated with the individual receivables. We write off these receivables when we believe the facts and circumstances indicate that continued pursuit of collection is no longer warranted. When we earn interest income in connection with receivables for which we have established allowances, we establish allowances in connection with such interest income that is unpaid. When cash is received in connection with receivables for which we have established allowances, we reduce the amount of losses recognized in connection with the receivables’ allowance. 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 Properties.” We amortize the intangible assets and deferred revenue as follows: Above- and below-market leases In-place lease value Tenant relationship value Above- and below-market cost arrangements Market concentration premium Amortization Period Related lease terms Related lease terms Estimated period of time that tenant will lease space in property Term of arrangements 40 years We recognize the amortization of acquired above-market and below-market leases as adjustments to rental revenue. We recognize the amortization of above- and below- market cost arrangements as adjustments to property operating expenses. We recognize the amortization of other intangible assets on property acquisitions as amortization expense. Deferred Leasing and Financing Costs, Net We defer costs incurred to obtain new tenant leases or extend existing tenant leases, including related compensation costs. 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 over the shortened term of the lease. We defer costs of financing arrangements and recognize these costs as interest expense over the related loan terms on a straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization. We expense any unamortized loan costs when loans are retired early. Noncontrolling Interests Our consolidated noncontrolling interests are comprised of interests in our Operating Partnership and consolidated real estate joint ventures. We evaluate whether noncontrolling interests are subject to redemption features outside of our control. For noncontrolling interests that are currently redeemable or deemed probable to eventually become redeemable, we classify such interests as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheets; we adjust these interests each period to the greater of their fair value or carrying amount (initial amount as adjusted for allocations of income and losses and future contributions and distributions), with a corresponding offset to additional paid-in capital on our consolidated balance sheets, and only recognize reductions in such interests to the extent of their carrying amount. Our other noncontrolling interests are reported in the equity section of our consolidated balance sheets. The amounts reported for noncontrolling interests on our consolidated statements of operations represent the portion of these entities’ income or losses not attributable to us. F-15 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Common units of the Operating Partnership are substantially similar economically to our common shares. Common units not owned by us are also exchangeable into our common shares, subject to certain conditions. The Operating Partnership has 352,000 Series I Preferred Units issued to an unrelated party that have an aggregate liquidation preference of $8.8 million ($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 convertible 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. The table below sets forth activity in our redeemable noncontrolling interest (in thousands): Beginning balance Net loss attributable to noncontrolling interest Adjustment to arrive at fair value of interest Ending balance Revenue Recognition Year Ended December 31, 2012 2011 $ $ 8,908 (2,565) 3,955 10,298 $ $ 9,000 (1,407) 1,315 8,908 We recognize minimum rents, net of abatements, on a straight-line basis over the non-cancelable term of tenant leases (including periods under bargain renewal options). 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. Amounts by which our minimum rental revenue recognized on a straight-line basis under leases are less than the contractual rent billings associated with such leases are included in deferred revenue associated with operating leases on our consolidated balance sheets. In connection with a tenant's entry into, or modification of, a lease, if we make cash payments to, or on behalf of, the tenant for purposes other than funding the construction of landlord assets, we defer the amount of such payments as lease incentives. We amortize lease incentives as a reduction of rental revenue over the term of the lease. 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, lease incentives 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 termination of the lease is 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 completion 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 completed 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. F-16 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Interest Rate Derivatives Our primary objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Derivatives are used to hedge the cash flows associated with interest rates on existing debt as well as future debt. We recognize all derivatives as assets or liabilities in the balance sheet at fair value. We defer the effective portion of changes in fair value of the designated cash flow hedges to accumulated other comprehensive loss (“AOCL”) and reclassify such deferrals to interest expense as interest expense is recognized on the hedged forecasted transactions. We recognize the ineffective portion of the change in fair value of interest rate derivatives directly in interest expense. When an interest rate swap designated as a cash flow hedge no longer qualifies for hedge accounting, we recognize changes in fair value of the hedge previously deferred to AOCL, along with any changes in fair value occurring thereafter, through earnings. We do not use interest rate 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. 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. Please refer to Note 11 for additional information pertaining to interest rate derivatives. Expense Classification We classify as property operations expense costs incurred for property taxes, ground rents, utilities, property management, insurance, repairs, exterior and interior maintenance and tenant revenue collection losses, as well as associated labor and indirect costs attributable to these costs. We classify as general and administrative and leasing expenses costs incurred for corporate-level management, public company administration, asset management, leasing, investor relations, marketing and corporate-level insurance (including general business, director and officers and key man life) and leasing prospects, as well as associated labor and indirect costs attributable to these costs. Share-Based Compensation We issued two forms of share-based compensation: restricted common shares (“restricted shares”) and performance share units (“PSUs”). We also issued options to purchase common shares of beneficial interest (“options”) in prior years. We account for share-based compensation in accordance with authoritative guidance provided by the FASB that establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The guidance 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. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The guidance 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. If an award is voluntarily cancelled by an employee, we recognize the previously unrecognized cost associated with the original award on the date of such cancellation. We capitalize costs associated with share-based compensation attributable to employees engaged in construction and development activities. When we adopted the authoritative guidance on accounting for share-based compensation, 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 this guidance. F-17 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) We compute the fair value of options 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 of beneficial interest (“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. We compute the fair value of PSUs using a Monte Carlo model. Under that model, the baseline common share value is based on the market value on the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility of our common shares. Recent Accounting Pronouncements We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 related to the presentation of comprehensive income that requires us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted this guidance using retrospective application. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. Our adoption of this guidance did not affect our financial position, results of operations, cash flows or measurement of comprehensive income but did change the location of our disclosure pertaining to comprehensive income in our consolidated financial statements. We adopted guidance issued by the FASB effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. In connection with our adoption of this guidance, we made an accounting policy election to use an exception provided for in the guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to continue to measure the fair value of groups of assets and liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure at the measurement date. Our adoption of this guidance did not affect our financial position, results of operations or cash flows but did result in additional disclosure pertaining to our fair value measurements. We adopted guidance issued by the FASB effective January 1, 2012 relating to the testing of goodwill for impairment that permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. This guidance eliminates the requirement to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Our adoption of this guidance did not materially affect our consolidated financial statements or disclosures. 3. Fair Value Measurements Accounting standards define fair value 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 of the measurement date. The standards also establish 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 circumstances. 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 most significant to the fair value measurement. The assets held in connection with our non-qualified elective deferred compensation plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on our consolidated balance sheet using quoted market prices, as are other marketable securities that we hold. The deferred compensation plan assets and other marketable securities are included in the line entitled restricted cash and marketable securities on our consolidated balance sheets. The offsetting liability associated with the deferred compensation plan is F-18 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 on our consolidated balance sheets. The assets and corresponding liability of our non-qualified elective deferred compensation plan and other marketable securities that we hold are classified in Level 1 of the fair value hierarchy. The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, 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, the credit valuation adjustments associated with our interest rate derivatives also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of December 31, 2012, 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. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. At December 31, 2012 and 2011, we owned warrants to purchase 50,000 common shares in The KEYW Holding Corporation (“KEYW”) at an exercise price of $9.25 per share. KEYW is an entity supporting the intelligence community's operations and transformation to Cyber Age mission by providing engineering services and integrated platforms that support the intelligence process. We acquired these warrants in March 2010 and began accounting for such warrants as derivatives in November 2010 when KEYW became a publicly-traded company. We compute the fair value of these warrants 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 as of the valuation date. The expected life is based on the period of time until the expiration of the warrants. Expected volatility is based on an average of the historical volatility of companies in KEYW's industry that we deem to be comparable. Expected dividend yield is based on the dividend yield on KEYW's common shares as of the date of valuation. The warrants are classified in Level 2 of the fair value hierarchy. In addition to the warrants in KEYW described above, we also owned 1.9 million shares, or approximately 7%, of KEYW's common stock at December 31, 2011 and 3.1 million shares, or approximately 12%, at December 31, 2010. Our investment in these common shares had a fair value of $13.8 million at December 31, 2011 based on the closing price of KEYW's common stock on the NASDAQ Stock Market on that date and is included in the line entitled "restricted cash and marketable securities" on our consolidated balance sheet. We sold 1.2 million of these shares in 2011, resulting in $2.1 million in gain recognized. We used the equity method of accounting for our investment in the common stock until the resignation of our then Chief Executive Officer from the Board of Directors of KEYW effective July 1, 2011, at which time we began accounting for our investment in KEYW's common stock as a trading marketable equity security to be reported at fair value, with unrealized gains and losses recognized through earnings. We sold our remaining 1.9 million shares in 2012 for $14.0 million. We recognized revenue from a lease with KEYW in one of our properties of $2.4 million in 2012, $780,000 in 2011 and $668,000 in 2010. As discussed further in Note 6, our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. We determine the fair value of the interest based on unobservable inputs after considering the assumptions that market participants would make in pricing the interest. We apply a discount rate to the estimated future cash flows allocable to our partner from the properties underlying the joint venture. Estimated cash flows used in such analyses are based on our plans for the properties and our views of market and economic conditions, and consider items such as current and future rental rates, occupancies for the properties and comparable properties and estimated operating and capital expenditures. In determining the fair value of our partner’s interest, we used a discount rate of 15.6%, which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy. F-19 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Recurring Fair Value Measurements The tables below set forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2012 and 2011 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands): Description December 31, 2012: Assets: Marketable securities in deferred compensation plan (1) Mutual funds Common stocks Other Common stock (1) Warrants to purchase common shares in KEYW (2) Assets Liabilities: Deferred compensation plan liability (3) Interest rate derivatives Liabilities Redeemable noncontrolling interest December 31, 2011: Assets: Marketable securities in deferred compensation plan (1) Mutual funds Common stocks Other Common stock (1) Interest rate derivative (2) Warrants to purchase common shares in KEYW (2) Assets Liabilities: Deferred compensation plan liability (3) Interest rate derivatives Liabilities Redeemable noncontrolling interest Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 6,275 298 203 809 — 7,585 6,776 — 6,776 $ — $ 5,878 909 801 13,928 — — 21,516 7,588 — 7,588 $ — $ — $ — — — 294 294 $ — $ 6,185 6,185 $ — $ — $ — — — 716 125 841 $ — $ 30,863 30,863 $ — $ — $ — — — — — $ — $ — — $ $ 10,298 — $ — — — — — $ — $ — — $ $ 8,908 6,275 298 203 809 294 7,879 6,776 6,185 12,961 10,298 5,878 909 801 13,928 716 125 22,357 7,588 30,863 38,451 8,908 (1) Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet. (2) Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet. (3) Included in the line entitled “other liabilities” on our consolidated balance sheet. The carrying values of cash and cash equivalents, restricted cash, accounts receivable, 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 as discussed in Note 9 based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 10 to the consolidated financial statements, we estimated the fair value of our exchangeable senior notes based on quoted market prices for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); 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 F-20 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 9 for mortgage loans receivable, Note 10 for debt and Note 11 for interest rate derivatives. Nonrecurring Fair Value Measurements We recognized impairment losses on certain properties and other assets associated with such properties in 2011 and 2012. Accordingly, certain properties and related assets were adjusted to fair value. