2013
Annual Report
» Ready
for Growth
Letter to
Shareholders
Sir Winston Churchill, the former Prime Minister of the United
Kingdom, said: “Difficulties mastered are opportunities won.”
In 2013, our Company completed nearly $300 million of
dispositions and strengthened our balance sheet to achieve
investment grade status. Having mastered these difficulties, our
Company is positioned to capitalize on growth opportunities.
Our 2013 asset dispositions marked the completion of the
Strategic Reallocation Plan (“SRP”), which we began in April
of 2011. In total, we disposed of 5.9 million square feet of
properties that represented nearly $700 million of value, far
exceeding the SRP’s stated goal of selling $510 million of older,
smaller operating properties. During the same time frame,
we increased our concentration of Strategic Tenant Niche*
properties by acquiring two buildings containing 340,000
square feet and developed 2.2 million square feet in our most
strategic parks. At December 31, 2013, such properties
accounted for 70% of our annualized revenues.
Historical Leasing Transactions
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
̓99 ̓00 ̓01 ̓02 ̓03 ̓04 ̓05 ̓06 ̓07 ̓08 ̓09 ̓10 ̓11 ̓12 ̓13
Total Leasing SF
Development Leasing SF
* Strategic Tenants are the U.S. Government and defense contractors
engaged in information technology and national security-related activities,
such as reconnaissance, surveillance and Cyber Security.
** Based on common shares and operating partnership units outstanding
at December 31, 2013.
In April, the Company earned the following investment grade
ratings: BBB- from Fitch Ratings, Baa3 from Moody’s Investors
Service and BBB- from Standard & Poor’s Ratings Services.
We later issued $600 million of 10-year senior unsecured notes
at an average interest rate of 4.36%.
As we close the books on 2013 and look toward 2014, we
have a high degree of confidence that our Company’s funds from
operations per share (“FFOPS”), as adjusted for comparability, is
approaching a positive inflection point. In terms of development
income, at the end of 2013, we had 10 well-leased development
projects that, upon stabilization, will generate roughly 18 cents**
of incremental FFOPS by 2016, relative to 2013 results. We also
intend to increase future FFOPS by leasing up vacancy in our
existing portfolio. In addition to properties that serve our Strategic
Tenant Niche, we own 66 traditional office properties (our “Regional
Offices”). Our Regional Office buildings are well located in select
submarkets of the Baltimore-Washington region and, at year-end,
were 82.4% occupied. As the local economy improves, we believe
we can increase our total core portfolio occupancy in the next
several years to between 92% and 93%.
Long term, developing our land positions that support strategic
government demand drivers remains an important growth engine
for our Company. In 2012, we executed the largest volume of
development leasing in our history, and 2013’s volume ranked
third (see chart, opposite). Our recent leasing accomplishments
prove that there is pent-up demand for new, efficient, well-located
office space in our chosen markets.
The environment in which our U.S. Government and defense
contractor customers operate improved greatly with the December
passage of the Bipartisan Budget Act of 2013 (“The Act”), and
should support higher development leasing volume. The Act
provided a two year window of budget certainty that will allow the
Department of Defense (“DOD”) to resume a more normalized
contract awarding process, which should, in turn, improve our
tenants’ ability to make longer-term space commitments. The
Act also reestablished the DOD’s ability to reallocate funds to
priority programs. Specifically, the Pentagon’s roadmap calls
for reducing the military’s reliance on manpower, and investing
instead in more agile Special Forces and high tech missions,
such as Cyber Security. Most of our properties are clustered
around knowledge-based defense installations whose missions
are aligned with these high-tech missions, not troops or the
manufacture of weaponry. Accordingly, we expect demand for
our Strategic Tenant Niche properties to increase in the coming
months and years.
Continued on Inside Back Cover
Continued from Inside Front Cover
legend
COPT Properties
Federal Agency /
Cyber Security Focus
Colleges & Universities
with Cyber Programs
Cyber Incubators /
Accelerators
ABerDeen
proving
grounD
Baltimore
Columbia
fort MeADe /
u.S. CyBer CoMMAnD / DiSA
Annapolis
Chantilly
nro
DoD
DHS
D.C.
DiA
Manassas
Springfield
ngA
fort Belvoir
Fulfilling the demand for space to support the DOD and
commercial applications of Cyber Security is a tremendous growth
opportunity for our Company. In 2010, U.S. Cyber Command was
established at Ft. Meade in Annapolis Junction, MD. Because
of the high concentration of U.S. Government cyber activity in
and around Ft. Meade, the area has become known as “Cyber
Valley.” This Government presence implies commensurately
robust growth in demand for contractor space to support U.S.
Cyber and related missions. These contractors, along with tech
companies creating Cyber Security products for commercial
use, require newly constructed and/or redeveloped space that
is efficient, precisely located and that has more security features
than standard office space.
Illustrated in the map above, our Company’s portfolio of existing
buildings and land – particularly The National Business Park –
are highly aligned with the DOD’s Cyber initiatives. We are one
of the few landlords with an operating platform of appropriately
credentialed employees, development expertise for secured
and specialized buildings, and developable land adjacent or
extremely proximate to these government demand drivers.
To date, we have executed 1.3 million square feet of leasing
with cyber-related customers.
As we begin 2014, our mandate is simple: increase occupancy,
develop buildings that meet the needs of high-tech, security
conscious customers in and around our proven U.S. Government
demand drivers, and remain disciplined with our balance sheet.
Sir Winston Churchill also said, “We shape our buildings; thereafter
they shape us.” At COPT, we have purposefully reshaped our
portfolio of buildings and, in doing so, have rededicated ourselves
to embrace a new decade of growth.
Thank you for your commitment to and continued confidence
in COPT,
Roger A. Waesche, Jr.
President & Chief Executive Officer
marylandmarylandvirginiaChesapeakeBay7095976627049595695327295502852299750
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, 2013
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)
Commission file number 333-189188 (Corporate Office Properties, L.P.)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
(Exact name of registrant as specified in its charter)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Maryland
(State or other jurisdiction of
incorporation or organization)
Delaware
(State or other jurisdiction of
incorporation or organization)
23-2947217
(IRS Employer
Identification No.)
23-2930022
(IRS Employer
Identification No.)
6711 Columbia Gateway Drive, Suite 300, Columbia, MD
(Address of principal executive offices)
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
Common Shares of beneficial interest, $0.01 par value
Series H 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
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.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
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.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
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 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.
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
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).
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
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):
Corporate Office Properties Trust
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Corporate Office Properties, L.P.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
(Do not check if a smaller reporting company)
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Yes
Yes
No
No
The aggregate market value of the voting and nonvoting shares of common stock held by non-affiliates of Corporate Office Properties Trust was
approximately $1.7 billion, as calculated using the closing price of such shares on the New York Stock Exchange and the number of outstanding shares as of June
28, 2013. For purposes of calculating this amount only, affiliates are defined as Trustees, executive owners and beneficial owners of more than 10% of Corporate
Office Properties Trust’s outstanding common shares, $0.01 par value. At February 19, 2014, 87,429,122 of Corporate Office Properties Trust’s common shares
were outstanding.
The aggregate market value of the voting and nonvoting common units of limited partnership interest held by non-affiliates of Corporate Office Properties,
L.P. was approximately $16.3 million, as calculated using the closing price of the common shares of Corporate Office Properties Trust (into which common units
not held by Corporate Office Properties Trust are exchangeable) on the New York Stock Exchange and the number of outstanding units as of June 28, 2013.
Portions of the proxy statement of Corporate Office Properties Trust for its 2014 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.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2013 of Corporate Office Properties Trust
(“COPT”) and subsidiaries (collectively, the “Company”) and Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the
“Operating Partnership”). Unless stated otherwise or the context otherwise requires, “we,” “our,” and “us” refer collectively to COPT, COPLP
and their subsidiaries.
COPT is a real estate investment trust, or REIT, and the sole general partner of COPLP. As of December 31, 2013, COPT owned
approximately 96% of the outstanding common units and approximately 96% of the outstanding preferred units in COPLP. The remaining
common and preferred units are owned by certain trustees of COPT and certain non-affiliated investors. As the sole general partner of COPLP,
COPT controls COPLP and can cause it to enter into major transactions including acquisitions, dispositions and refinancings and cause changes
in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership which are reflected in this Form 10-K. We believe it is
important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the
Operating Partnership operate as an interrelated, consolidated company. COPT is a real estate investment trust, whose only material asset is its
ownership of partnership interests of COPLP. As a result, COPT does not conduct business itself, other than acting as the sole general partner of
COPLP, issuing public equity from time to time and guaranteeing certain debt of COPLP. COPT itself is not directly obligated under any
indebtedness but guarantees some of the debt of COPLP. COPLP owns substantially all of the assets of COPT either directly or through its
subsidiaries, conducts almost all of the operations of the business and is structured as a limited partnership with no publicly traded equity.
Except for net proceeds from public equity issuances by COPT, which are contributed to COPLP in exchange for partnership units, COPLP
generates the capital required by COPT’s business through COPLP’s operations, by COPLP’s direct or indirect incurrence of indebtedness or
through the issuance of partnership units.
Noncontrolling interests and shareholders’ equity and partners’ capital are the main areas of difference between the consolidated financial
statements of COPT and those of COPLP. The common limited partnership interests in COPLP not owned by COPT are accounted for as
partners’ capital in COPLP’s consolidated financial statements and as noncontrolling interests in COPT’s consolidated financial statements.
COPLP’s consolidated financial statements also reflect COPT’s noncontrolling interests in certain real estate partnerships, limited liability
companies (“LLCs”), business trusts and corporations; the differences between shareholders’ equity, partners’ capital and noncontrolling
interests result from the differences in the equity issued at the COPT and COPLP levels and in COPT’s noncontrolling interests in these real
estate partnerships, LLCs, business trusts and corporations. The only other significant differences between the consolidated financial statements
of COPT and those of COPLP are assets in connection with a non-qualified elective deferred compensation plan (comprised primarily of mutual
funds and equity securities) and the corresponding liability to the plan’s participants that are held directly by COPT.
We believe combining the annual reports on Form 10-K of the Company and the Operating Partnership into this single report results in the
following benefits:
•
•
•
•
combined reports better reflect how management and the analyst community view the business as a single operating unit;
combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business
as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following
separate sections for each of the Company and the Operating Partnership:
•
•
•
•
consolidated financial statements;
the following notes to the consolidated financial statements:
• Note 3, Fair Value Measurements of COPT and subsidiaries and COPLP and subsidiaries;
• Note 14, Equity of COPT and subsidiaries;
• Note 15, Equity of COPLP and subsidiaries;
• Note 21, Earnings per Share of COPT and subsidiaries and Earnings per Unit of COPLP and subsidiaries; and
• Note 22, Quarterly Data of COPT and subsidiaries and COPLP and subsidiaries.
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of
COPT”; and
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the
Operating Partnership.”
This report also includes separate sections under Part II, Item 9A. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications
for each of COPT and COPLP to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the
requisite certifications and that COPT and COPLP are compliant with Rule 13a-15 and Rule 15d-14 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and 18 U.S.C. §1350.