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the year ended December 31, 2012 (dollars in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impairment Losses Recognized in 2012 (1) Total Description Assets (2): Properties, net $ — $ — $ 379,684 $ 379,684 $ 62,702 (1) Represents impairment losses, excluding exit costs incurred of $4.2 million in 2012. (2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications. The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands): Description Properties on which impairment losses were recognized Fair Value on Measurement Date Valuation Technique Unobservable Input Range (Weighted Average) $ 379,684 indicative of value Bid for properties Contract of sale Discounted cash flow Discount rate Indicative bid (1) Contract price (1) (1) (1) 10.0% to 11.0% (10.4%) Terminal capitalization rate 8.7% to 10.0% (8.9%) Market rent growth rate Expense growth rate Yield Market rent rate Leasing costs 3.0% (2) 3.0% (2) 12% (2) $8.50 per square foot (2) $20.00 per square foot (2) Yield Analysis (1) These fair value measurements were developed by third party sources, subject to our corroboration for reasonableness. (2) Only one value applied for this unobservable input. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values for the year ended December 31, 2011 (dollars in thousands): Description Assets (1): Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Impairment Losses Recognized in 2011 Total Properties, net Prepaid and other assets $ — $ — — $ — 320,894 163 $ 320,894 163 $ 150,093 928 (1) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications. F-21 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 4. Concentration of Rental Revenue We derived large concentrations of our revenue from real estate operations from certain tenants during the periods set forth in our consolidated statements of operations. The following table summarizes the percentage 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: United States Government Northrop Grumman Corporation (1) Booz Allen Hamilton, Inc. Computer Sciences Corporation Five largest tenants For the Years Ended December 31, 2012 2011 2010 18% 7% 6% 5% 39% 17% 8% 6% N/A 38% 16% 9% 5% N/A 35% (1) Includes affiliated organizations and agencies and predecessor companies. We also derived in excess of 90% 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, Washington, DC - Capitol Riverfront, St. Mary's & King George Counties, Greater Baltimore, Maryland (“Greater Baltimore”) and Suburban Maryland, are within close proximity to each other, and all but two of our regions with real estate operations (San Antonio, Texas (“San Antonio”) and Colorado Springs, Colorado (“Colorado Springs”)) are located in the Mid-Atlantic region of the United States. 5. Properties, net Operating properties, net consisted of the following (in thousands): Land Buildings and improvements Less: accumulated depreciation Operating properties, net December 31, $ 2012 427,766 2,725,875 (555,975) $ 2,597,666 $ 2011 472,483 2,801,252 (559,679) $ 2,714,056 Projects we had in development or held for future development consisted of the following (in thousands): Land Construction in progress, excluding land Projects in development or held for future development 2012 Dispositions and Impairments December 31, 2012 236,324 329,054 565,378 $ $ 2011 229,833 409,086 638,919 $ $ In April 2011, we completed a review of our portfolio and identified a number of properties that are no longer closely aligned with our strategy, and our Board of Trustees approved a plan by Management to dispose of some of these properties (the “Strategic Reallocation Plan”). In December 2011, we identified additional properties for disposal, and our Board of Trustees approved a plan by management to increase the scope of the Strategic Reallocation Plan to include the disposition of F-22 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) additional properties. We completed dispositions of the following properties in 2012 primarily in connection with the Strategic Reallocation Plan (dollars in thousands): Location Project Name White Marsh Portfolio Disposition White Marsh, Maryland 1101 Sentry Gateway 222 and 224 Schilling Circle 15 and 45 West Gude Drive 11800 Tech Road 400 Professional Drive July 2012 Portfolio Disposition San Antonio, Texas Hunt Valley, Maryland Rockville, Maryland Silver Spring, Maryland Gaithersburg, Maryland Baltimore/Washington Corridor and Greater Baltimore Date of Sale 1/30/2012 1/31/2012 2/10/2012 5/2/2012 6/14/2012 7/2/2012 7/24/2012 Number of Buildings 5 1 2 2 1 1 23 Total Rentable Square Feet 163,000 95,000 56,000 231,000 240,000 130,000 1,387,000 Transaction Value $ 19,100 13,500 4,400 49,107 21,300 16,198 161,901 Gain on Disposition 2,445 $ 1,739 102 — — — 16,900 35 2,302,000 $ 285,506 $ 21,186 Each of the above dispositions represent property sales except for 400 Professional Drive, the disposition of which was completed in connection with a debt extinguishment, as described further below. We also had dispositions of non-operating properties during the year ended December 31, 2012 for aggregate transaction values totaling $28.1 million; in addition to the gain on sales reflected above, we also recognized impairment losses on certain of these sales that are disclosed below. On July 2, 2012, the mortgage lender on a $15 million nonrecourse mortgage loan that was secured by our 400 Professional Drive property accepted a deed in lieu of foreclosure on the property. As a result, we transferred title to the property to the mortgage lender and we were relieved of the debt obligation plus accrued interest. As of the transfer date, the property had an estimated fair value of $11 million. Upon completion of this transfer, we recognized a gain on extinguishment of debt of $3.7 million, representing the difference between the mortgage loan and interest payable extinguished over the carrying value of the property transferred as of the transfer date, which included the effect of previous impairments taken. We recognized impairment losses in 2012 in connection with the following: • • • our office properties and developable land in Greater Philadelphia, Pennsylvania. Our Board of Trustees approved a plan by Management to shorten the holding period for these properties because they no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, we recognized aggregate non-cash impairment losses of $46.1 million in 2012 for the amounts by which the carrying values of the properties exceeded their respective estimated fair values. These losses contemplate our expectation that we will incur future cash expenditures of approximately $25 million to complete the redevelopment of certain of these properties; the Strategic Reallocation Plan of $19.0 million ($23.7 million classified as discontinued operations and including $4.2 million in exit costs), including $6.9 million pertaining to certain properties in Colorado Springs, Colorado classified as held for sale at December 31, 2012 and approximately $5.1 million related to our disposition of an additional property from which the cash flows were not sufficient to recover its carrying value; and construction costs incurred on a property held for future development of $1.9 million. The table below sets forth the impairment losses and exit costs recognized in 2012 by period of recognition and by property classification (in thousands): Operating properties Non-operating properties Total 3/31/2012 11,833 (5,246) 6,587 $ $ Three Months Ended 9/30/2012 $ 55,829 — $ 55,829 6/30/2012 2,354 $ — 2,354 $ 12/31/2012 247 $ 1,893 2,140 $ Total $ 70,263 (3,353) $ 66,910 F-23 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2012 Acquisition On July 11, 2012, we acquired 13857 McLearen Road, a 202,000 square foot office property in Herndon, Virginia that was 100% leased, for $48.3 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands): Land, operating properties Building and improvements Intangible assets on real estate acquisitions Total assets Below-market leases Total acquisition cost $ $ 3,507 30,177 14,993 48,677 (369) 48,308 Intangible assets recorded in connection with the above acquisition included the following (dollars in thousands): Tenant relationship value In-place lease value Above-market leases Weighted Average Amortization Period (in Years) 10 5 5 7 $ $ 7,472 7,109 412 14,993 We expensed $229,000 in operating property acquisition costs in 2012 that are included in business development expenses and land carry costs on our consolidated statements of operations. 2012 Construction Activities During 2012, we placed into service an aggregate of 371,000 square feet in four newly constructed office properties, including two properties in the Baltimore/Washington Corridor, one in Greater Baltimore and one in Northern Virginia. As of December 31, 2012, we had 11 office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.4 million square feet upon completion, including four in the Baltimore/Washington Corridor, four in Huntsville, Alabama and three in Northern Virginia. We also had redevelopment underway on two office properties in Greater Philadelphia that we estimate will total 297,000 square feet upon completion. F-24 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2011 Dispositions and Impairment As discussed above, we implemented the Strategic Reallocation Plan in 2011 to dispose of office properties and land that are no longer closely aligned with our strategy. We determined that the carrying amounts of certain of the properties included in the Strategic Reallocation Plan (the “Impaired Properties”) were not likely to be recovered from the cash flows from the operations and sales of such properties over the shorter holding periods. Accordingly, we recognized aggregate non-cash impairment losses in 2011 of $122.5 million (including $67.5 million classified as discontinued operations and excluding $4.8 million in related income tax benefit) for the amounts by which the carrying values of the Impaired Properties exceeded their respective estimated fair values. We completed the sale of the following properties under the Strategic Reallocation Plan in 2011 (dollars in thousands): Project Name Location Date of Sale 1344 & 1348 Ashton Road and 1350 Dorsey Road 216 Schilling Circle Towson Portfolio 11011 McCormick Road 10001 Franklin Square Drive Rutherford Business Center Portfolio Hanover, Maryland Hunt Valley, Maryland Towson, Maryland Hunt Valley, Maryland White Marsh, Maryland 5/24/2011 8/23/2011 9/29/2011 11/1/2011 12/13/2011 Woodlawn, Maryland 12/15/2011 Number of Buildings Total Rentable Square Feet Transaction Value Gain on Disposition 3 1 4 1 1 13 23 $ 39,000 36,000 179,000 57,000 218,000 $ 3,800 4,700 16,000 3,450 16,250 365,000 894,000 $ 32,460 76,660 $ 150 175 1,134 822 305 2,221 4,807 On February 15 and 17, 2011, the United States Army (the “Army”) provided us disclosures regarding the past testing and use of tactical defoliants/herbicides at a property we owned and subsequently disposed of in Cascade, Maryland that was formerly an Army base known as Fort Ritchie (“Fort Ritchie”). Upon receipt of these disclosures, we commenced a review of our development plans and prospects for the property. We believed that these disclosures by the Army were likely to cause further delays in the resolution of certain existing litigation related to the property, and that they also increased the level of uncertainty as to our ultimate development rights at the property and future residential and commercial demand for the property. We analyzed various possible outcomes and resulting cash flows expected from the operations and ultimate disposition of the property. After determining that the carrying amount of the property was not likely to be recovered from those cash flows, we recognized a non-cash impairment loss of $27.7 million in March 2011 for the amount by which the carrying value of the property exceeded its estimated fair value. In 2011, we also recognized additional impairment losses of $803,000 on goodwill associated with operating properties. The table below sets forth the impairment losses recognized in 2011 by period of recognition and by property classification (in thousands): Non-operating properties Operating properties Total Three Months Ended 3/31/2011 27,742 — 27,742 $ $ 6/30/2011 $ 13,574 31,031 $ 44,605 12/31/2011 $ 39,193 39,481 $ 78,674 Total $ 80,509 70,512 $ 151,021 F-25 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2011 Acquisition On August 9, 2011, we acquired 310 The Bridge Street, a 138,000 square foot office property in Huntsville, Alabama that was 100% leased, for $33.4 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands): Land, operating properties Building and improvements Intangible assets on real estate acquisitions Total acquisition cost $ $ 261 26,577 6,575 33,413 Intangible assets recorded in connection with the above acquisitions included the following (in thousands): Tenant relationship value In-place lease value Above-market leases Weighted Average Amortization Period (in Years) 8 3 3 6 $ $ 3,187 2,904 484 6,575 We expensed $156,000 in 2011 in connection with acquisitions of operating properties that are included in business development expenses on our consolidated statements of operations. 2011 Construction Activities During 2011, we placed into service an aggregate of 566,000 square feet in seven newly constructed office properties, including three in the Baltimore/Washington Corridor, two in Greater Baltimore, one in San Antonio and one in St. Mary’s County. 6. 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 (dollars in thousands): Investment Balance at (1) December 31, 2012 December 31, 2011 $ Date Acquired (6,071) 9/29/2005 (6,420) $ Ownership 20% Nature of Activity Operates 16 Buildings Maximum Exposure to Loss (2) $ — (1) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $4.5 million at December 31, 2012 and $5.2 million at December 31, 2011 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation and our discontinuance of the equity method effective October 2012, as discussed below. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same. (2) 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, that we would be required to make if certain contingent events occur (see Note 20). Net cash flows of the joint venture are distributed to the partners in proportion to their respective ownership interests. We did not recognized fees from the joint venture for property management, construction and leasing services we provided in 2012, 2011 and 2010. F-26 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands): Properties, net Other assets Total assets Liabilities (primarily debt) Owners’ equity Total liabilities and owners’ equity December 31, 2012 $ 58,460 4,376 $ 62,836 2011 $ 59,792 3,529 $ 63,321 $ 72,693 (9,857) $ 62,836 $ 67,710 (4,389) $ 63,321 The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands): Revenues Property operating expenses Interest expense Depreciation and amortization expense Net loss For the Years Ended December 31, 2012 2011 2010 $ $ $ 7,316 (2,829) (7,672) (2,283) (5,468) $ $ 7,577 (3,673) (3,913) (2,463) (2,472) $ 8,405 (3,600) (3,937) (3,154) (2,286) We historically accounted for the investment in our one unconsolidated real estate joint venture using the equity method of accounting primarily because: (1) we share with our partner the power to direct the matters that most significantly impact the activities of the joint venture, including the management and operations of the properties and disposal rights with respect to such properties; and (2) our partner has the right to receive benefits and absorb losses that could be significant to the VIE through its proportionately larger investment. We deferred gain in a prior period on our initial contribution of property to the joint venture due to certain guarantees described in Note 20, and we subsequently recognized losses in excess of our investment due to such guarantees and our intent to support the joint venture. During the fourth quarter of 2012, the holder of mortgage debt encumbering all of the joint venture’s properties notified us of the debt’s default, initiated foreclosure proceedings and terminated our property management responsibilities; accordingly, we discontinued our application of the equity method to this investment effective in October 2012 due to our having neither the obligation nor intent to support the joint venture. The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at December 31, 2012 (dollars in thousands): LW Redstone Company, LLC M Square Associates, LLC Arundel Preserve #5, LLC Date Acquired 3/23/2010 6/26/2007 7/2/2007 COPT-FD Indian Head, LLC 10/23/2006 MOR Forbes 2 LLC 12/24/2002 Nominal Ownership % at 12/31/2012 85% 50% 50% 75% 50% Nature of Activity Developing business park (2) Operating two buildings and developing others (3) Operating one building (4) Holding land parcel (5) Operating one building (6) December 31, 2012 (1) Encumbered Assets Total Assets $ 76,295 60,798 39,581 6,436 3,879 $ 16,809 47,360 36,811 — — Total Liabilities 12,990 $ 43,149 17,722 16 96 (1) Excludes amounts eliminated in consolidation. (2) This joint venture’s property is in Huntsville, Alabama. (3) This joint venture’s properties are in College Park, Maryland (in the Suburban Maryland region). (4) This joint venture’s property is in Hanover, Maryland (in the Baltimore/Washington Corridor). (5) This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014. (6) This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region). $ 186,989 $ 100,980 $ 73,973 F-27 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) With regard to our consolidated joint ventures: • • • • • For LW Redstone, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million) that we expect will be reimbursed by the City of Huntsville; as of December 31, 2012, we had advanced $33.3 million to the City to fund such costs (included in prepaid expenses and other assets on our consolidated balance sheet). We also expect to fund additional development and construction costs through equity contributions to the extent that third party financing is not obtained. Our partner was credited with a $9.0 million capital account upon formation and is not required to make any future equity contributions. While net cash flow distributions to the partners vary depending on the source of the funds distributed, cash flows are generally distributed as follows: • cumulative preferred returns on capital invested to fund the project’s infrastructure costs on a pro rata basis to us and our partner; cumulative preferred returns on our capital invested to fund the project’s vertical construction; return of our invested capital; return of our partner’s capital; any remaining residual 85% to us and 15% to our partner. • • • • Our partner has the right to require us to acquire its interest for fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as redeemable noncontrolling interests in the mezzanine section of our consolidated balance sheet. We have the right to purchase our partner’s interest at fair value upon the earlier of five years following the project’s achievement of a construction commencement threshold of 4.4 million square feet or March 2040. For M Square Associates, LLC, net cash flows of this entity will be distributed to the partners as follows: (1) member loans and accrued interest; (2) our preferred return and capital contributions used to fund infrastructure costs; (3) the partners' preferred returns and 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. For Arundel Preserve #5, LLC, net cash flows will be distributed to the partners as follows: (1) member loans and accrued interest; (2) preferred returns in proportion to the partners' respective capital accounts; (3) repayment of any building operating reserves funded by us; and (4) residual cash flows in proportion to the partners' respective ownership interests. For COPT-FD Indian Head, LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests. For MOR Forbes 2 LLC, net cash flows will be distributed to the partners in proportion to their respective ownership interests. We consolidate these real estate joint ventures because we have: (1) the power to direct the matters that most significantly impact the activities of the joint ventures, including development, leasing and management of the properties constructed by the VIEs; and (2) the right to receive returns on our fundings and, in many cases, the obligation to fund the activities of the ventures to the extent that third-party financing is not obtained, both of which could be potentially significant to the VIEs. Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 20. 7. Intangible Assets on Real Estate Acquisitions Intangible assets on real estate acquisitions consisted of the following (in thousands): In-place lease value Tenant relationship value Above-market cost arrangements Above-market leases Market concentration premium December 31, 2012 December 31, 2011 Gross Carrying Amount 134,964 46,828 12,416 8,925 1,333 204,466 $ $ Accumulated Amortization 93,362 $ 23,346 4,100 7,432 347 128,587 $ Net Carrying Amount Gross Carrying Amount $ $ 41,602 23,482 8,316 1,493 986 75,879 $ $ 151,361 45,940 12,416 10,118 1,333 221,168 Accumulated Amortization 97,594 $ 23,246 2,857 8,037 314 132,048 $ Net Carrying Amount $ $ 53,767 22,694 9,559 2,081 1,019 89,120 Amortization of the intangible asset categories set forth above totaled $21.4 million in 2012, $28.3 million in 2011 and $28.3 million in 2010. The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: seven years; tenant relationship value: eight years; above-market cost arrangements: 28 years; above-market leases: four years; and market concentration premium: 30 years. The approximate weighted average amortization period for all of the F-28 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) categories combined is ten years. Estimated amortization expense associated with the intangible asset categories set forth above for the next five years is: $14.4 million for 2013; $12.3 million for 2014; $10.6 million for 2015; $9.5 million for 2016; and $7.1 million for 2017. 8. Deferred Leasing and Financing Costs Deferred leasing and financing costs, net consisted of the following (in thousands): Deferred leasing costs Deferred financing costs Accumulated amortization Deferred leasing and financing costs, net 9. Prepaid Expenses and Other Assets December 31, 2012 97,852 30,520 (68,420) 59,952 $ $ 2011 96,140 44,159 (73,784) 66,515 $ $ Prepaid expenses and other assets consisted of the following (in thousands): Mortgage and other investing receivables Prepaid expenses Furniture, fixtures and equipment, net Deferred tax asset Lease incentives Other assets Prepaid expenses and other assets Mortgage and Other Investing Receivables December 31, 2012 33,396 19,270 7,991 6,612 5,578 4,608 77,455 $ $ 2011 27,998 20,035 10,177 6,923 5,233 13,284 83,650 $ $ Mortgage and other investing receivables consisted of the following (in thousands): Notes receivable from City of Huntsville Mortgage loans receivable December 31, 2012 33,252 144 33,396 $ $ 2011 17,741 10,257 27,998 $ $ Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 6). As of December 31, 2012, our mortgage loans receivable reflected above consisted of one loan secured by a property in Greater Baltimore. We did not have an allowance for credit losses in connection with these receivables at December 31, 2012 or December 31, 2011. The fair value of our mortgage and other investing receivables totaled $33.4 million at December 31, 2012 and $28.0 million at December 31, 2011. Operating Notes Receivable We had operating notes receivable due from tenants with terms exceeding one year totaling $271,000 at December 31, 2012 and $530,000 at December 31, 2011. We carried allowances for estimated losses for most of these balances. F-29 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 10. Debt Our debt consisted of the following (dollars in thousands): Maximum Availability at December 31, 2012 Carrying Value at December 31, 2012 December 31, 2011 Stated Interest Rates at December 31, 2012 Scheduled Maturity Dates at December 31, 2012 Mortgage and Other Secured Loans: Fixed rate mortgage loans (1) Variable rate secured loans N/A $ 948,414 $ 1,052,421 5.20% - 7.87% (2) N/A 39,213 LIBOR + 2.25% (3) 2013-2034 2015 38,475 29,557 Other construction loan facilities $ 123,802 40,336 LIBOR + 1.95% to 2.75% (4) 2013-2015 Total mortgage and other secured loans 1,016,446 1,131,970 Revolving Credit Facility Term Loan Facilities Unsecured notes payable 4.25% Exchangeable Senior Notes Total debt 800,000 770,000 N/A N/A — 662,000 LIBOR + 1.75% to 2.50% September 1, 2014 770,000 1,788 230,934 400,000 LIBOR + 1.65% to 2.60% (5) 2015-2019 5,050 227,283 0% (6) 4.25% 2026 April 2030 (7) $ 2,019,168 $ 2,426,303 (1) Several of the fixed rate mortgages carry interest rates that were above or below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates. The carrying values of these loans reflect net unamortized premiums totaling $1.3 million at December 31, 2012 and $2.4 million at December 31, 2011. (2) The weighted average interest rate on these loans was 6.01% at December 31, 2012. (3) The interest rate on the loan outstanding was 2.46% at December 31, 2012. (4) The weighted average interest rate on these loans was 2.66% at December 31, 2012. (5) The weighted average interest rate on these loans was 2.17% at December 31, 2012. (6) These notes carry interest rates that were below market rates upon assumption and therefore were recorded at their fair value based on applicable effective interest rates. The carrying value of these notes reflects an unamortized discount totaling $873,000 at December 31, 2012 and $1.8 million at December 31, 2011. (7) Refer to the paragraph below for descriptions of provisions for early redemption and repurchase of these notes. Effective September 1, 2011, we entered into a credit agreement providing for an unsecured revolving credit facility (the “Revolving Credit Facility”) with a group of lenders for which J.P. Morgan Securities LLC and KeyBanc Capital Markets acted as join lead arrangers and joint book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. and Bank of America, N.A. acted as co-syndication agents. The lenders’ aggregate commitment under the facility was $1.0 billion, with the ability for us to increase the lenders’ aggregate commitment to $1.5 billion, provided that there is no default under the facility and subject to the approval of the lenders. Effective August 10, 2012, we exercised our right to reduce the lenders’ aggregate commitment under the facility from $1.0 billion to $800 million, with the ability for us to increase the lenders’ aggregate commitment to $1.3 billion, provided that there is no default under the facility and subject to the approval of the lenders. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the agreement. The facility matures on September 1, 2014, and may be extended by one year at our option, provided that there is no default under the facility and we pay an extension fee of 0.20% of the total availability of the facility. The interest rate on the facility is based on LIBOR (customarily the 30-day rate) plus 1.75% to 2.50%, as determined by our leverage levels. The facility also carries a quarterly fee that is based on the unused amount of the facility multiplied by a per annum rate of 0.25% to 0.35%, as determined by the level of our unused amount. As of December 31, 2012, the maximum borrowing capacity under this facility totaled $800.0 million, of which $792.3 million was available. Effective September 1, 2011, we entered into an unsecured term loan agreement with the same group of lenders as the Revolving Credit Facility under which we borrowed $400.0 million, with a right for us to borrow an additional $100.0 million, provided that there is no default under the agreement. The term loan matures on September 1, 2015, and may be extended by one year at our option, provided that there is no default and we pay an extension fee of 0.20% of the total availability of the agreement. The variable interest rate on the term loan is based on LIBOR rate (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels. Upon entry into the Revolving Credit Facility and term loan on September 1, 2011, we repaid and extinguished our previously existing Revolving Credit Facility and Revolving Construction Facility and used most of the remaining proceeds to F-30 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) repay two variable rate secured loans totaling $270.3 million. Upon the early extinguishment of this debt, we recognized a loss of $1.7 million, representing unamortized issuance costs. Effective February 14, 2012, we entered into an unsecured term loan agreement with a group of lenders for which J.P. Morgan Securities LLC and KeyBank Capital Markets acted as joint lead arrangers and joint book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. acted as syndication agent. We borrowed $250.0 million under the term loan. The term loan matures on February 14, 2017. The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels. Effective August 3, 2012, we entered into an unsecured term loan agreement with a group of lenders for which Wells Fargo Securities, LLC acted as sole arranger and sole book runner, Wells Fargo Bank, National Association acted as administrative agent and Capital One, N.A. acted as documentation agent. We borrowed $120.0 million under the term loan, with the ability for us to borrow an additional $80.0 million, provided that there is no default under the loan and subject to the approval of the lenders. The term loan matures on August 2, 2019. The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate) plus 2.10% to 2.60%, as determined by our leverage levels. In 2010, the Operating Partnership issued a $240.0 million aggregate principal amount of 4.25% Exchangeable Senior Notes due 2030. Interest on the notes is payable on April 15 and October 15 of each year. These notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at the Operating Partnership’s discretion, our common shares at an exchange rate (subject to adjustment) of 20.8513 shares per one thousand dollar principal amount of the notes (exchange rate is as of December 31, 2012 and is equivalent to an exchange price of $47.96 per common share) (the initial exchange rate of the notes was based on a 20% premium over the closing price on the NYSE on the transaction pricing date). On or after April 20, 2015, 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 April 15, 2015, April 15, 2020 and April 15, 2025, 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. 