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 REGISTRANTS’ 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
4
PAGE
6
10
19
20
24
24
25
28
32
58
59
59
59
60
60
60
60
60
60
60
68
FORWARD-LOOKING STATEMENTS
This Form 10-K contains “forward-looking” statements, within the meaning of federal securities law, 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. Additionally, documents we subsequently file with the SEC and incorporated by reference will
contain forward-looking statements.
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. Accordingly, future events and actual results may differ materially from those addressed in the forward-looking
statements. We caution readers that forward-looking statements reflect our opinion only as of the date on which they were
made. You should not place undue reliance on forward-looking statements. The following factors, among others, could cause
actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
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 prolonged 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;
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 publicly update or supplement forward-looking statements, whether as a result of new
information, future events or otherwise. For further information on these and other factors that could affect us and the
statements contained herein, you should refer to the section below entitled “Item 1A. Risk Factors.”
5
Item 1. Business
OUR COMPANY
PART I
General. Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated
and self-managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries
(collectively, the “Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts
almost all of its operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise
requires, “we”, “us” and “our” as used herein refer to each of the Company and the Operating Partnership. We focus 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, 2013,
our properties included the following:
•
•
•
•
183 operating office properties totaling 17.4 million square feet that were 89% occupied;
10 office properties under, or contractually committed for, construction or approved for redevelopment that we estimate
will total approximately 1.4 million square feet upon completion, including two partially operational properties included
above;
land held or under pre-construction totaling 1,708 acres (including 56 acres controlled but not owned) that we believe are
potentially developable into approximately 20.0 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.
COPLP owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). In
addition to owning real estate, COPLP 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. Some of these services are
performed by a taxable REIT subsidiary (“TRS”).
Interests in COPLP are in the form of common and preferred units. As of December 31, 2013, COPT owned 95.6% of the
outstanding COPLP common units (“common units”) and 96.4% of the outstanding COPLP preferred units (“preferred units”).
The remaining common and preferred units in COPLP were controlled by third parties, which included certain members of
COPT’s Board of Trustees. Common units in COPLP not owned by COPT carry certain redemption rights. The number of
common units in COPLP owned by COPT is equivalent to the number of outstanding common shares of beneficial interest
(“common shares”) of COPT, and the entitlement of all COPLP common units to quarterly distributions and payments in
liquidation is substantially the same as those of COPT common shareholders. Similarly, in the case of each series of preferred
units in COPLP held by COPT, there is a series of preferred shares of beneficial interest (“preferred shares”) in COPT that is
equivalent in number and carries substantially the same terms as such series of COPLP preferred units. COPT’s common
shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to
COPT’s executive officers as COPLP’s executive officers, and although, as a partnership, COPLP does not have a board of
trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
We believe that COPT is organized and has 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 COPT in such a manner. If COPT
continues to qualify for taxation as a REIT, it generally will not be subject to Federal income tax on its taxable income (other
than that of its TRS) that is distributed to its 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.
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
6
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.
Significant 2013 Developments
During 2013:
• COPLP issued the following unsecured senior notes, guaranteed by COPT, and used the net proceeds from these issuances
to repay borrowings under our Revolving Credit Facility and for general corporate purposes, including partial repayment of
certain of our unsecured debt:
•
$350.0 million aggregate principal amount of 3.600% Senior Notes in May at an initial offering price of 99.816% of
their face value. The proceeds from the offering, after deducting discounts of the initial purchasers of the notes, but
before other offering expenses, were approximately $347.1 million; and
$250.0 million aggregate principal amount of 5.250% Senior Notes in September at an initial offering price of
98.783% of their face value. The proceeds from the offering, after deducting underwriting discounts, but before other
offering expenses, were approximately $245.3 million;
•
• we repaid a $239.4 million principal amount of our 4.25% Exchangeable Senior Notes for an aggregate repayment amount
of $255.1 million, and recognized a $25.9 million loss of early extinguishment of debt, including unamortized loan
issuance costs. Most of this repayment resulted from a tender offer for the notes that was completed on June 27, 2013;
• COPT completed a public offering of 4,485,000 common shares in March at a price of $26.34 per share for net proceeds of
$118.1 million, after underwriter discounts but before offering expenses, that were contributed to COPLP in exchange for
4,485,000 common units. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate
purposes;
• COPT issued 1.5 million common shares in July at a weighted average price of $26.05 per share under its at-the-market
(“ATM”) stock offering program established in October 2012, representing its first issuance under the ATM program. Net
proceeds from the shares issued totaled $38.5 million. The proceeds from the shares issued were contributed to COPLP in
exchange for 1.5 million common units, and used by COPLP for general corporate purposes;
• COPT redeemed all of its outstanding Series J Preferred Shares at a price of $25.00 per share, or $84.8 million in the
aggregate, plus accrued and unpaid dividends thereon through the date of redemption, using proceeds from the March 2013
public offering of common shares. These shares accrued dividends equal to 7.625% of the liquidation preference. In
connection with this redemption, COPLP redeemed the Series J Preferred Units previously owned by COPT that carried
terms substantially the same as the Series J Preferred Shares. At the time of the redemption, we recognized a $2.9 million
decrease to net income available to common equityholders pertaining to the original issuance costs incurred on the
securities;
• we disposed of 31 operating properties totaling 2.3 million square feet for aggregate transaction values totaling $293.3
million, including the following:
•
15 properties in Colorado Springs, Colorado and two in the Baltimore/Washington Corridor sold for $146.4 million,
the net proceeds of which was used to pay off $65.2 million in fixed rate secured debt due to mature in early 2014 and
the remainder primarily to pay down our Revolving Credit Facility and for general corporate purposes; and
nine properties in the Baltimore/Washington Corridor and five properties in Colorado Springs that secured a $146.5
million non recourse loan. In December, we conveyed the properties to the holder of the loan.
With these transactions, we completed the disposition of our Colorado Springs operating segment;
•
• we placed into service an aggregate of 812,000 square feet in eight newly constructed properties that were 75% leased as
of December 31, 2013, all but one of which were proximate to defense installations and other knowledge-based demand
drivers; and
• we finished the period with occupancy of our portfolio of operating office properties at 89.1%.
7
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.
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
maintain a high concentration 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 a 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.
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; (5) future acquisition and development opportunities; and (6) infill locations with strong supply and demand
fundamentals. 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. However, we may also invest in central business districts in the Greater Washington,
DC/Baltimore region.
Asset Management Strategy: We aggressively manage our portfolio to maximize the operating value and performance of
each property through: (1) proactive property management and leasing; (2) achievement of operating efficiencies by increasing
economies of scale and, where possible, aggregating vendor contracts to achieve volume pricing discounts; (3) renewing tenant
leases and re-tenanting at increased rents where market conditions permit; (4) redevelopment when we believe property
conditions and market demand warrant. We may also seek to dispose of properties when they no longer meet our strategic
objectives, or when capital markets and the circumstances pertaining to such holdings otherwise warrant, in order to maximize
our return on invested capital and be better positioned for long-term growth.
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 high level of efficiency and low impact on human health and the
environment during their life cycles 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 energy efficient products and practices.
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.
8
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.
Capital Strategy: Our capital strategy is aimed at maintaining access to capital in the face of differing market conditions in
the most cost-effective manner by:
• maintaining an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt
(including the effect of interest rate swaps) from public markets and banks;
using secured nonrecourse debt from institutional lenders and banks, when appropriate;
•
• managing our debt by monitoring, among other things: (1) our total and secured 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 timing of debt maturities to ensure that maturities in any year do not exceed levels that we
believe we can refinance; and (4) the relationship of our variable-rate debt to our total debt;
using equity raised through issuances of common and preferred shares, issuances of common and preferred units in COPLP
and, to a lesser extent, joint venture structures for certain investments;
paying dividends at a level that at least enables us to maintain our REIT status;
recycling proceeds from property sales under our asset management strategy (discussed above) to fund our investment
activities and to reduce overall debt; and
continuously evaluating the ability of our capital resources to accommodate our plans for future growth.
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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
infrastructure costs. As of December 31, 2013, our commercial office real estate operations were primarily located in the
following geographical segments:
• Baltimore/Washington Corridor (primarily defined as the Maryland counties of Howard and Anne Arundel, but also Prince
George’s and Montgomery);
• Northern Virginia (defined as Virginia counties of Fairfax and Loudoun);
•
San Antonio, Texas;
• Huntsville, Alabama;
• Greater Washington, DC;
•
• Greater Baltimore, Maryland (generally defined as the Maryland counties of Baltimore and Harford and Baltimore City);
St. Mary’s & King George Counties (in Maryland and Virginia, respectively);
and
• Greater Philadelphia, Pennsylvania (in Blue Bell, Pennsylvania).
As of December 31, 2013, 165 of our office properties, or 87% 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, Huntsville 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 18 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, 2013, we had 380 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 us 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
9
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. Competitors for such acquisitions may have substantially greater financial resources than ours. In addition, our
competitors may be willing to accept lower returns on their investments or may be willing to incur higher leverage. 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.
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, 2013, 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
operations, cash flows and ability to make expected distributions to our shareholders. These conditions include, but are not
limited to:
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•
•
•
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•
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•
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 on
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 equityholders.
10
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 equityholders.
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 equityholders.
We may be adversely affected by developments concerning some of our major tenants and sector concentrations,
including prolonged 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, 2013, our 20 largest tenants accounted for 65.1% of the total annualized rental revenue of our office
properties, and the four largest of these tenants accounted for 41.0%. 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, 2013. Information regarding our four largest tenants is set forth
below:
Tenant
Annualized
Rental Revenue at
December 31, 2013
(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)
$
111,207
27,182
25,822
19,795
24.8%
6.1%
5.8%
4.4%
57
10
8
6
(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
prolonged 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 equityholders.
As of December 31, 2013, 69.7% of the total annualized rental revenue of our office properties 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 maintain a high revenue concentration
with United States Government agencies and defense contractors, most of whom are engaged in knowledge-based defense and
security activities. 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
11
targeting these activities could also decrease or delay leasing activity from tenants engaged in these activities. 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 equityholders.
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 in leasing that center through December 31, 2013. 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, we could
record an impairment loss, which would adversely affect our financial position and results of operations.
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, 2013, our properties located in the Greater Washington,
DC/Baltimore region accounted for a combined 86.2% 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 equityholders.
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
equityholders 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 equityholders.
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 equityholders.
We are dependent on external sources of capital for future growth. Because COPT is a REIT, it must distribute at least
90% of its annual taxable income to its shareholders. Due to this requirement, we are not able to significantly fund our
acquisition, construction and development activities using retained cash flow from operations. Therefore, our ability to fund
these activities is dependent on our ability to access debt or equity capital. Such capital could be in the form of new debt,
12
equity issuances of common shares, preferred shares, common and preferred units in COPLP 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 equityholders’ 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 often use our Revolving Credit Facility to initially finance much of our investing activities and certain 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. If 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 equityholders.
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 equityholders.
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:
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•
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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 equityholders.
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 equityholders. 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, or due to other technological
advances. 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 equityholders.
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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 discussed above, our data centers are subject to obsolescence risks.
In the event that we needed to reposition data center space for another use, the renovations required to do so could be very
difficult and costly, and we may, as a result, deem such renovations to be impractical. The inability to reposition our data
center space could adversely affect our financial position, results of operations, cash flows and ability to make expected
distributions to our equityholders.