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 and are guaranteed by us. The carrying value of these notes included a principal amount of $240 million and an unamortized discount totaling $9.1 million at December 31, 2012 and $12.7 million at December 31, 2011. The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%. Because the closing price of our common shares at December 31, 2012 and 2011 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized (in thousands): Interest expense at stated interest rate Interest expense associated with amortization of discount Total For the Years Ended December 31, 2012 $ 10,200 2011 $ 10,200 3,651 $ 13,851 3,437 $ 13,637 2010 7,480 2,445 9,925 $ $ F-31 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Until September 15, 2011, the Operating Partnership had $162.5 million aggregate principal amount of 3.50% Exchangeable Senior Notes due 2026. These notes had an exchange settlement feature that provided that the notes were, under certain circumstances, exchangeable for cash (up to the principal amount of the notes) and, with respect to any excess exchange value, were exchangeable into (at our option) cash, our common shares or a combination of cash and our common shares. On September 15, 2011, we repurchased these notes at 100% of the principal amount of $162.5 million after the holders of such notes surrendered them for repurchase pursuant to the terms of the notes and the related Indenture. The effective interest rate under the notes, including amortization of the issuance costs, was 5.97%. Because the closing price of our common shares at December 31, 2011 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized: Interest expense at stated interest rate Interest expense associated with amortization of discount Total For the Years Ended December 31, 2011 4,013 2,617 6,630 $ $ 2010 5,687 3,736 9,423 $ $ Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of December 31, 2012, we were within the compliance requirements of these financial covenants. Our debt matures on the following schedule (in thousands): 2013 2014 2015 2016 2017 Thereafter Total $ 121,129 (1) 158,341 795,802 (2) 278,642 551,388 122,490 $ 2,027,792 (3) (1) Includes $17.5 million that may be extended for one year, subject to certain conditions. (2) Includes $411.1 million that may be extended for one year, subject to certain conditions. (3) Represents scheduled principal amortization and maturities only and therefore excludes net discounts of $8.6 million. Weighted average borrowings under our Revolving Credit Facilities totaled $276.5 million in 2012 and $482.3 million in 2011. The weighted average interest rate on our Revolving Credit Facilities was 2.27% in 2012 and 1.65% in 2011. We capitalized interest costs of $13.9 million in 2012, $17.4 million in 2011 and $16.5 million in 2010. The following table sets forth information pertaining to the fair value of our debt (in thousands): Fixed-rate debt 4.25% Exchangeable Senior Notes Other fixed-rate debt Variable-rate debt December 31, 2012 December 31, 2011 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 230,934 950,202 838,032 $ 2,019,168 $ 240,282 968,180 845,558 $ 2,054,020 $ 227,283 1,057,471 1,141,549 $ 2,426,303 $ 238,077 1,054,424 1,139,856 $ 2,432,357 F-32 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 11. Interest Rate Derivatives The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands): $ Notional Amount 100,000 100,000 100,000 100,000 38,475 (1) 100,000 100,000 100,000 100,000 50,000 50,000 120,000 100,000 100,000 (2) 75,000 (2) 100,000 (2) 75,000 (2) Fixed Rate Floating Rate Index 0.6123% One-Month LIBOR 0.6100% One-Month LIBOR 0.8320% One-Month LIBOR 0.8320% One-Month LIBOR 3.8300% One-Month LIBOR + 2.25% 0.8055% One-Month LIBOR 0.8100% One-Month LIBOR 1.6730% One-Month LIBOR 1.7300% One-Month LIBOR 0.5025% One-Month LIBOR 0.5025% One-Month LIBOR 1.7600% One-Month LIBOR 1.9750% One-Month LIBOR 3.8415% Three-Month LIBOR 3.8450% Three-Month LIBOR 2.0525% Three-Month LIBOR-Reverse 2.0525% Three-Month LIBOR-Reverse Effective Date 1/3/2012 1/3/2012 1/3/2012 1/3/2012 11/2/2010 9/2/2014 9/2/2014 9/1/2015 9/1/2015 1/3/2011 1/3/2011 1/2/2009 1/1/2010 9/30/2011 9/30/2011 12/30/2011 12/30/2011 Expiration Date 9/1/2014 9/1/2014 9/1/2015 9/1/2015 11/2/2015 9/1/2016 9/1/2016 8/1/2019 8/1/2019 1/3/2012 1/3/2012 5/1/2012 5/1/2012 9/30/2021 9/30/2021 9/30/2021 9/30/2021 $ $ Fair Value at December 31, 2012 2011 (594) $ (591) (1,313) (1,313) (1,268) (263) (272) (154) (417) — — — — — — — — 55 56 (66) (49) (1,054) — — — — (1) (1) (552) (532) (16,333) (12,275) 345 260 (6,185) $ (30,147) (1) The notional amount of this instrument is scheduled to amortize to $36.2 million. (2) As described below, we settled these instruments on January 5, 2012, along with interest accrued thereon, for an aggregate of $29.7 million. Our policy is to present payments to terminate interest rate swaps entered into in order to hedge forecasted interest payments as operating activities on our consolidated statement of cash flows. Accordingly, the payments to settle these instruments were included in net cash provided by operating activities on our consolidated statement of cash flows. Each of the one-month LIBOR interest rate swaps set forth in the table above was designated as a cash flow hedge of interest rate risk. On April 5, 2011, we entered into the two forward starting three-month LIBOR swaps set forth above with an effective date of September 30, 2011 for an aggregate notional amount of $175 million. We designated these swaps as cash flow hedges of interest payments on ten-year, fixed-rate borrowings forecasted to occur between August 2011 and April 2012. After meeting with our Board of Trustees on December 21, 2011, we determined that we would pursue other financing options and concluded that the originally forecasted borrowings were expected not to occur. Accordingly, the swaps no longer qualified for hedge accounting. On December 22, 2011, we entered into the two reverse three-month LIBOR swaps set forth above with an effective date of December 30, 2011 for an aggregate notional amount of $175 million in order to remove the majority of the variability in the termination value of the forward starting swaps entered into on April 5, 2011. We recognized aggregate net losses of $29.8 million on these interest rate swaps in December 2011. On January 5, 2012, we settled all of the forward starting swaps entered into on April 5, 2011 and December 22, 2011 and interest accrued thereon for an aggregate of $29.7 million. F-33 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheet (in thousands): December 31, 2012 December 31, 2011 Derivatives Interest rate swaps designated as cash flow hedges Interest rate swaps not designated as hedges Interest rate swaps designated as cash flow hedges Interest rate swaps not designated as hedges Balance Sheet Location Prepaid expenses and other assets N/A Interest rate derivatives N/A $ Fair Value — Balance Sheet Location Prepaid expenses and other assets Prepaid expenses and other assets Interest rate derivatives — Interest rate derivatives — (6,185) Fair Value $ 111 605 (2,255) (28,608) The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands): For the Years Ended December 31, 2011 2010 2012 Amount of loss recognized in accumulated other comprehensive loss (“AOCL”) (effective portion) Amount of loss reclassified from AOCL into interest expense (effective portion) Amount of loss reclassified from AOCL to loss on interest rate derivatives upon discontinuing hedge accounting Amount of loss on interest rate derivatives recognized subsequent to such derivatives no longer being designated as hedges $ (7,676) $ (31,531) $ (5,473) (3,697) (4,601) (3,689) — — 28,430 1,375 — — Over the next 12 months, we estimate that approximately $2.6 million will be reclassified from AOCL as an increase to interest expense. We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on any of our indebtedness, we could also be declared in default on our derivative obligations. These agreements also incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparties. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of December 31, 2012, the fair value of interest rate derivatives in a liability position related to these agreements was $6.2 million, excluding the effects of accrued interest. As of December 31, 2012, we had not posted any collateral related to these agreements. We are not in default with any of these provisions. If we breached any of these provisions, we could be required to settle our obligations under the agreements at their termination value of $6.4 million. 12. Shareholders’ Equity Preferred Shares At December 31, 2012, we had 25.0 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 (dollars in thousands, except per share data): Series Series H Series J Series K Series L # of Shares Issued 2,000,000 3,390,000 531,667 6,900,000 12,821,667 Aggregate Liquidation Preference $ Month of Issuance 50,000 December 2003 84,750 26,583 172,500 $ 333,833 July 2006 January 2007 June 2012 Annual Annual Dividend Dividend Per Share Yield 7.500% $1.87500 7.625% $1.90625 5.600% $2.80000 7.375% $1.84375 Earliest Redemption Date 12/18/2008 7/20/2011 1/9/2017 6/27/2017 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. The Series K Cumulative Redeemable Preferred Shares are also convertible, F-34 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) subject to certain conditions, into common shares on the basis of 0.8163 common shares for each preferred share. Holders of all preferred shares are entitled to cumulative dividends, payable quarterly (as and if declared by our 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 June 27, 2012, we completed the public offering of 6.9 million Series L Cumulative Preferred Shares of beneficial interest (“Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. We contributed the net proceeds from the sale to our Operating Partnership in exchange for 6.9 million Series L Preferred Units. The Series L Preferred Units carry terms that are substantially the same as the Series L Preferred Shares. On August 6, 2012, we redeemed all of our outstanding 8% Series G Preferred Shares of beneficial interest (the “Series G Preferred Shares”) at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. We recognized a $1.8 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series G Preferred Shares at the time of the redemption. Common Shares During 2011 and 2012, we completed the following public offerings of common shares: • • 4.6 million common shares in May 2011 at a public offering price of $33.00 per share for net proceeds of $145.7 million after underwriter discounts but before offering expenses; and 8.6 million common shares in October 2012 at a public offering price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses. In October 2012, we established an at-the-market (“ATM”) stock offering program under which we may, from time to time, offer and sell common shares in “at the market” stock offerings having an aggregate gross sales price of up to $150.0 million. We completed no sales of shares under this program in 2012. Holders of common units in our Operating Partnership converted their units into common shares on the basis of one common share for each common unit in the amount of 234,246 in 2012 and 100,939 in 2011. We declared dividends per common share of $1.10 in 2012, $1.65 in 2011 and $1.61 in 2010. See Note 13 for disclosure of common share activity pertaining to our share-based compensation plans. 13. Share-Based Compensation and Employee Benefit Plans Share-Based Compensation Plans In May 2010, we adopted the Amended and Restated 2008 Omnibus Equity and Incentive Plan. We may issue equity- based awards under this plan 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 5,900,000 common shares of beneficial interest to be issued in the form of 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. The plan expires on May 13, 2020. 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. Grants of restricted shares and options under these plans to nonemployee Trustees generally vest on the first anniversary of the grant date provided that the Trustee remains in his or her position. Restricted shares and options granted to employees vest based on increments and over periods of time set forth under the terms of the respective awards provided that the employees remain employed by us. Options expire ten years after the date of grant. 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. F-35 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table summarizes restricted share transactions under our share-based compensation plans for 2010, 2011 and 2012: Unvested at December 31, 2009 Granted Forfeited Vested Unvested at December 31, 2010 Granted Forfeited Vested Unvested at December 31, 2011 Granted Forfeited Vested Unvested at December 31, 2012 Restricted shares expected to vest Weighted Average Grant Date Fair Value 30.43 37.74 34.38 32.24 32.77 33.68 34.23 32.86 33.13 23.64 31.43 32.72 29.67 29.73 Shares 668,990 290,956 (13,986) (276,102) 669,858 320,284 (18,058) (323,706) 648,378 177,662 (17,019) (374,378) 434,643 419,014 $ $ $ The aggregate intrinsic value of restricted shares that vested was $9.0 million in 2012, $11.2 million in 2011 and $10.3 million in 2010. Our Board of Trustees made the following grants of Performance Share Units (“PSUs”) to executives: • • • 100,645 PSUs on March 4, 2010 (the “2010 PSU Grants”) with an aggregate grant date fair value of $5.4 million. Certain executives voluntarily cancelled 58,105 of these PSUs in 2011; we recognized a non-cash compensation charge of $1.2 million in 2011 in connection with these PSU cancellations. The remaining PSUs at December 31, 2011 were held by Mr. Randall M. Griffin, our former Chief Executive Officer, and were terminated upon his retirement on March 31, 2012; based on the Company’s total shareholder return relative to its peer group of companies, there was no payout value in connection with the termination of the PSUs; 56,883 PSUs on March 3, 2011 (the “2011 PSU Grants”) with an aggregate grant date fair value of $2.8 million which were all outstanding at December 31, 2012; and 54,070 PSUs on March 1, 2012, (the “2012 PSU Grants”) with an aggregate grant date fair value of $1.8 million which were all outstanding at December 31, 2012. The PSUs have a performance period beginning on the respective grant dates and concluding on the earlier of three years from the respective grant dates or the date of: (1) termination by the Company without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of the Company’s total shareholder return relative to a peer group of companies, as set forth in the following schedule: Percentile Rank 75th or greater 50th or greater 25th Below 25th Earned PSUs Payout % 200% of PSUs granted 100% of PSUs granted 50% of PSUs granted 0% of PSUs granted If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of fully-vested common shares equal to the sum of: F-36 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) • • the number of earned PSUs in settlement of the award plan; plus the aggregate dividends that would have been paid with respect to the common shares issued in settlement of the earned PSUs through the date of settlement had such shares been issued on the grant date, divided by the share price on such settlement date, as defined under the terms of the agreement. If a performance period ends due to a sale event or qualified termination, the number of earned PSUs is prorated based on the portion of the three-year performance period that has elapsed. If employment is terminated by the employee or by the Company for cause, all PSUs are forfeited. PSUs do not carry voting rights. We computed grant date fair values for PSUs using Monte Carlo models and are recognizing these values over three-year periods that commenced on the respective grant dates. The grant date fair value and certain of the assumptions used in the Monte Carlo models for PSUs granted in 2010, 2011 and 2012 are set forth below: Grant date fair value Baseline common share value Expected volatility of common shares Risk-free interest rate For the Years Ended December 31, 2010 2011 2012 $ 53.31 $ 49.15 $ 32.77 $ 37.84 $ 35.17 $ 24.39 43.2% 0.41% 61.1% 1.32% 62.2% 1.38% The following table summarizes option transactions under our share-based compensation plans for 2010, 2011 and 2012 (dollars in thousands, except per share data): Outstanding at December 31, 2009 Forfeited/Expired – 