Real estate investments are illiquid, and we may not be able to dispose of properties on a timely basis when we
determine it is appropriate to do so. We may seek to dispose of properties in connection with our asset management strategy,
the success of which may be key to our capital strategy. 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
COPLP, we are restricted by agreements with the sellers of the properties for a certain period of time from entering into
transactions (such as the sale or refinancing of the acquired property) that will result in a taxable gain to the sellers without the
seller’s consent. Our failure to successfully execute such dispositions 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 equityholders.
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. Any foreclosure on 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 equityholders. 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 COPT’s shareholders required to maintain its 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, COPLP could be restricted from making cash
distributions to COPT, which could result in reduced distributions to our equityholders 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 unsecured 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.
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 operating cash flow, and could decrease our distributions to equityholders.
14
As of December 31, 2013, our scheduled debt maturities over the next five years were as of follows:
Year
Amount (1)
(in thousands)
2014
2015
2016
2017
2018
$
89,483
395,969
279,339
405,615
1,374
(1) Represents principal maturities only and therefore excludes net discounts of $8.0 million. Maturities include $250.0 million in 2015 that may be extended
for two one-year periods and $250.0 million in 2017 that may 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 equityholders.
A downgrade in our credit ratings could materially adversely affect our business and financial condition. The credit
ratings assigned to COPLP’s Senior Notes could change. These ratings are subject to ongoing evaluation by the credit rating
agencies. Any downgrades in terms of ratings or outlook by the credit rating agencies could have a material adverse impact on
our cost and availability of capital, which could in turn have a material adverse impact on our financial condition, results of
operations, cash flows and ability to make expected distributions to our equityholders and liquidity, and also have a material
adverse effect on the market price of COPT’s common shares.
We have certain distribution requirements that reduce cash available for other business purposes. Since COPT is a
REIT, it must distribute at least 90% of its annual taxable income, which limits the amount of cash that can be retained 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 for COPT to meet the 90% distribution requirement.
We may be unable to continue to make shareholder/unitholders distributions at expected levels. We expect to make
regular quarterly cash distributions to our equityholders. 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:
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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;
governmental actions and initiatives, including risks associated with the impact of a government shutdown or budgetary
reductions or impasses;
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/units only after we make preferential distributions
to holders of our preferred shares/units.
Our ability to pay distributions may be limited, and we cannot provide assurance that we will be able to pay
distributions regularly. Our ability to pay distributions will depend on our ability to operate profitably and generate cash flow
from our operations. We cannot guarantee that we will be able to pay distributions on a regular quarterly basis in the future.
Additionally, the terms of some of COPLP’s debt may limit its ability to make some types of payments and other distributions
to COPT. This in turn may limits our ability to make some types of payments, including payment of distributions on common
or preferred shares/units, unless we meet certain financial tests or such payments or distributions are required to maintain
15
COPT’s qualification as a REIT. As a result, if we are unable to meet the applicable financial tests, we may not be able to pay
distributions in one or more periods. Furthermore, any new common or preferred shares/units that may in the future be issued
for raising capital, financing acquisitions, share-based compensation arrangements or otherwise will increase the cash required
to continue to pay cash distributions at current levels.
We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact
our ability to pay distributions to equityholders. Our governing documents do not limit us from incurring additional
indebtedness and other liabilities. As of December 31, 2013, we had $1.9 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 equityholders. As a result, we may not have sufficient funds remaining to make expected
distributions to our equityholders if we incur additional indebtedness.
Our ability to pay distributions is further limited by the requirements of Maryland law. As a Maryland REIT, COPT
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 equityholders whose preferential
rights are superior to those receiving the distribution. Therefore, we may not be able to make expected distributions to our
equityholders if either of the above described conditions exists for COPT after giving effect to the distribution.
We may issue additional common or preferred shares/units that dilute our equityholders’ interests. COPT may issue
additional common shares and preferred shares/units without shareholder approval. Similarly, COPT may cause COPLP to
issue its common or preferred units for contributions of cash or property without approval by the limited partners of COPLP or
COPT’s shareholders. Our existing equityholders’ 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 may 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 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 equityholders.
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 equityholders.
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
16
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 equityholders.
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 equityholders.
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 equityholders.
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, 2014. 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
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 equityholders.
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 equityholders.
COPT’s ownership limits are important factors. COPT’s Declaration of Trust limits ownership of its 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. COPT’s 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.” COPT’s Declaration of Trust allows our Board of Trustees to exempt
17
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/units or
otherwise be in the best interest of our equityholders.
COPT’s 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 equityholders. 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.
COPT’s failure to qualify as a REIT would have adverse tax consequences, which would substantially reduce funds
available to make distributions to our equityholders. We believe that COPT has qualified for taxation as a REIT for Federal
income tax purposes since 1992. We plan for COPT 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 COPT’s gross income must come from certain sources that are specified in the REIT tax laws. COPT is also required
to distribute to shareholders at least 90% of its REIT taxable income (excluding capital gains). The fact that COPT holds most
of its assets through COPLP and its subsidiaries further complicates the application of the REIT requirements. Even a technical
or inadvertent mistake could jeopardize COPT’s 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 COPT to remain qualified as a REIT.
If COPT fails to qualify as a REIT, it would be subject to Federal income tax at regular corporate rates. Also, unless the
Internal Revenue Service granted us relief under certain statutory provisions, COPT would remain disqualified as a REIT for
four years following the year it first fails to qualify. If COPT fails to qualify as a REIT, it would have to pay significant income
taxes and would therefore have less money available for investments or for distributions to our equityholders. In addition, if
COPT fails to qualify as a REIT, it will no longer be required to pay distributions to shareholders. As a result of all these
factors, COPT’s 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 shares/units.