2010 Exercised – 2010 Outstanding at December 31, 2010 Forfeited/Expired – 2011 Exercised – 2011 Outstanding at December 31, 2011 Forfeited/Expired – 2012 Exercised – 2012 Outstanding at December 31, 2012 Exercisable at December 31, 2010 Exercisable at December 31, 2011 Exercisable at December 31, 2012 Shares 1,501,906 (34,966) (278,656) 1,188,284 (51,598) (191,264) 945,422 (85,588) (61,624) 798,210 1,188,284 945,422 798,210 Range of Exercise Price per Share $8.63 - $57.00 $41.33 - $49.60 $8.63 - $42.07 $9.54 - $57.00 $22.49 - $50.59 $9.54 - $30.25 $13.40 - $57.00 $25.52 - $57.00 $13.40 - $22.49 $13.60 - $57.00 (1) (2) (3) Weighted Average Exercise Price per Share $ $ $ $ $ $ $ $ $ $ $ $ $ 30.29 46.59 16.42 33.07 42.82 12.82 36.63 42.98 15.08 37.62 33.07 36.63 37.62 Weighted Average Remaining Contractual Term (in Years) 5 5 4 3 Aggregate Intrinsic Value $ 14,579 $ 7,987 $ 510 $ 325 (1) 231,946 of these options had an exercise price ranging from $9.54 to $16.73; 246,103 had an exercise price ranging from $16.74 to $30.04; 205,012 had an exercise price ranging from $30.05 to $41.28; 253,607 had an exercise price ranging from $41.29 to $45.24; and 251,616 had an exercise price ranging from $45.25 to $57.00. (2) 53,957 of these options had an exercise price ranging from $13.40 to $16.73; 225,903 had an exercise price ranging from $16.74 to $30.04; 198,762 had an exercise price ranging from $30.05 to $41.28; and 466,800 had an exercise price ranging from $41.29 to $57.00. (3) 9,500 of these options had an exercise price ranging from $13.60 to $16.73; 204,736 had an exercise price ranging from $16.74 to $30.04; 180,962 had an exercise price ranging from $30.05 to $41.28; and 403,012 had an exercise price ranging from $41.29 to $57.00. The aggregate intrinsic value of options exercised was $553,000 in 2012, $4.0 million in 2011 and $5.9 million in 2010. F-37 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax benefit of $43,000 in 2012 and $47,000 in 2011 on options exercised and vesting restricted shares in connection with employees of that subsidiary. The table below sets forth our reporting for share based compensation expense (in thousands): General, administrative and leasing expenses Property operating expenses Capitalized to development activities Share-based compensation expense For the Years Ended December 31, 2012 2011 2010 $ $ 8,611 1,371 1,202 11,184 $ $ 9,077 2,843 2,347 14,267 $ $ 7,511 2,543 1,791 11,845 The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of pre-vesting forfeitures of: 0% for all PSUs; 0% to 5% for restricted shares for 2012; and 0% to 4% for restricted shares for 2011 and 2010. As of December 31, 2012, all of our options are vested and fully expensed. As of December 31, 2012, there was $6.8 million of unrecognized compensation cost related to unvested restricted shares that is expected to be recognized over a weighted average period of approximately two years. As of December 31, 2012, there was $2.3 million of unrecognized compensation cost related to PSUs that is expected to be recognized over a weighted average performance period of approximately two years. 401(k) Plan We have a 401(k) defined contribution plan covering substantially all of our employees that permits participants to contribute up to 90% of their compensation, as defined in the Plan, per pay period on a before-tax basis or after-tax basis, or a combination of both, subject to limitations under the Internal Revenue Code of 1986 ( the “IRC”), as amended. Participants who are 50 years of age or older by the end of a particular plan year and have contributed the maximum 401(k) deferral amount allowed under the plan for that year are eligible to contribute an additional portion of their annual compensation on a before-tax basis as catch-up contributions, up to the annual limit under the IRC. We match 100% of the first 1% of pre-tax and/or after-tax contributions that participants contribute to the plan and 50% of the next 5% in participant contributions to the plan (representing an aggregate match by us of 3.5% on the first 6% of participant pre-tax and/or after-tax contributions to the plan). Participants’ contributions are fully vested. Participants are 50% vested in Company matching contributions after one year of credited service and 100% vested after two years of credited service. We fund all contributions with cash. Our matching contributions under the plan totaled approximately $1.1 million in 2012, $1.1 million in 2011 and $1.0 million in 2010. The 401(k) plan is fully funded at December 31, 2012. 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 compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. The balance of the plan, which was fully funded, totaled $6.8 million at December 31, 2012 and $7.6 million at December 31, 2011, and is included in the accompanying consolidated balance sheets. F-38 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 14. 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 properties at December 31, 2012 were as follows (in thousands): Year Ending December 31, 2013 2014 2015 2016 2017 Thereafter $ 352,149 310,422 261,123 208,483 168,585 373,283 $ 1,674,045 F-39 15. Information by Business Segment Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) We have ten reportable operating office property segments (comprised of: the Baltimore/Washington Corridor; Northern Virginia; San Antonio; Washington, DC — Capitol Riverfront; St. Mary’s and King George Counties; Greater Baltimore; Suburban Maryland; Colorado Springs; Greater Philadelphia; and other). We also have an operating wholesale data center segment. On January 1, 2012, we revised our reportable segments to include only operating properties. Accordingly, we revised net operating income from real estate operations (“NOI from real estate operations”) to exclude operating expenses not related to operating properties, revised our definition of segment assets to include only long-lived assets associated with operating properties and revised our definition of additions to long-lived assets to include only additions to existing operating properties (excluding acquisitions and transfers from non-operating properties). In 2012, we also reclassified costs expensed in connection with marketing space for lease to prospective tenants from property operating expenses to general, administrative and leasing expenses, the result of which is the exclusion of such expenses from NOI from real estate operations. Financial information for prior periods has been presented in conformity with these revisions. The table below reports segment financial information for our reportable segments (in thousands). We measure the performance of our segments through the measure we define as NOI from real estate operations, which is derived by subtracting property operating expenses from revenues from real estate operations. Baltimore/ Washington Corridor Northern Virginia San Antonio Washington, DC - Capitol Riverfront St. Mary’s & King George Counties Greater Baltimore Suburban Maryland Colorado Springs Greater Philadelphia Other Operating Wholesale Data Center Total Operating Office Property Segments Year Ended December 31, 2012 Revenues from real estate operations Property operating expenses NOI from real estate operations Additions to long-lived assets Transfers from non-operating properties Segment assets at December 31, 2012 Year Ended December 31, 2011 Revenues from real estate operations Property operating expenses NOI from real estate operations Additions to long-lived assets Transfers from non-operating properties Segment assets at December 31, 2011 $ $ $ $ $ $ $ 224,959 77,295 147,664 $ 24,599 $ 64,318 $ $ 1,214,105 $ 79,574 29,103 50,471 $ 65,157 $ 44,250 $ $ 569,860 $ 32,018 16,499 $ 15,519 280 $ 468 $ $119,369 $ 16,697 7,555 $ 9,142 317 $ — $ $ 104,544 $ 218,051 78,631 139,420 $ 20,974 $ $ 67,357 $ 1,216,770 $ 74,214 28,518 45,696 $ 14,770 $ $ 4 $ 484,392 $ 30,066 14,371 $ 15,695 $ $ 17,638 $131,412 $ — $ $ $ 17,878 6,762 11,116 2,794 $ $ — $ $ 111,318 Year Ended December 31, 2010 Revenues from real estate operations Property operating expenses NOI from real estate operations Additions to long-lived assets Transfers from non-operating properties Segment assets at December 31, 2010 $ 207,456 74,365 133,091 $ 21,629 $ $ 48,549 $ 1,182,659 $ 75,063 26,688 48,375 91,919 $ 21,673 10,260 $ 11,413 $ 17 (42) $ 40,500 $114,850 $ $ $ $ 492,005 $ $ $ $ $ 4,678 1,736 2,942 92,827 $ $ — $ $ 119,927 $ $ 16,392 4,745 11,647 1,844 289 98,027 $ 52,616 19,917 $ 32,699 $ 9,690 $ 37,558 $ 320,548 $ 15,016 6,295 8,721 $ 1,319 $ 790 $ $ 53,252 $ 25,189 9,283 $ 15,906 2,977 $ 4,295 $ $ 176,726 14,366 4,142 10,224 1,638 16,858 100,818 $ 70,668 29,543 $ 41,125 $ 21,086 $ 16,307 $ 402,067 $ 21,982 9,174 $ 12,808 $ 12,267 $ 395 $ 148,635 $ 23,860 8,800 $ 15,060 4,116 $ $ 214 $ 182,758 13,967 4,176 9,791 1,103 $ 71,850 30,406 $ 41,444 $ 11,501 — $ 15,289 $ 473,977 88,221 $ 21,759 9,455 $ 12,304 1,959 $ $ 5,623 $ 145,646 $ 24,897 8,231 $ 16,666 $ 1,626 $ 32,438 $ 215,801 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ F-40 9,698 2,562 7,136 286 10,626 78,798 $ 14,294 2,666 $ 11,628 133 $ 394 $ $109,924 7,458 1,402 6,056 516 5,446 102,572 $ 12,235 3,048 $ 9,187 $ 26,889 $ $115,048 $ $ — $ $ $ $ $ $ $ $ 6,647 4,815 1,832 199 58,009 100,777 $ 493,100 180,735 $ 312,365 $ 106,801 $ 220,997 $2,945,930 5,054 3,429 1,625 59 20,169 43,650 $ 495,832 187,820 $ 308,012 $ 105,109 $ 144,388 $3,039,440 6,299 2,131 4,168 30 23,119 99,701 $ $ 13,024 4,105 $ $ 8,919 $ (2,012) $ $ $ 14 $ $ 85,633 $ 461,728 1,062 1,216 172,769 (154) $ 288,959 $ 220,968 369 $ 185,288 19,798 $3,042,647 24,227 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands): Segment revenues from real estate operations Construction contract and other service revenues Less: Revenues from discontinued operations (Note 17) Total revenues For the Years Ended December 31, 2012 $ 493,100 73,836 (38,929) $ 528,007 2011 $ 495,832 84,345 (67,336) $ 512,841 2010 $ 461,728 104,675 (74,169) $ 492,234 The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands): Segment property operating expenses Less: Property operating expenses from discontinued operations (Note 17) Total property operating expenses For the Years Ended December 31, 2010 2011 2012 $ 172,769 $ 187,820 $ 180,735 (26,152) (25,423) (13,574) $ 146,617 $ 162,397 $ 167,161 As previously discussed, we provide real estate services such as property management and construction and development services primarily for our properties but also for third parties. The primary manner in which we evaluate the operating performance of our service activities is through a measure we define as net operating income from service operations (“NOI from service operations”), which is based on the net of revenues and expenses from these activities. Construction contract and other service revenues and expenses consist primarily of subcontracted costs that are reimbursed to us by the customer along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. The table below sets forth the computation of our NOI from service operations (in thousands): Construction contract and other service revenues Construction contract and other service expenses NOI from service operations For the Years Ended December 31, 2010 2011 2012 $ 104,675 $ 84,345 $ 73,836 (102,302) (81,639) (70,576) 2,373 2,706 3,260 $ $ $ The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to (loss) income from continuing operations as reported on our consolidated statements of operations (in thousands): NOI from real estate operations NOI from service operations Interest and other income Equity in (loss) income of unconsolidated entities Income tax (expense) benefit Other adjustments: Depreciation and other amortization associated with real estate operations Impairment losses General, administrative and leasing expenses Business development expenses and land carry costs Interest expense on continuing operations NOI from discontinued operations Loss on interest rate derivatives Loss on early extinguishment of debt Income (loss) from continuing operations F-41 For the Years Ended December 31, 2010 2011 2012 $ 288,959 $ 308,012 $ 312,365 2,373 2,706 3,260 9,568 5,603 7,172 (331) (546) 1,376 (108) (381) 6,710 — (113,480) (43,214) (31,900) (5,711) (94,624) (25,355) — (943) 6,643 $ (113,111) (83,478) (30,314) (6,122) (98,222) (41,913) (29,805) (1,639) (97,897) — (28,501) (6,403) (95,729) (48,017) — — $ (81,904) $ 25,621 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The following table reconciles our segment assets to total assets (in thousands): Segment assets Non-operating property assets Other assets Total assets As of December 31, 2012 $ 2,945,930 570,402 137,427 $ 3,653,759 2011 $ 3,039,440 658,900 165,215 $ 3,863,555 The accounting policies of the segments are the same as those used to prepare our consolidated financial statements, except that discontinued operations are not presented separately for segment purposes. In the segment reporting presented above, we did not allocate interest expense, depreciation and amortization and impairment losses to our real estate segments since they are not included in the measure of segment profit reviewed by management. We also did not allocate general and administrative expenses, business development expenses and land carry costs, interest and other income, equity in loss of unconsolidated entities, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments. 16. Income Taxes We 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 distribute at least 90% of our adjusted taxable income to our shareholders. As a REIT, we generally will not be subject 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 2012 and actual 2011 and 2010) and net income as reported on our consolidated statements of operations are set forth below (in thousands): Net income (loss) Adjustments: Rental revenue recognition Compensation expense recognition Operating expense recognition Gain on sales of properties Impairment losses Loss on interest rate derivatives Gains from non-real estate investments Income from service operations Income tax expense Depreciation and amortization Discounts/premiums included in interest expense Income from unconsolidated entities Noncontrolling interests, gross Other Taxable income $ For the Years Ended December 31, 2010 2011 2012 (Estimated) 20,341 $ $ (127,576) $ 45,504 (12,575) (2,098) 1,148 (45,323) 66,910 (29,805) 2,843 1,500 381 25,410 3,194 (725) (463) 836 31,574 (10,708) (1,298) 751 1,154 151,021 29,805 4,447 (12,078) 6,710 44,070 5,548 (374) (7,502) 80 84,050 $ $ (9,192) (4,820) 280 6,548 — — (6,994) (1,628) 119 42,365 5,841 (244) (3,288) 2,173 76,664 F-42 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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 For the Years Ended December 31, 2011 56.9% 9.4% 33.7% 2012 33.2% 0.0% 66.8% 2010 59.7% 8.0% 32.3% Preferred Shares For the Years Ended December 31, 2011 85.9% 14.1% 0.0% 2012 100.0% 0.0% 0.0% 2010 88.3% 11.7% 0.0% We distributed all of our REIT taxable income in 2012, 2011 and 2010 and, as a result, did not incur Federal income tax in those years on such income. The net basis of our consolidated assets and liabilities for tax reporting purposes is approximately $387 million lower than the amount reported on our consolidated balance sheet at December 31, 2012, which is primarily related to differences in basis for net properties, intangible assets on property acquisitions and deferred rent receivable. We own a taxable REIT subsidiary (“TRS”) that is subject to Federal and state income taxes. Our TRS had income (loss) before income taxes under GAAP of $11.3 million in 2012, $(27.7) million in 2011 and $345,000 in 2010. Our TRS’ provision for income tax consisted of the following (in thousands): Deferred Federal State Current Federal State Total income tax (expense) benefit Reported on line entitled income tax (expense) benefit Reported on line entitled gain on sales of real estate, net Total income tax (expense) benefit For the Years Ended December 31, 2010 2011 2012 $ $ $ $ (312) $ (69) (381) 5,510 1,219 6,729 — — — (381) $ (381) $ — (381) $ (16) (3) (19) 6,710 6,710 — 6,710 $ $ $ $ 64 14 78 (161) (36) (197) (119) (108) (11) (119) 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: Income taxes at U.S. statutory rate State and local, net of U.S. Federal tax benefit Other Effective tax rate 2010 For the Years Ended December 31, 2011 34.0% 34.0 % 4.6% 4.2 % 0.0% (3.5)% 38.6% 34.7 % 2012 34.0% 4.6% 0.0% 38.6% Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation, compensation paid in the form of contributions to a deferred nonqualified compensation plan, impairment losses and net operating losses that are not deductible until future periods. As of December 31, 2012, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $16 million expiring in 2033. The table below sets forth the tax effects of temporary differences and carry forwards included in the net deferred tax asset of our TRS (in thousands): F-43 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Operating loss and interest deduction carry forwards Share-based compensation Property (1) Net deferred tax asset December 31, 2012 2011 $ $ 6,014 598 — 6,612 $ $ 1,758 497 4,668 6,923 (1) Difference primarily pertains to depreciation and amortization, basis of contributed assets and the capitalization of interest and certain other costs. 