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 that 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 distributions to our equityholders.
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 COPT’s 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 COPT;
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
18
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 COPLP. These individuals may have interests that conflict with the interests of our equityholders. For example, if
COPLP sells or refinances certain of the properties that these Trustees contributed to COPLP, 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 equityholders.
Item 1B. Unresolved Staff Comments
None
19
Item 2. Properties
The following table provides certain information about our office property markets and submarkets as of December 31, 2013:
Property Region, Business Park/Submarket and Location
Baltimore/Washington Corridor:
National Business Park - Annapolis Junction, MD
Columbia Gateway - Columbia, MD
Airport Square/bwtech - Linthicum, MD
Commons/Parkway - Hanover, MD
Other
Subtotal / Average
Northern Virginia:
Westfields Corporate Center - Chantilly, VA
Patriot Ridge - Springfield, VA
Herdon, Tysons Corner and Merrifield, VA
Other
Subtotal / Average
San Antonio:
Sentry Gateway - San Antonio, TX
Other
San Antonio
Huntsville
Washington DC-Capitol Riverfront
St. Mary’s & King George Counties
Greater Baltimore:
White Marsh, MD and Timonium, MD
Baltimore City, MD
Northgate Business Park - Aberdeen, MD
Subtotal / Average
Greater Philadelphia, Pennsylvania
Other Region
Total / Average
Number of
Buildings
Rentable
Square Feet
Occupancy (1)
Annualized
Rental
Revenue (2)
(in thousands)
Annualized Rental
Revenue per
Occupied Square
Foot (2)(3)
28
27
16
10
11
92
9
1
9
1
20
6
2
8
4
2
19
28
1
3
32
4
2
3,260,248
2,141,653
1,214,409
431,585
1,119,849
8,167,744
1,431,833
239,272
1,704,561
200,000
3,575,666
792,454
120,054
912,508
440,966
360,326
903,916
1,287,005
480,745
284,884
2,052,634
660,165
295,842
99.5 % $
88.0 %
75.1 %
80.5 %
98.9 %
91.7% $
114,817
45,678
22,396
7,932
31,225
222,048
93.8 % $
50.1 %
88.2 %
100.0 %
88.6% $
100.0 % $
73.8 %
96.6% $
38,978
4,844
49,394
2,268
95,484
29,570
1,666
31,236
80.7% $
8,646
76.4% $
12,493
89.8% $
16,857
81.0 % $
90.5 %
37.9 %
77.2% $
22,051
14,712
3,429
40,192
93.7% $
12,567
100.0% $
9,402
183
17,369,767
89.1% $
448,925
$35.40
24.25
24.56
22.83
28.20
$29.63
$29.01
40.37
32.86
11.34
$30.15
$37.31
18.81
$35.45
$24.29
$45.36
$20.77
$21.16
33.81
31.78
$25.36
$20.31
$31.78
$28.99
(1) This percentage is based upon all rentable square feet under lease terms that were in effect as of December 31, 2013.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2013 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, 2013. 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: $28.87; Baltimore/Washington Corridor: $29.55; and Northern Virginia: $30.02.
20
The following table provides certain information about our office properties that were under, or contractually committed for,
construction, or had redevelopment underway, or otherwise approved, as of December 31, 2013 (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)
National
Business Park
National
Business Park
125,160
100 %
3Q 2014
$
25,378
$
11,145
139,056
48 %
2Q 2014
26,132
7,476
Under Construction
Baltimore/Washington Corridor:
312 Sentinel Way
Annapolis Junction, MD
420 National Business Parkway
Jessup, MD
Subtotal / Average
Northern Virginia:
Ashburn Crossing - DC-9
Ashburn, VA
15395 John Marshall Hwy
Haymarket, VA
NOVA Office A
Northern Virginia
Subtotal / Average
San Antonio:
8100 Potranco Road
San Antonio, TX
Huntsville:
1100 Redstone Gateway
Huntsville, AL
Total Under Construction
Under Redevelopment
Greater Philadelphia:
721 Arbor Way (Hillcrest II)
Blue Bell, PA
264,216
72 %
Ashburn
110,000
100 %
3Q 2014
Other Northern
Virginia
Other Northern
Virginia
233,768
100 %
1Q 2014
159,300
100 %
1Q 2015
503,068
100 %
San Antonio
160,466
0 %
4Q 2015
Huntsville
121,111
100 %
1Q 2014
1,048,861
78%
Greater
Philadelphia
183,416
86 %
2Q 2014
731 Arbor Way (Hillcrest III)
Greater
140,765
79 %
1Q 2016
Blue Bell, PA
Subtotal / Average
Philadelphia
324,181
83 %
Baltimore/Washington Corridor:
6708 Alexander Bell Drive
Columbia, MD
Howard County
Perimeter
52,000
0 %
4Q 2015
Total Under Redevelopment
376,181
71%
$
$
$
$
$
$
$
$
$
$
51,510
$
18,621
7,584
$
7,976
23,426
574
13,308
31,252
44,318
6,966
$
$
39,802
32,734
21,356
$
223
124,150
$
91,380
27,533
$
5,467
5,685
20,915
33,218
$
26,382
3,799
$
7,605
37,017
$
33,987
(1) Includes land, construction, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
21
The following table provides certain information about our land held or under pre-construction as of December 31, 2013,
including properties under ground lease to us:
Market/Submarket and Location
Strategic Land
Baltimore/Washington Corridor:
National Business Park
Arundel Preserve (1)
Columbia Gateway
M Square
Airport Square
Subtotal
Northern Virginia
San Antonio
Huntsville (2)
St. Mary’s & King George Counties
Greater Baltimore
Acres
Estimated
Developable
Square Feet
200
89
22
49
5
365
103
69
440
44
49
2,166
1,080
560
525
84
4,415
2,435
1,033
4,173
109
1,478
Total strategic land held and pre-construction
1,070
13,643
Non-Strategic Land
Baltimore/Washington Corridor
Greater Baltimore
Greater Philadelphia
Colorado Springs
Other (3)
Total non-strategic land held
7
128
8
171
324
638
65
1,352
463
2,540
1,967
6,387
Total land held and pre-construction
1,708
20,030
(1) This land includes approximately 56 acres under contract to be purchased by us.