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 administrative expense and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant. 17. Discontinued Operations and Assets Held for Sale Income from discontinued operations primarily includes revenues and expenses associated with the following: • • • • • • • • • • • • • • • • 11101 McCormick Road in Greater Baltimore that was sold on February 1, 2010; 431 and 437 Ridge Road in Central New Jersey (included in the Other region) that were sold on September 8, 2010; 1344 and 1348 Ashton Road and 1350 Dorsey Road in the Baltimore/Washington Corridor that were sold on May 24, 2011; 216 Schilling Circle in Greater Baltimore that was sold on August 23, 2011; four properties comprising the Towson Portfolio in Greater Baltimore that were sold on September 29, 2011; 11011 McCormick Road in Greater Baltimore that was sold on November 1, 2011; 10001 Franklin Square Drive in Greater Baltimore that was sold on December 13, 2011; 13 properties comprising the Rutherford Business Center portfolio in Greater Baltimore that were sold on December 15, 2011; five properties in White Marsh, Maryland (in the Greater Baltimore region) that were sold on January 30, 2012; 1101 Sentry Gateway in San Antonio that was sold on January 31, 2012; 222 and 224 Schilling Circle in Greater Baltimore that were sold on February 10, 2012; 15 and 45 West Gude Drive in Suburban Maryland that were sold on May 2, 2012; 11800 Tech Road in Suburban Maryland that was sold on June 14, 2012; 400 Professional Drive in Suburban Maryland for which the title to the property was transferred to the mortgage lender on July 2, 2012 (see Note 5); 23 operating properties in the Baltimore/Washington Corridor and Greater Baltimore regions that were sold on July 24, 2012; and 16 operating properties in Colorado Springs and an operating property in Suburban Maryland classified as held for sale at December 31, 2012. F-44 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The table below sets forth the components of discontinued operations reported on our consolidated statements of operations (in thousands): Revenue from real estate operations Property operating expenses Depreciation and amortization Impairment losses General, administrative and leasing expenses Business development and land carry costs Interest expense Gain on sales of real estate Gain (loss) on early extinguishment of debt Discontinued operations $ $ $ $ For the Years Ended December 31, 2010 2011 2012 74,169 67,336 38,929 (26,152) (25,423) (13,574) (25,346) (21,020) (8,457) (67,543) (23,696) — (223) (12) (3) (72) (75) (24) (6,399) (6,079) (2,174) 1,077 4,796 20,940 (384) — 1,736 17,054 13,677 $ (48,404) $ The table below sets forth the components of assets held for sale on our consolidated balance sheets (in thousands): Properties, net Deferred rent receivable Intangible assets on real estate acquisitions, net Deferred leasing costs, net Lease incentives Assets held for sale, net 18. Earnings Per Share (“EPS”) As of December 31, 2012 2011 $ 108,356 $ 128,740 2,800 4,068 1,737 4,409 3,723 2,923 — 89 $ 116,616 $ 140,229 We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders allocable to unrestricted common shares under the two-class method by the weighted average number of unrestricted common shares outstanding during the period. 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 dilutive potential common shares outstanding during the period attributable to share-based compensation using the treasury stock or if-converted methods; and the numerator is adjusted to add back any changes in income or loss that would result from the assumed conversion into common shares that we added to the denominator. F-45 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data): Numerator: Income (loss) from continuing operations Gain on sales of real estate, net Preferred share dividends Issuance costs associated with redeemed preferred shares Loss (income) from continuing operations attributable to noncontrolling interests Income from continuing operations attributable to restricted shares Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders Numerator for basic and diluted EPS from continuing operations attributable to COPT common shareholders Discontinued operations Discontinued operations attributable to noncontrolling interests Numerator for basic and diluted EPS on net (loss) income attributable to COPT common shareholders Denominator (all weighted averages): Denominator for basic EPS (common shares) Dilutive effect of share-based compensation awards Denominator for diluted EPS Basic EPS: (Loss) income from continuing operations attributable to COPT common shareholders Discontinued operations attributable to COPT common shareholders Net (loss) income attributable to COPT common shareholders Diluted EPS: (Loss) income from continuing operations attributable to COPT common shareholders Discontinued operations attributable to COPT common shareholders Net (loss) income attributable to COPT common shareholders For the Years Ended December 31, 2010 2011 2012 $ 6,643 21 (20,844) (1,827) $ (81,904) $ 2,732 (16,102) — 25,621 2,829 (16,102) — 1,387 (469) 5,288 (1,037) (1,421) (1,071) $ (15,089) $ (91,023) $ 9,856 $ (15,089) $ (91,023) $ 13,677 (751) (48,404) 2,860 9,856 17,054 (1,323) $ (2,163) $ (136,567) $ 25,587 73,454 — 73,454 69,382 — 69,382 59,611 333 59,944 $ $ $ $ (0.21) $ (1.31) $ 0.17 0.18 (0.03) $ (0.66) (1.97) $ 0.26 0.43 (0.21) $ (1.31) $ 0.17 0.18 (0.03) $ (0.66) (1.97) $ 0.26 0.43 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 (in thousands): Conversion of common units Conversion of convertible preferred units Conversion of convertible preferred shares Weighted Average Shares Excluded from Denominator for the Years Ended December 31, 2012 2011 2010 4,235 176 434 4,355 176 434 4,608 176 434 The following share-based compensation securities were excluded from the computation of diluted EPS because their effect was antidilutive: • • weighted average restricted shares of 461,000 for 2012, 638,000 for 2011 and 666,000 for 2010; and weighted average options of 772,000 for 2012, 712,000 for 2011 and 653,000 for 2010, respectively. F-46 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) As discussed in Note 10, we have outstanding senior notes that have an exchange settlement feature but 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 prices per common share applicable for such periods. 19. Quarterly Data (Unaudited) The tables below set forth selected quarterly information for the years ended December 31, 2012 and 2011 (in thousands, except per share data). Certain of the amounts below have been reclassified to conform to the current period presentation of our consolidated financial statements. For the Year Ended December 31, 2012 Revenues Operating income (loss) Income (loss) from continuing operations Discontinued operations Net income (loss) Net loss (income) attributable to noncontrolling interests Net income (loss) attributable to COPT Preferred share dividends Issuance costs associated with redeemed preferred shares Net income (loss) attributable to COPT common shareholders Basic earnings per common share First Quarter $ 132,195 36,192 $ 12,685 $ (2,450) $ 10,235 $ 60 10,295 (4,025) — 6,270 0.09 $ $ Second Quarter $ 128,163 $ 33,837 $ 10,065 1,775 $ $ 11,861 (556) 11,305 (4,167) — 7,138 0.10 $ $ Diluted earnings per common share $ 0.09 $ 0.10 Third Quarter $ 130,144 (8,586) $ $ (31,850) $ 11,085 $ (20,765) 1,603 (19,162) (6,546) (1,827) $ (27,535) (0.39) $ (0.39) $ Fourth Quarter $ 137,505 34,522 $ 15,743 $ 3,267 $ 19,010 $ (471) 18,539 (6,106) — 12,433 0.16 $ $ $ 0.16 Revenues Operating income (loss) (Loss) income from continuing operations Discontinued operations Net (loss) income Net loss (income) attributable to noncontrolling interests Net (loss) income attributable to COPT Preferred share dividends Net (loss) income attributable to COPT common shareholders Basic earnings per common share Diluted earnings per common share For the Year Ended December 31, 2011 First Quarter $ 126,320 $ 787 $ (22,851) 1,584 $ $ (18,566) 1,204 (17,362) (4,025) $ (21,387) (0.33) $ (0.33) $ Second Quarter $ 131,840 $ 16,600 (397) $ $ (25,008) $ (25,378) 1,964 (23,414) (4,026) $ (27,440) (0.40) $ (0.41) $ Third Quarter $ 126,707 $ 27,400 1,669 $ 5,801 $ 7,470 $ (626) 6,844 (4,025) 2,819 0.04 $ $ $ 0.04 Fourth Quarter $ 127,974 (9,007) $ $ (60,325) $ (30,781) $ (91,102) 5,606 (85,496) (4,026) $ (89,522) (1.26) $ (1.26) $ F-47 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) The amounts reported above were revised for the error corrections described in Note 2. The tables below set forth the revisions to the selected quarterly information (the “Previously Reported” columns include the effects of other reclassifications and retrospective changes in presentation discussed in Note 2)(in thousands): Income (loss) from continuing operations Net income (loss) Net (income) loss attributable to noncontrolling interests Net income (loss) attributable to COPT Net income (loss) attributable to COPT common shareholders Basic and diluted earnings per common share 3/31/2012 Three Months Ended 6/30/2012 9/30/2012 Previously Reported As Revised Previously Reported As Revised Previously Reported As Revised $ $ $ $ $ 9,427 6,977 (300) 6,677 2,652 0.04 $ $ $ $ $ 12,685 10,235 60 10,295 6,270 0.09 $ $ $ $ $ 10,065 11,861 (1,107) 10,754 6,587 0.09 $ $ $ $ $ 10,065 11,861 (556) 11,305 7,138 0.10 $ $ $ $ $ (31,850) $ (31,850) (20,765) $ (20,765) 993 1,603 (19,772) $ (19,162) (28,145) $ (27,535) (0.39) $ (0.39) 3/31/2011 6/30/2011 9/30/2011 12/31/2011 Previously Reported As Revised Previously Reported As Revised Previously Reported As Revised Previously Reported As Revised Three Months Ended (Loss) income from continuing operations Net (loss) income Net loss (income) attributable to noncontrolling interests $ $ (22,851) $ (22,851) $ (1,026) $ (397) $ (18,566) $ (18,566) $ (26,007) $ (25,378) $ 1,669 7,470 776 1,204 1,783 1,964 (904) Net (loss) income attributable to COPT $ (17,790) $ (17,362) $ (24,224) $ (23,414) $ 6,566 Net (loss) income attributable to COPT common shareholders Basic earnings per common share Diluted earnings per common share $ $ $ (21,815) $ (21,387) $ (28,250) $ (27,440) $ 2,541 (0.33) $ (0.33) $ (0.42) $ (0.40) $ (0.33) $ (0.33) $ (0.42) $ (0.41) $ 0.03 0.03 $ $ $ $ $ $ 1,669 7,470 (626) 6,844 2,819 0.04 0.04 $ $ $ $ $ $ (56,438) $ (60,325) (87,215) $ (91,102) 4,988 5,606 (82,227) $ (85,496) (86,253) $ (89,522) (1.21) $ (1.21) $ (1.26) (1.26) 20. Commitments and Contingencies Litigation In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments. Environmental We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental 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. Joint Ventures In connection with our 2005 contribution of properties to an unconsolidated partnership in which we hold a partnership interest, we entered into standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation, and springing guarantees of partnership debt in the event of a voluntary bankruptcy of the partnership). The maximum amount we could be required to pay under the guarantees is approximately $64 million. We are entitled to recover 80% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement. In 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings. F-48 Corporate Office Properties Trust and Subsidiaries Notes to Consolidated Financial Statements (Continued) Management considered this event and estimates that the aggregate fair value of the guarantees would not exceed the amounts included in distributions received in excess of investment in unconsolidated real estate joint venture reported on the consolidated balance sheets. We are party to a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.3 million square feet of office space on 92 acres of land located in Hanover, Maryland. As we and the joint venture partner agree 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 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, 2012. 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. Tax Incremental Financing Obligation In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as National Business Park North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $3.6 million liability through December 31, 2012 representing the estimated fair value of our obligation to fund through a special tax any future shortfalls between debt service on the bonds and real estate taxes available to repay the bonds. Ground Leases We are obligated as lessee under ground leases with various lease expiration dates extending to the year 2100. Future minimum rental payments due under the terms of these leases as of December 31, 2012 follow (in thousands): Year Ending December 31, 2013 2014 2015 2016 2017 Thereafter $ 919 973 974 974 974 81,700 $ 86,514 Environmental Indemnity Agreement We agreed to provide certain environmental indemnifications in connection with a lease and subsequent sale of three New Jersey properties. The prior owner of the properties, a Fortune 100 company that is responsible 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 environmental indemnification 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 $5.0 million in perpetuity after the State of New Jersey declares the remediation to be complete; to indemnify the tenant for consequential damages (e.g., business interruption) at one of the buildings in perpetuity and another of the buildings through 2025. This indemnification is limited to $12.5 million; and to pay 50% of additional costs related to construction and environmental regulatory activities incurred by the tenant as a result of the indemnified environmental condition of the properties. This indemnification is limited to $300,000 annually and $1.5 million in the aggregate. F-49 Corporate Office Properties Trust Schedule III—Real Estate and Accumulated Depreciation December 31, 2012 (Dollars in thousands) Property (Type) (1) Location Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land 1000 Redstone Gateway (O) Huntsville, AL $ 11,078 $ — $ 18,582 $ — $ — $ 18,582 $ 18,582 $ 1055 North Newport Road (O)(10) Colorado Springs, CO 10807 New Allegiance Drive (O)(10) Colorado Springs, CO 1099 Winterson Road (O) 1100 Redstone Gateway (O) Linthicum, MD Huntsville, AL 114 National Business Parkway (O) Annapolis Junction, MD 11751 Meadowville Lane (O) 1190 Winterson Road (O) 1199 Winterson Road (O) 1200 Redstone Gateway (O) 1201 M Street (O) 1201 Winterson Road (O) 1220 12th Street, SE (O) 1243 Winterson Road (L) Richmond, VA Linthicum, MD Linthicum, MD Huntsville, AL Washington, DC Linthicum, MD Washington, DC Linthicum, MD 12515 Academy Ridge View (O)(10) Colorado Springs, CO 1302 Concourse Drive (O) 1304 