(2) This land is owned by the Unites States Government and is under a long term enhanced-use lease to us. We are not required to pay rent on
the individual land sites included in this lease until tenants of properties completed on such land sites begin paying rent.
(3) This land includes 217 acres that is being put back to its jurisdictional county per a development agreement described in Note 6 to our
consolidated financial statements.
The following table provides certain information about our wholesale data center property as of December 31, 2013:
Property and Location
Year
Built
Gross
Building
Area
Raised Floor
Square
Footage (1)
Initial
Stabilization
Critical Load
(in MWs) (2)
MW
Operational
MW
Leased
9651 Hornbaker Road - Manassas, VA 2010
233,000
100,000
18
9
6.3
(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”)).
22
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, 2013, assuming that none of the tenants exercise any early termination rights. This analysis includes the effect
of early renewals completed on existing leases but excludes the effect of new tenant leases on 200,518 square feet executed
but yet to commence as of December 31, 2013.
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)
(in thousands)
Percentage of
Total
Annualized
Rental Revenue
Expiring (2)
Total Annualized
Rental Revenue
of Expiring
Leases Per
Occupied Square
Foot
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2030
116
92
85
83
68
52
49
24
12
16
8
5
1
1
2,243,447
2,085,493
1,684,980
1,830,330
1,734,283
1,258,500
1,806,019
582,376
822,791
348,691
254,026
766,394
16,200
50,456
14.5 % $
13.5 %
10.9 %
11.8 %
11.2 %
8.1 %
11.7 %
3.8 %
5.3 %
2.3 %
1.6 %
4.9 %
0.1 %
0.3 %
64,930
62,210
47,072
51,176
52,522
36,999
52,059
16,466
24,710
8,934
5,237
24,966
421
1,224
14.5%
13.9%
10.5%
11.4%
11.7%
8.2%
11.6%
3.7%
5.5%
2.0%
1.2%
5.6%
0.1%
0.3%
$28.94
29.83
27.94
27.96
30.28
29.40
28.83
28.27
30.03
25.62
20.61
32.58
26.00
24.25
Total/Weighted Average
612
15,483,986
100.0 % $
448,925
100.0%
$28.99
With regard to leases expiring in 2014, we believe that the weighted average annualized rental revenue per occupied square
foot for such leases at December 31, 2013 was, on average, approximately 4% to 6% higher than estimated current market
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, 2013:
Year of Lease Expiration (1)
Number of
Leases
Expiring
Raised Floor
Square Footage
Expiring
Critical Load
Leased (in
megawatts)
Critical Load
Used (in
megawatts)
2016
2018
2019
2020
2022
Total/Weighted Average
1
2
1
1
1
6
9,437
1,283
6,374
11,122
5,590
33,806
2
0.3
1
2
1
6.3
0.2
0.2
1.0
2.0
0.5
3.9
Annualized
Rental Revenue
of Expiring
Leases (2)
(in thousands)
$
$
228
445
2,141
4,485
766
8,065
(1) All of the leasing statistics set forth above assume no exercise of any existing early termination rights. In addition, most of the leases with our largest tenant,
the United States Government, provide for consecutive one-year terms; 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.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2013 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.
23
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).
Item 4. Mine Safety Disclosures
Not applicable.
24
PART II
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information for COPT
COPT’s 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 COPT’s common shares as reported on the NYSE, as well as the quarterly
common share dividends per share declared:
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
Low
$20.58
$21.13
$21.36
$23.22
High
$25.48
$24.05
$25.61
$26.12
Price Range
Low
$24.75
$23.81
$22.40
$21.48
High
$27.52
$29.95
$28.85
$25.37
Dividends
Per Share
$0.2750
$0.2750
$0.2750
$0.2750
Dividends
Per Share
$0.2750
$0.2750
$0.2750
$0.2750
The number of holders of record of COPT’s common shares was 541 as of December 31, 2013. 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.
COPT pays dividends at the discretion of its Board of Trustees. COPT’s 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. COPT’s ability to make cash dividends will also be limited by the terms of COPLP’s
Partnership Agreement, as well as by limitations imposed by state law. In addition, COPT is prohibited from paying cash
dividends in excess of the amount necessary for it 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 COPT’s ability to pay dividends,
and COPT does not believe that this restriction is reasonably likely to limit its ability to pay future dividends because it expects
to comply with the terms of our Revolving Credit Facility.
25
Market Information for COPLP
There is no established public trading market for COPLP’s partnership units. The table below shows the quarterly
common unit distributions per unit declared:
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Distributions
Per Unit
$0.2750
$0.2750
$0.2750
$0.2750
Distributions
Per Unit
$0.2750
$0.2750
$0.2750
$0.2750
As of December 31, 2013, there were 40 holders of record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2013, 454 of COPLP’s common units were exchanged for 454 COPT
common shares in accordance with the COPLP’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.