Concourse Drive (O) 1306 Concourse Drive (O) Linthicum, MD Linthicum, MD Linthicum, MD 131 National Business Parkway (O) Annapolis Junction, MD 132 National Business Parkway (O) Annapolis Junction, MD 13200 Woodland Park Road (O) Herndon, VA 133 National Business Parkway (O) Annapolis Junction, MD 1331 Ashton Road (O) 1334 Ashton Road (O) Hanover, MD Hanover, MD — — 12,012 — — — 11,291 18,578 — 36,659 972 1,840 1,323 — 364 1,305 1,335 1,599 — — — 1,288 30,153 — — — — — 6,922 — — 630 2,612 2,078 1,999 2,796 1,906 2,917 — 10,428 9,262 2,517 — — 587 736 134 National Business Parkway (O) Annapolis Junction, MD 19,200 3,684 1340 Ashton Road (O) 1341 Ashton Road (O) 1343 Ashton Road (O) 13450 Sunrise Valley Road (O) Hanover, MD Hanover, MD Hanover, MD Herndon, VA 13454 Sunrise Valley Road (O) 135 National Business Parkway (O) Herndon, VA Annapolis Junction, MD 1362 Mellon Road (O) 13857 McLearen Road (O) Hanover, MD Herndon, VA 140 National Business Parkway (O) Annapolis Junction, MD — — — — — 9,925 — — — 905 306 193 1,386 2,899 2,484 1,706 3,507 3,407 — 122 2,499 — 21 112 4,025 3,266 — 1,959 460 733 — — 2,991 1,202 2,837 2,657 2,895 13,831 4,821 677 2,301 2,230 1,067 588 405 2,722 3,909 2,882 18 1,724 643 972 1,840 1,323 — 364 1,305 1,335 1,599 — — 1,288 — 630 2,612 2,078 1,999 2,796 1,906 2,917 10,428 2,517 587 736 3,684 905 306 193 1,386 2,899 2,484 1,706 3,507 3,407 5,708 15,561 7,792 924 3,130 52,210 9,365 9,661 2,297 51,744 5,614 43,197 — 6,087 11,304 14,136 14,023 10,280 15,154 55,542 14,889 3,024 3,789 9,747 4,687 1,811 1,179 8,298 15,895 12,632 8,430 31,901 24,810 6,680 17,401 9,115 924 3,494 53,515 10,700 11,260 2,297 51,744 6,902 43,197 630 8,699 13,382 16,135 16,819 12,186 18,071 65,970 17,406 3,611 4,525 13,431 5,592 2,117 1,372 9,684 18,794 15,116 10,136 35,408 28,217 5,708 15,439 5,293 924 3,109 52,098 5,340 6,395 2,297 49,785 5,154 42,464 — 6,087 8,313 12,934 11,186 7,623 12,259 41,711 10,068 2,347 1,488 7,517 3,620 1,223 774 5,576 11,986 9,750 8,412 30,177 24,167 F-50 — (178) (298) (3,348) — (878) (7,278) (5,111) (4,665) — (3,939) (2,068) (3,914) — (441) (4,626) (4,657) (4,998) (3,876) (6,563) (19,432) (6,167) (939) (1,468) (4,138) (1,874) (727) (435) (2,853) (4,605) (4,932) (841) (973) (5,748) Year Built or Renovated (7) 2007-2008 2009 1988 (7) 2002 2007 1987 1988 (7) 2001 1985 2003 (8) 2006 1996 2002 1990 1990 2000 2002 1997 1989 1989 1999 1989 1989 1989 1998 1998 1998 2006 2007 2003 Date Acquired (6) 3/23/2010 5/19/2006 9/28/2005 4/30/1998 3/23/2010 6/30/2000 9/15/2006 4/30/1998 4/30/1998 3/23/2010 9/28/2010 4/30/1998 9/28/2010 12/19/2001 6/26/2009 11/18/1999 11/18/1999 11/18/1999 9/28/1998 5/28/1999 6/2/2003 9/28/1998 4/28/1999 4/28/1999 11/13/1998 4/28/1999 4/28/1999 4/28/1999 7/25/2003 7/25/2003 12/30/1998 2/10/2006 7/11/2012 12/31/2003 Property (Type) (1) Location 141 National Business Parkway (O) 14280 Park Meadow Drive (O) Annapolis Junction, MD Chantilly, VA 1460 Dorsey Road (L) Hanover, MD 14840 Conference Center Drive (O) Chantilly, VA 14850 Conference Center Drive (O) Chantilly, VA 14900 Conference Center Drive (O) Chantilly, VA 15000 Conference Center Drive (O) Chantilly, VA 1501 South Clinton Street (O) Baltimore, MD 15010 Conference Center Drive (O) Chantilly, VA 15049 Conference Center Drive (O) Chantilly, VA 15059 Conference Center Drive (O) Chantilly, VA 1550 West Nursery Road (O) 1550 Westbranch Drive (O) 1560A Cable Ranch Road (O) 1560B Cable Ranch Road (O) 16442 Commerce Drive (O) 16480 Commerce Drive (O) 16501 Commerce Drive (O) 16539 Commerce Drive (O) 16541 Commerce Drive (O) 16543 Commerce Drive (O) Linthicum, MD McLean, VA San Antonio, TX San Antonio, TX Dahlgren, VA Dahlgren, VA Dahlgren, VA Dahlgren, VA Dahlgren, VA Dahlgren, VA 1670 North Newport Road (O)(10) Colorado Springs, CO 1751 Pinnacle Drive (O) 1753 Pinnacle Drive (O) 1915 Aerotech Drive (O) 1925 Aerotech Drive (O) 201 Technology Drive (O) 206 Research Boulevard (O) 209 Research Boulevard (O) 210 Research Boulevard (O) 22289 Exploration Drive (O) 22299 Exploration Drive (O) 22300 Exploration Drive (O) 22309 Exploration Drive (O) 23535 Cottonwood Parkway (O) 2500 Riva Road (O) McLean, VA McLean, VA Colorado Springs, CO Colorado Springs, CO Lebanon, VA Aberdeen, MD Aberdeen, MD Aberdeen, MD Lexington Park, MD Lexington Park, MD Lexington Park, MD Lexington Park, MD California, MD Annapolis, MD Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land Year Built or Renovated 9,725 — — — — — 54,000 2,398 3,731 1,800 1,572 1,615 3,436 5,193 — 27,964 96,000 — — 3,500 4,415 5,753 — 14,071 — — — 2,305 — 1,885 — — 1,571 4,383 30,283 24,438 3,394 3,717 — — — — — — — — — — 5,595 1,097 2,299 613 1,856 522 688 773 436 853 10,486 8,275 556 556 726 1,813 1,045 1,065 1,422 1,362 1,094 2,243 692 2,791 2,098 1,737 2,251 2,389 1,009 — 508 539 3,560 18,198 2,398 3,731 1,800 1,572 1,615 3,436 5,193 5,222 27,964 344 726 1,423 3,500 4,415 5,753 — 14,071 116 28 11 555 164 185 1,443 1,321 12 763 12,461 8,736 539 343 60 — — — 1,005 682 169 227 223 1 5,096 306 1,075 5,595 1,097 2,299 613 1,856 522 688 773 436 853 10,486 8,275 556 556 726 1,813 1,045 1,065 1,422 1,362 1,094 2,243 692 2,791 2,098 1,737 2,251 11,979 16,962 — 8,683 8,897 17,962 65,243 55,637 42,265 21,091 15,038 16,930 26,328 3,798 6,556 3,137 7,589 2,275 4,303 4,415 1,754 5,951 54,800 43,089 3,633 3,410 31,151 17,334 16,063 13,144 6,724 6,473 5,207 10,646 3,274 12,146 22,430 15,572 22,686 14,377 20,693 1,800 10,255 10,512 21,398 70,436 83,601 45,765 25,506 20,791 31,001 31,923 4,895 8,855 3,750 9,445 2,797 4,991 5,188 2,190 6,804 65,286 51,364 4,189 3,966 31,877 19,147 17,108 14,209 8,146 7,835 6,301 12,889 3,966 14,937 24,528 17,309 24,937 (4,354) (4,529) — (3,385) (3,434) (5,796) (20,752) (5,696) (6,503) (7,276) (4,891) (1,862) (2,354) (667) (1,120) (761) (1,649) (594) (1,224) (1,149) (349) (776) (16,190) (10,657) (1,037) (759) (4,021) (107) (859) (519) (1,951) (2,026) (1,569) (3,459) (789) (3,384) (5,167) (5,403) (7,961) 1990 1999 (8) 2000 2000 1999 1989 2006 2006 1997 2000 2009 2002 1985/2007 1985/2006 2002 2000 2002 1990 1996 2002 1986/1987 1989/1995 1976/2004 1985 1985 2007 2012 2010 2010 2000 1998 1997 1984/1997 1984 2000 2005 2001 2002 9,590 15,953 — 8,175 8,358 14,402 47,045 50,415 41,921 20,365 13,615 16,930 26,212 3,770 6,545 2,582 7,425 2,090 2,860 3,094 1,742 5,188 42,339 34,353 3,094 3,067 31,091 17,334 16,063 13,144 5,719 5,791 5,038 10,419 3,051 12,145 17,334 15,266 21,611 F-51 Date Acquired (6) 9/28/1998 9/29/2004 2/28/2006 7/25/2003 7/25/2003 7/25/2003 11/30/2001 10/27/2009 11/30/2001 8/14/2002 8/14/2002 10/28/2009 6/28/2010 6/19/2008 6/19/2008 12/21/2004 12/28/2004 12/21/2004 12/21/2004 12/21/2004 12/21/2004 9/30/2005 9/23/2004 9/23/2004 6/8/2006 6/8/2006 10/5/2007 9/14/2007 9/14/2007 9/14/2007 3/24/2004 3/24/2004 11/9/2004 3/24/2004 3/24/2004 3/4/2003 5/26/2000 5/26/2000 11/13/2000 2691 Technology Drive (O) Annapolis Junction, MD 2701 Technology Drive (O) Annapolis Junction, MD 2711 Technology Drive (O) Annapolis Junction, MD 24,000 13,794 19,359 Property (Type) (1) Location 2720 Technology Drive (O) 2721 Technology Drive (O) 2730 Hercules Road (O) Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD 2900 Towerview Road (O) Herndon, VA 300 Sentinel Drive (O) 302 Sentinel Drive (O) 304 Sentinel Drive (O) 306 Sentinel Drive (O) 308 Sentinel Drive (O) Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD 310 The Bridge Street (O) Huntsville, AL 312 Sentinel Way (O) Annapolis Junction, MD 3120 Fairview Park Drive (O) Falls Church, VA 314 Sentinel Way (O) 316 Sentinel Way (O) 318 Sentinel Way (O) 320 Sentinel Way (O) 322 Sentinel Way (O) 324 Sentinel Way (O) Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD Annapolis Junction, MD 3535 Northrop Grumman Pt. (O)(10) Colorado Springs, CO 375 West Padonia Road (O) Timonium, MD 410 National Business Parkway (O) Annapolis Junction, MD 420 National Business Parkway (O) Annapolis Junction, MD 4230 Forbes Boulevard (O)(10) Lanham, MD 430 National Business Parkway (O) Annapolis Junction, MD 44408 Pecan Court (O) 44414 Pecan Court (O) 44417 Pecan Court (O) 44420 Pecan Court (O) 44425 Pecan Court (O) 45310 Abell House Lane (O) 46579 Expedition Drive (O) 46591 Expedition Drive (O) California, MD California, MD California, MD California, MD California, MD California, MD Lexington Park, MD Lexington Park, MD 4851 Stonecroft Boulevard (O) Chantilly, VA 4940 Campbell Drive (O) 4969 Mercantile Road (O) 4979 Mercantile Road (O) 5020 Campbell Boulevard (O) 5022 Campbell Boulevard (O) 5024 Campbell Boulevard (O) White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land Year Built or Renovated 24,068 — 32,734 — — 22,693 37,280 20,973 — — — — — — 22,240 — 21,912 — 17,982 — — — — — — — — — — — — — — — — — — — — 3,863 4,611 8,737 3,207 1,517 2,648 3,411 3,260 1,422 261 3,138 6,863 1,254 2,748 2,185 2,067 2,605 1,656 — 2,483 1,831 2,370 511 1,852 817 405 434 344 1,309 2,272 1,406 1,200 1,878 1,379 1,308 1,299 1,014 624 767 29,272 14,597 31,612 16,344 58,642 29,398 24,917 22,592 26,197 26,576 9,128 35,606 1,325 31,861 28,426 21,623 22,827 23,005 18,388 10,415 16,569 15,673 4,346 21,038 1,583 1,619 1,939 890 3,506 13,794 5,796 7,199 11,558 3,858 4,456 4,686 3,136 1,924 2,420 F-52 88 1,497 5,277 5,607 119 380 132 110 — 26 — 5,406 — 131 — — — — 121 4,821 — — 192 — 118 336 88 126 1,217 — 1,078 656 21 987 62 84 781 332 250 3,863 4,611 8,737 3,207 1,517 2,648 3,411 3,260 1,422 261 3,138 6,863 1,254 2,748 2,185 2,067 2,605 1,656 — 2,483 1,831 2,370 511 1,852 817 405 434 344 1,309 2,272 1,406 1,200 1,878 1,379 1,308 1,299 1,014 624 767 29,360 16,094 36,889 21,951 58,761 29,778 25,049 22,702 26,197 26,602 9,128 41,012 1,325 31,992 28,426 21,623 22,827 23,005 18,509 15,236 16,569 15,673 4,538 21,038 1,701 1,955 2,027 1,016 4,723 33,223 20,705 45,626 25,158 60,278 32,426 28,460 25,962 27,619 26,863 12,266 47,875 2,579 34,740 30,611 23,690 25,432 24,661 18,509 17,719 18,400 18,043 5,049 22,890 2,518 2,360 2,461 1,360 6,032 13,794 16,066 6,874 7,855 8,280 9,055 11,579 13,457 4,845 4,518 4,770 3,917 2,256 2,670 6,224 5,826 6,069 4,931 2,880 3,437 (6,102) (4,841) (11,825) (3,785) (4,026) (3,642) (4,361) (3,541) (1,085) (2,028) — (2,247) (149) (830) (4,849) (2,688) (3,431) (1,352) (1,555) (5,242) (34) — (1,837) (449) (161) (475) (636) (90) (921) (368) (2,147) (1,083) (2,379) (933) (678) (727) (673) (496) (702) Date Acquired (6) 1/31/2002 10/21/1999 9/28/1998 2004 2000 1990 1982/2008 12/20/2005 2009 2007 2005 2006 2010 2009 (7) 2008 2008 2011 2005 2007 2006 2010 2008 1986 2012 (7) 2003 2011 1986 1986 1989 1989 1997 2011 2002 2005 2004 1990 1983 1985 1986-1988 1986-1988 1986-1988 11/14/2003 11/14/2003 11/14/2003 11/14/2003 11/14/2003 8/4/2011 11/14/2003 11/23/2010 11/14/2003 11/14/2003 11/14/2003 11/14/2003 11/14/2003 6/29/2006 6/10/2008 12/21/1999 6/29/2003 6/29/2006 12/24/2002 6/29/2006 3/24/2004 3/24/2004 3/24/2004 11/9/2004 5/5/2004 8/30/2010 3/24/2004 3/24/2004 8/14/2002 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 Property (Type) (1) Location 5026 Campbell Boulevard (O) 525 Babcock Road (O)(10) 5325 Nottingham Drive (O) 5355 Nottingham Drive (O) 5520 Research Park Drive (O) 5522 Research Park Drive (O) White Marsh, MD Colorado Springs, CO White Marsh, MD White Marsh, MD Catonsville, MD Catonsville, MD 565 Space Center Drive (O)(10) Colorado Springs, CO 5725 Mark Dabling Boulevard (O) Colorado Springs, CO 5755 Mark Dabling Boulevard (O) Colorado Springs, CO 5775 Mark Dabling Boulevard (O) Colorado Springs, CO 5825 University Research Court (O) College Park, MD 5850 University Research Court (O) College Park, MD 655 Space Center Drive (O)(10) Colorado Springs, CO 6700 Alexander Bell Drive (O) 6708 Alexander Bell Drive (O) Columbia, MD Columbia, MD 6711 Columbia Gateway Drive (O) Columbia, MD 6716 Alexander Bell Drive (O) Columbia, MD 6721 Columbia Gateway Drive (O) Columbia, MD 6724 Alexander Bell Drive (O) Columbia, MD 6731 Columbia Gateway Drive (O) Columbia, MD 6740 Alexander Bell Drive (O) Columbia, MD 6741 Columbia Gateway Drive (O) Columbia, MD 6750 Alexander Bell Drive (O) 6760 Alexander Bell Drive (O) Columbia, MD Columbia, MD 6940 Columbia Gateway Drive (O) Columbia, MD 6950 Columbia Gateway Drive (O) Columbia, MD 7000 Columbia Gateway Drive (O) Columbia, MD 7015 Albert Einstein Drive (O) Columbia, MD 7061 Columbia Gateway Drive (O) Columbia, MD 7063 Columbia Gateway Drive (O) Columbia, MD 7065 Columbia Gateway Drive (O) Columbia, MD 7067 Columbia Gateway Drive (O) Columbia, MD 7125 Columbia Gateway Drive (L) Columbia, MD 7125 Columbia Gateway Drive (O) 7130 Columbia Gateway Drive (O) Columbia, MD Columbia, MD 7134 Columbia Gateway Drive (O) Columbia, MD 7138 Columbia Gateway Drive (O) Columbia, MD 7142 Columbia Gateway Drive (O) Columbia, MD 7150 Columbia Gateway Drive (O) Columbia, MD Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land — — — — — — — 12,882 10,208 12,477 16,292 22,183 — 4,000 6,320 — — 29,252 10,939 — — — — — 17,300 — 15,800 2,486 — — — — — 33,779 6,519 2,949 5,406 6,280 4,850 700 355 816 761 — — 644 900 799 1,035 — — 745 1,755 897 2,683 1,242 1,753 449 2,807 1,424 675 1,263 890 3,545 3,596 3,131 2,058 729 902 919 1,829 3,361 17,126 1,350 704 1,104 1,342 1,032 2,138 397 3,976 3,562 20,066 4,550 6,284 11,397 10,324 12,440 22,190 30,273 15,445 7,019 3,588 23,239 4,969 34,090 5,039 19,098 5,696 1,711 12,461 3,561 9,916 14,269 12,103 6,093 3,094 3,684 3,763 11,823 128 46,994 4,359 1,971 3,518 3,978 3,429 F-53 45 79 485 1,616 — — 352 2,832 3,597 1,658 11 57 59 4,628 1,592 314 2,525 — 579 1,648 3,045 114 3,351 1,979 3,162 1,033 622 826 571 1,043 1,263 2,415 279 6,583 1,784 299 1,961 1,326 321 700 355 816 761 — — 644 900 799 1,035 — — 745 1,755 897 2,683 1,242 1,753 449 2,807 1,424 675 1,263 890 3,545 3,596 3,131 2,058 729 902 919 1,829 3,361 17,126 1,350 704 1,104 1,342 1,032 2,183 476 4,461 5,178 2,883 831 5,277 5,939 20,066 20,066 4,550 6,636 14,229 13,921 14,098 22,201 30,330 15,504 11,647 5,180 23,553 7,494 34,090 5,618 20,746 8,741 1,825 15,812 5,540 13,078 15,302 12,725 6,919 3,665 4,727 5,026 14,238 407 53,577 6,143 2,270 5,479 5,304 3,750 4,550 7,280 15,129 14,720 15,133 22,201 30,330 16,249 13,402 6,077 26,236 8,736 35,843 6,067 23,553 10,165 2,500 17,075 6,430 16,623 18,898 15,856 8,977 4,394 5,629 5,945 16,067 3,768 70,703 7,493 2,974 6,583 6,646 4,782 Year Built or Renovated 1986-1988 1967 2002 2005 2009 2007 2009 1984 1989 1984 2008 2008 2008 1988 1988 2006-2007 1990 2009 2001 2002 1992 2008 2001 1991 1999 1998 1999 1999 2000 2000 2000 2001 (396) (89) (763) (1,380) (1,679) (614) (107) (4,567) (3,464) (4,260) (2,118) (2,236) — (4,568) (2,440) (3,503) (3,394) (3,233) (1,787) (6,546) (3,933) (195) (5,893) (2,582) (5,274) (5,975) (3,246) (2,179) (1,460) (2,058) (1,923) (4,340) — 1973/1999(8) (10,556) (1,577) (499) (2,174) (1,406) (867) 1973/1999 1989 1990 1990 1994 1991 Date Acquired (6) 1/9/2007 7/12/2007 1/9/2007 1/9/2007 4/4/2006 3/8/2006 7/8/2005 5/18/2006 5/18/2006 5/18/2006 1/29/2008 1/29/2008 7/8/2005 5/14/2001 5/14/2001 9/28/2000 12/31/1998 9/28/2000 5/14/2001 3/29/2000 12/31/1998 9/28/2000 12/31/1998 12/31/1998 11/13/1998 10/22/1998 5/31/2002 12/1/2005 8/30/2001 8/30/2001 8/30/2001 8/30/2001 6/29/2006 6/29/2006 9/19/2005 9/19/2005 9/19/2005 9/19/2005 9/19/2005 Property (Type) (1) Location 7150 Riverwood Drive (O) 7160 Riverwood Drive (O) 7170 Riverwood Drive (O) 7175 Riverwood Drive (O) 7200 Redstone Gateway (O) 7200 Riverwood Road (O) 7205 Riverwood Drive (O) 7272 Park Circle Drive (O) 7318 Parkway Drive (O) 7320 Parkway Drive (O) Columbia, MD Columbia, MD Columbia, MD Columbia, MD Huntsville, MD Columbia, MD Columbia, MD Hanover, MD Hanover, MD Hanover, MD 745 Space Center Drive (O)(10) Colorado Springs, CO 7467 Ridge Road (O) 7700 Potranco Road (O) 7700-1 Potranco Road (O) 7700-5 Potranco Road (O) 7740 Milestone Parkway (O) 7770 Backlick Road (O) 800 International Drive (O) 8000 Potranco Road (O) 8003 Corporate Drive (O) 8007 Corporate Drive (O) 8010 Corporate Drive (O) 8013 Corporate Drive (O) 8015 Corporate Drive (O) 8019 Corporate Drive (O) 8020 Corporate Drive (O) 8023 Corporate Drive (O) 8030 Potranco Road (O) 8094 Sandpiper Circle (O) 8098 Sandpiper Circle (O) 8100 Potranco Road (L) 8110 Corporate Drive (O) 8140 Corporate Drive (O) 849 International Drive (O) 8621 Robert Fulton Drive (O) 8661 Robert Fulton Drive (O) 8671 Robert Fulton Drive (O) 870 Elkridge Landing Road (O) 881 Elkridge Landing Road (O) Hanover, MD San Antonio, TX San Antonio, TX San Antonio, TX Hanover, MD Springfield, VA Linthicum, MD San Antonio, TX White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD White Marsh, MD San Antonio, TX White Marsh, MD White Marsh, MD San Antonio, TX White Marsh, MD White Marsh, MD Linthicum, MD Columbia, MD Columbia, MD Columbia, MD Linthicum, MD Linthicum, MD Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land Year Built or Renovated — — — — — — — 5,232 — 7,000 — — 1,821 2,732 1,283 1,788 — 4,089 1,367 1,479 972 905 654 1,629 — 14,020 — — 17,548 931 8,408 — — — — — — — — — — — — — — — 11,692 11,000 6,200 7,600 18,900 11,812 — — 3,825 6,387 775 1,964 611 1,434 1,349 642 446 680 2,184 651 1,964 1,960 1,797 1,964 2,285 2,158 1,356 2,317 1,510 1,718 2,003 1,034 4,388 7,006 3,096 4,133 4,531 16,356 14,300 6,300 3,888 3,570 7,521 6,517 38,804 1,066 1,884 34,363 71,600 3,099 21,178 1,611 3,336 3,262 1,536 1,116 1,898 3,767 1,603 21,298 3,716 3,651 1,396 10,117 8,457 5,426 12,642 3,764 4,280 9,442 4,137 F-54 972 1,503 594 — — 3,001 — 1,798 812 1,575 15 1,924 7 — — 61 8 947 — 53 307 1,672 1,809 243 738 2,199 5 — 369 633 — 489 2,018 3,081 199 1,042 1,941 6,689 1,049 1,821 2,732 1,283 1,788 — 4,089 1,367 1,479 972 905 654 1,629 14,020 — — 3,825 6,387 775 1,964 611 1,434 1,349 642 446 680 2,184 651 1,964 1,960 1,797 1,964 2,285 2,158 1,356 2,317 1,510 1,718 2,003 1,034 5,360 8,509 3,690 4,133 4,531 19,357 14,300 8,098 4,700 5,145 7,536 8,441 38,811 1,066 1,884 34,424 71,608 4,046 21,178 1,664 3,643 4,934 3,345 1,359 2,636 5,966 1,608 7,181 11,241 4,973 5,921 4,531 23,446 15,667 9,577 5,672 6,050 8,190 10,070 52,831 1,066 1,884 38,249 77,995 4,821 23,142 2,275 5,077 6,283 3,987 1,805 3,316 8,150 2,259 21,298 23,262 4,085 4,284 1,396 10,606 10,475 8,507 12,841 4,806 6,221 16,131 5,186 6,045 6,081 3,360 12,891 12,633 9,863 15,158 6,316 7,939 18,134 6,220 (1,163) (2,688) (726) — — (6,741) — (1,663) (1,582) (1,557) (171) (3,346) (5,703) (108) (154) (2,265) (157) (1,662) (1,149) (311) (727) (842) (432) (306) (555) (954) (267) (1,148) (820) (558) — (2,202) (3,046) (4,043) (2,314) (1,518) (2,148) (7,148) (1,991) 2000 2000 2000 1996(7) (7) 1986 (7) 1991/1996 1984 1983 2006 1990 1982/1985 2007 2009 2009 2012(7) 1988 2010 1999 1995 1998 1990 1990 1990 1997 1990 2010 1998 1998 (8) 2001 2003 1988 2005-2006 2002 2002 1981 1986 Date Acquired (6) 1/10/2007 1/10/2007 1/10/2007 7/27/2005 3/23/2010 10/13/1998 7/27/2005 1/10/2007 4/16/1999 4/4/2002 7/8/2005 4/28/1999 3/30/2005 3/30/2005 3/30/2005 7/2/2007 3/10/2010 4/30/1998 1/20/2006 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/9/2007 1/20/2006 1/9/2007 1/9/2007 6/14/2005 1/9/2007 1/9/2007 2/23/1999 6/10/2005 12/30/2003 12/30/2003 8/3/2001 4/30/1998 Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land Year Built or Renovated Date Acquired (6) — — 8,008 — — — — 8,488 — — — — — — — — 1,165 1,993 981 1,156 1,215 2,081 1,044 1,013 1,209 939 1,104 6,050 3,415 526 777 979 1,219 1,058 1,129 1,137 1,052 1,854 877 695 466 1,401 1,187 900 Property (Type) (1) Location 891 Elkridge Landing Road (O) 900 Elkridge Landing Road (O) 900 International Drive (O) 901 Elkridge Landing Road (O) 911 Elkridge Landing Road (O) 920 Elkridge Landing Road (O) 921 Elkridge Landing Road (O) 930 International Drive (O) 938 Elkridge Landing Road (O) 939 Elkridge Landing Road (O) 940 Elkridge Landing Road (L) 9651 Hornbaker Road (D) 9690 Deereco Road (O) Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Linthicum, MD Manassas, VA Timonium, MD 980 Technology Court (O)(10) Colorado Springs, CO 985 Space Center Drive (O)(10) Colorado Springs, CO 9900 Franklin Square Drive (O) White Marsh, MD 9910 Franklin Square Drive (O) White Marsh, MD 5,040 9920 Franklin Square Drive (O) White Marsh, MD 9925 Federal Drive (O)(10) Colorado Springs, CO 9930 Franklin Square Drive (O) White Marsh, MD 9940 Franklin Square Drive (O) White Marsh, MD 9945 Federal Drive (O)(10) 9950 Federal Drive (O)(10) 9960 Federal Drive (O)(10) 9965 Federal Drive (L)(10) 9965 Federal Drive (O)(10) Colorado Springs, CO Colorado Springs, CO Colorado Springs, CO Colorado Springs, CO Colorado Springs, CO — — — — — — — — — 999 Corporate Boulevard (O) Linthicum, MD Aerotech Commerce (L) Colorado Springs, CO 13,533 — Arborcrest (O) Arundel Preserve (L) Ashburn Crossing - DC-8 (O) Ashburn Crossing - DC-9 (O) Ashburn Crossing (L) Blue Bell, PA Hanover, MD Ashburn, VA Ashburn, VA Ashburn, VA Canton Crossing Land (L) Canton Crossing Util Distr Ctr (O) Baltimore, MD Baltimore, MD Columbia Gateway - Southridge (L) Columbia, MD Dahlgren Technology Center (L) Dahlgren, VA Expedition VII (L) Indian Head (L) Lexington Park, MD Bryans Road, MD — 21,969 — — — — — 7,291 4,192 4,309 — 16,085 7,300 — — — — — 6,387 1,083 705 6,436 4,772 7,972 3,922 4,437 4,861 9,683 4,176 4,053 4,748 3,756 4,718 196,428 13,723 2,046 12,287 3,466 6,590 5,293 4,334 3,921 3,382 849 5,045 2,286 — 6,061 8,332 — 83,529 5,886 — — 3 1,820 15,550 2,938 178 726 — F-55 1,777 2,887 834 1,558 2,024 687 639 1,100 476 1,790 170 253 5,833 442 1,569 202 65 1,429 80 36 281 — 1,501 291 — 565 556 — 1,165 1,993 981 1,156 1,215 2,081 1,044 1,013 1,209 939 1,104 6,050 3,415 526 777 979 1,219 1,058 1,129 1,137 1,052 1,854 877 695 466 1,401 1,187 900 1,094 21,969 — — — — — 7,291 4,192 4,309 — 16,085 7,300 722 — — — — 6,387 1,083 705 6,436 6,549 10,859 4,756 5,995 6,885 7,714 12,852 5,737 7,151 8,100 10,370 12,451 4,815 5,153 5,224 5,546 4,888 5,859 6,166 6,433 6,485 5,992 196,681 202,731 19,556 2,488 13,856 3,668 6,655 6,722 4,414 3,957 3,663 849 6,546 2,577 — 6,626 8,888 — 84,623 5,886 — — 3 1,820 16,272 2,938 178 726 — 22,971 3,014 14,633 4,647 7,874 7,780 5,543 5,094 4,715 2,703 7,423 3,272 466 8,027 10,075 900 106,592 5,886 7,291 4,192 4,312 17,905 23,572 9,325 1,261 1,431 6,436 (2,674) (4,722) (1,964) (2,148) (2,789) (4,084) (1,989) (2,203) (1,615) (2,452) (4,884) (2,809) (7,927) (585) (2,948) (734) (1,457) (1,470) (97) (795) (732) (13) (1,944) (256) — (907) (3,230) — (2,686) — — — — — (1,655) — — — — 1984 1982 1986 1984 1985 1982 1983 1986 1984 1983 (8) 2010 1988 1995 1989 1999 2005 2006 2008 2001 2000 2009 2001 2001 (8) 1983/2007 2000 (8) 7/2/2001 4/30/1998 4/30/1998 7/2/2001 4/30/1998 7/2/2001 4/30/1998 4/30/1998 7/2/2001 4/30/1998 7/2/2001 9/14/2010 12/21/1999 9/28/2005 9/28/2005 1/9/2007 1/9/2007 1/9/2007 9/28/2005 1/9/2007 1/9/2007 9/28/2005 12/22/2005 12/22/2005 12/22/2005 1/19/2006 8/1/1999 5/19/2006 1991(6)(7) 10/14/1997 (8) (7) (7) (8) (8) 2005 (8) (8) (8) (8) (9) 12/27/2012 12/27/2012 12/27/2012 10/27/2009 10/27/2009 9/20/2004 3/16/2005 3/24/2004 10/23/2006 Property (Type) (1) Location InterQuest (L) Colorado Springs, CO M Square Research Park (L) College Park, MD National Business Park (L) Annapolis Junction, MD National Business Park North (L) Jessup, MD North Gate Business Park (L) Aberdeen, MD Northwest Crossroads (L) Old Annapolis Road (O) Patriot Park (L) Patriot Ridge (L) Redstone Gateway (L) Route 15/Biggs Ford Road (L) Sentry Gateway (L) West Nursery Road (L) Westfields - Park Center (L) Westfields Corporate Center (L) White Marsh (L) Woodland Park (L) San Antonio, TX Columbia, MD Colorado Springs, CO Springfield, VA Huntsville, AL Frederick, MD San Antonio, TX Linthicum, MD Herndon, VA Herndon, VA White Marsh, MD Herndon, VA Other Developments, including intercompany eliminations (V) Various — 14,515 — — — 2,372 — 25,654 — — — — 6,486 7,430 1,637 8,768 — 18,517 — — — — — — — 8,703 8,275 1,441 3,609 7,141 — 30,322 9,614 — — Initial Cost Gross Amounts Carried At Close of Period Encumbrances (2) Land Building and Land Improvements Costs Capitalized Subsequent to Acquisition Building and Land Improvements Total (3)(4) Accumulated Depreciation (5) Land Year Built or Renovated 8 3,602 6,354 25,069 10,717 836 5,500 248 10,873 13,700 526 3,621 53 2,640 1,342 10,385 81 — 14,515 — — — 2,372 — 25,654 — — 2,103 — 6,486 7,430 1,637 8,768 — 18,517 — — — — — — — 8,703 8,275 1,441 3,609 7,141 — 30,322 — 9,614 8 14,523 3,602 6,354 25,069 10,717 836 7,603 248 10,873 13,700 526 3,621 53 2,640 1,342 10,385 81 3,602 8,726 50,723 17,203 8,266 9,240 9,016 29,390 13,700 9,229 11,896 1,494 6,249 8,483 40,707 9,695 — — — — — — (2,333) — — — — — — — — — — Date Acquired (6) 9/28/2005 1/29/2008 11/14/2003 6/29/2006 9/14/2007 1/20/2006 (8) (8) (8) (8) (8) (8) 1974/1985 12/14/2000 (8) (8) (8) (8) (8) (8) (8) (8) (8) (8) 7/8/2005 3/10/2010 3/23/2010 8/28/2008 3/30/2005 10/28/2009 7/18/2002 7/31/2002 1/9/2007 4/29/2004 7 (152) (438) 7 (590) (583) 689 Various Various (1) A legend for the Property Type follows: (O) = Office Property; (L) = Land held or pre-construction; (D) = Data Center; and (V) = Various. (2) Excludes our term loan facilities of $770.0 million, senior exchangeable notes of $230.9 million, unsecured notes payable of $1.8 million, and net premiums on the remaining loans of $1.3 million. (3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.4 billion at December 31, 2012. (4) As discussed in Note 5 to our Consolidated Financial Statements, we recognized impairment losses of $46.1 million in connection with our property in Greater Philadelphia, Pennsylvania and $19.0 million, including $ 1,015,130 $681,001 $ 2,893,547 $ 285,412 $ 681,001 $ 3,178,959 $3,859,960 $ (568,176) exit costs, in connection with certain properties included in our Strategic Reallocation Plan. (5) The estimated lives over which depreciation is recognized follow: Building and land improvements: 10-40 years; and tenant improvements: related lease terms. (6) The acquisition date of multi-parcel properties reflects the date of the earliest parcel acquisition. (7) Under construction or redevelopment at December 31, 2012. (8) Held or under pre-construction at December 31, 2012. (9) Development in progress in anticipation of acquisition at December 31, 2012. (10) Included in our Strategic Reallocation Plan and classified as held for sale as of December 31, 2012. F-56 The following table summarizes our changes in cost of properties for the years ended December 31, 2012, 2011 and 2010 (in thousands): Beginning balance Acquisitions of operating properties Improvements and other additions Sales Impairments Other dispositions Other Ending balance 2012 2011 2010 $ 4,038,932 $ 3,948,487 $ 3,452,512 33,684 214,418 (291,491) (121,557) (13,891) (135) 26,887 304,079 (75,315) (165,206) — — 187,052 338,358 (29,430) — — (5) $ 3,859,960 $ 4,038,932 $ 3,948,487 The following table summarizes our changes in accumulated depreciation for the same time periods (in thousands): Beginning balance Depreciation expense Sales Impairments Other dispositions Other Ending balance 2012 2011 2010 $ 577,601 $ 503,032 $ 422,612 93,158 (40,346) (58,855) (3,247) (135) 99,173 (9,640) (15,039) — 75 88,048 (7,764) — — 136 $ 568,176 $ 577,601 $ 503,032 F-57 (cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:585)(cid:74)(cid:76)(cid:90) (cid:29)(cid:30)(cid:24)(cid:24)(cid:3)(cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:3)(cid:46)(cid:72)(cid:91)(cid:76)(cid:94)(cid:72)(cid:96)(cid:3)(cid:43)(cid:89)(cid:80)(cid:93)(cid:76)(cid:19)(cid:3)(cid:58)(cid:92)(cid:80)(cid:91)(cid:76)(cid:3)(cid:26)(cid:23)(cid:23) (cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:19)(cid:3)(cid:52)(cid:72)(cid:89)(cid:96)(cid:83)(cid:72)(cid:85)(cid:75)(cid:3)(cid:25)(cid:24)(cid:23)(cid:27)(cid:29) (cid:59)(cid:76)(cid:83)(cid:76)(cid:87)(cid:79)(cid:86)(cid:85)(cid:76)(cid:33)(cid:3)(cid:27)(cid:27)(cid:26)(cid:21)(cid:25)(cid:31)(cid:28)(cid:21)(cid:28)(cid:27)(cid:23)(cid:23)(cid:3)(cid:3)(cid:3)(cid:99)(cid:3)(cid:3)(cid:3)(cid:45)(cid:72)(cid:74)(cid:90)(cid:80)(cid:84)(cid:80)(cid:83)(cid:76)(cid:33)(cid:3)(cid:27)(cid:27)(cid:26)(cid:21)(cid:25)(cid:31)(cid:28)(cid:21)(cid:30)(cid:29)(cid:28)(cid:23) (cid:94)(cid:94)(cid:94)(cid:21)(cid:74)(cid:86)(cid:87)(cid:91)(cid:21)(cid:74)(cid:86)(cid:84)(cid:3)(cid:3)(cid:3)(cid:99)(cid:3)(cid:3)(cid:3)(cid:53)(cid:64)(cid:58)(cid:44)(cid:33)(cid:3)(cid:54)(cid:45)(cid:42) Corporate Information ANNUAL MEETING The 2013 annual meeting of shareholders will be held at 9:30 a.m. Eastern Time on May 9, 2013, at the corporate (cid:79)(cid:76)(cid:72)(cid:75)(cid:88)(cid:92)(cid:72)(cid:89)(cid:91)(cid:76)(cid:89)(cid:90)(cid:3)(cid:86)(cid:77)(cid:3)(cid:42)(cid:86)(cid:89)(cid:87)(cid:86)(cid:89)(cid:72)(cid:91)(cid:76)(cid:3)(cid:54)(cid:585)(cid:74)(cid:76)(cid:3)(cid:55)(cid:89)(cid:86)(cid:87)(cid:76)(cid:89)(cid:91)(cid:80)(cid:76)(cid:90)(cid:3)(cid:59)(cid:89)(cid:92)(cid:90)(cid:91)(cid:3)(cid:72)(cid:91)(cid:3)(cid:29)(cid:30)(cid:24)(cid:24)(cid:3)(cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:3)(cid:46)(cid:72)(cid:91)(cid:76)(cid:94)(cid:72)(cid:96)(cid:3)(cid:43)(cid:89)(cid:80)(cid:93)(cid:76)(cid:19)(cid:3)(cid:58)(cid:92)(cid:80)(cid:91)(cid:76)(cid:3)(cid:26)(cid:23)(cid:23)(cid:19)(cid:3)(cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:19)(cid:3)(cid:52)(cid:72)(cid:89)(cid:96)(cid:83)(cid:72)(cid:85)(cid:75)(cid:3)(cid:25)(cid:24)(cid:23)(cid:27)(cid:29)(cid:21) Board of Trustees (cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:585)(cid:74)(cid:76)(cid:89)(cid:90) Investor Relations Jay H. Shidler Chairman Clay W. Hamlin, III Vice Chairman Thomas F. Brady Robert L. Denton Elizabeth A. Hight David M. Jacobstein Steven D. Kesler Richard Szafranski Roger A. Waesche, Jr. Kenneth D. Wethe Roger A. Waesche, Jr. (cid:55)(cid:89)(cid:76)(cid:90)(cid:80)(cid:75)(cid:76)(cid:85)(cid:91)(cid:3)(cid:13)(cid:3)(cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:44)(cid:95)(cid:76)(cid:74)(cid:92)(cid:91)(cid:80)(cid:93)(cid:76)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89) Stephen E. Budorick Executive Vice President & (cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:54)(cid:87)(cid:76)(cid:89)(cid:72)(cid:91)(cid:80)(cid:85)(cid:78)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89) Wayne H. Lingafelter Executive Vice President, Development & Construction Stephen E. Riffee Executive Vice President & (cid:42)(cid:79)(cid:80)(cid:76)(cid:77)(cid:3)(cid:45)(cid:80)(cid:85)(cid:72)(cid:85)(cid:74)(cid:80)(cid:72)(cid:83)(cid:3)(cid:54)(cid:77)(cid:196)(cid:74)(cid:76)(cid:89) For help with questions about the Company, or for additional corporate information, please contact: Stephanie Krewson Vice President, Investor Relations (cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:50)(cid:73)(cid:240)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:55)(cid:85)(cid:88)(cid:86)(cid:87) (cid:29)(cid:30)(cid:24)(cid:24)(cid:3)(cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:3)(cid:46)(cid:72)(cid:91)(cid:76)(cid:94)(cid:72)(cid:96)(cid:3)(cid:43)(cid:89)(cid:80)(cid:93)(cid:76)(cid:19)(cid:3)(cid:58)(cid:92)(cid:80)(cid:91)(cid:76)(cid:3)(cid:26)(cid:23)(cid:23) (cid:42)(cid:86)(cid:83)(cid:92)(cid:84)(cid:73)(cid:80)(cid:72)(cid:19)(cid:3)(cid:52)(cid:72)(cid:89)(cid:96)(cid:83)(cid:72)(cid:85)(cid:75)(cid:3)(cid:25)(cid:24)(cid:23)(cid:27)(cid:29) (cid:59)(cid:76)(cid:83)(cid:76)(cid:87)(cid:79)(cid:86)(cid:85)(cid:76)(cid:33)(cid:3)(cid:27)(cid:27)(cid:26)(cid:21)(cid:25)(cid:31)(cid:28)(cid:21)(cid:28)(cid:27)(cid:23)(cid:23) (cid:45)(cid:72)(cid:74)(cid:90)(cid:80)(cid:84)(cid:80)(cid:83)(cid:76)(cid:33)(cid:3)(cid:27)(cid:27)(cid:26)(cid:21)(cid:25)(cid:31)(cid:28)(cid:21)(cid:30)(cid:29)(cid:27)(cid:23) Email: ir@copt.com C o v e r P h o t o g r a p h y : (cid:30) (cid:30) (cid:30) (cid:23) (cid:3) (cid:41) (cid:72) (cid:74) (cid:82) (cid:83) (cid:80) (cid:74) (cid:82) (cid:3) (cid:57) (cid:86) (cid:72) (cid:75) (cid:3) (cid:3) (cid:99) (cid:3) (cid:3) (cid:55) (cid:72) (cid:91) (cid:89) (cid:80) (cid:86) (cid:91) (cid:3) (cid:80) (cid:57) (cid:75) (cid:78) (cid:76) (cid:3) (cid:3) (cid:99) (cid:3) (cid:3) (cid:58) (cid:87) (cid:89) (cid:80) (cid:85) (cid:78) (cid:196) (cid:76) (cid:75) (cid:83) (cid:19) (cid:3) (cid:61) (cid:80) (cid:89) (cid:78) (cid:85) (cid:72) (cid:80) (cid:80)