26
COPT’s Common Shares Performance Graph
The graph and the table set forth below assume $100 was invested on December 31, 2008 in COPT’s common shares. 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
12/31/08
100.00
100.00
100.00
12/31/09
125.29
126.46
127.99
12/31/10
124.69
145.51
163.76
12/31/11
80.78
148.59
177.32
12/31/12
99.48
172.37
212.26
12/31/13
98.59
228.19
218.32
Period Ended
27
Item 6. Selected Financial Data
The following tables set forth summary historical consolidated financial data and operating data for COPT and COPLP and
their respective subsidiaries as of and for each of the years ended December 31, 2009 through 2013. You should read the
following summary historical financial data in conjunction with the consolidated historical financial statements and notes
thereto of COPT and its subsidiaries and COPLP and its subsidiaries 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)
Depreciation and amortization associated with real estate
operations (1)
Construction contract and other service expenses
Impairment losses (1)
General, administrative and leasing expenses (1)
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense (1)
Interest and other income
Loss on early extinguishment of debt
Loss on interest rate derivatives
Income (loss) from continuing operations before equity in
income (loss) of unconsolidated entities and income taxes
Equity in income (loss) of unconsolidated entities
Income tax (expense) benefit
Income (loss) from continuing operations
Discontinued operations (1)(2)
Income (loss) before gain on sales of real estate
Gain on sales of real estate, net of income taxes (3)
Net income (loss)
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares (4)
Net income (loss) attributable to COPT common
shareholders
Basic earnings per common share (5)
Income (loss) from continuing operations
Net income (loss)
Diluted earnings per common share (5)
Income (loss) from continuing operations
Net income (loss)
2013
2012
2011
2010
2009
$ 460,997
62,363
523,360
$ 434,299
73,836
508,135
$ 408,611
84,345
492,956
$ 365,253
104,675
469,928
$ 328,810
343,087
671,897
167,199
159,206
154,375
138,471
116,216
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
—
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(7,837)
93,707
(19,971)
(2,904)
70,832
0.21
0.83
0.21
0.83
$
$
$
$
$
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
(943)
—
8,894
(546)
(381)
7,967
12,353
20,320
21
20,341
636
20,977
(20,844)
(1,827)
107,003
81,639
83,213
30,306
6,122
462,658
30,298
(90,037)
5,603
(1,639)
(29,805)
(85,580)
(331)
6,710
(79,201)
(51,107)
(130,308)
2,732
(127,576)
8,148
(119,428)
(16,102)
—
91,705
102,302
—
28,485
6,403
367,366
102,562
(87,551)
9,682
—
—
24,693
1,376
(108)
25,961
16,714
42,675
2,829
45,504
(2,744)
42,760
(16,102)
—
$
$
$
$
$
(1,694) $ (135,530) $
26,658
(0.19) $
(0.03) $
(1.28) $
(1.97) $
(0.19) $
(0.03) $
(1.28) $
(1.97) $
0.17
0.43
0.17
0.43
$
$
$
$
$
74,766
336,519
—
27,837
5,259
560,597
111,300
(68,540)
5,164
—
—
47,924
(941)
(196)
46,787
14,512
61,299
—
61,299
(4,970)
56,329
(16,102)
—
40,227
0.47
0.70
0.47
0.70
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
85,167
85,224
73,454
73,454
69,382
69,382
59,611
59,944
55,930
56,407
28
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt
Total liabilities
Redeemable noncontrolling interest
Total equity
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Numerator for diluted EPS
Diluted funds from operations (6)
Diluted funds from operations per share (6)
Cash dividends declared per common share
Property Data (as of year end):
Number of properties owned (7)
Total rentable square feet owned (7)
2013
2012
2011
2010
2009
$ 3,214,301
$ 3,629,952
$ 1,927,703
$ 2,114,945
$
17,758
$ 1,497,249
$ 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
$
$
156,436
152,143
$
$
158,979
$ (119,790) $
$
$
$
$
$
4,590
70,418
214,149
2.40
1.10
191,838
13,744
$ (200,547) $
$
$
$
$
$
194,817
$ (260,387) $ (479,167) $ (349,076)
155,746
39,217
152,626
2.46
1.53
$
(2,163) $ (136,567) $
$
$
$
324,571
25,587
148,645
2.30
1.61
165,720
2.13
1.10
53,062
0.72
1.65
103,701
$
$
$
$
$
$
$
$
183
17,370
208
18,831
238
20,514
256
20,432
253
19,543
(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) Includes income derived from three operating properties disposed in 2010, 23 operating properties disposed in 2011, 35 operating
properties disposed in 2012 and 31 operating properties disposed in 2013 (see Note 20 to our consolidated financial statements).
(3) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(4) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized upon the
redemption of the Series G Preferred Shares in 2012 and Series J Preferred Shares in 2013.
(5) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of COPT.
(6) 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.”
(7) Amounts reported reflect only operating office properties.
29
Corporate Office Properties, L.P. 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)
Depreciation and amortization associated with real estate
operations (1)
Construction contract and other service expenses
Impairment losses (1)
General, administrative and leasing expenses (1)
Business development expenses and land carry costs
Total operating expenses
Operating income
Interest expense (1)
Interest and other income
Loss on early extinguishment of debt
Loss on interest rate derivatives
Income (loss) from continuing operations before equity in
income (loss) of unconsolidated entities and income taxes
Equity in income (loss) of unconsolidated entities
Income tax (expense) benefit
Income (loss) from continuing operations
Discontinued operations (1)(2)
Income (loss) before gain on sales of real estate
Gain on sales of real estate, net of income taxes (3)
Net income (loss)
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units (4)
Net income (loss) attributable to COPLP common
unitholders
Basic earnings per common unit (5)
Income (loss) from continuing operations
Net income (loss)
Diluted earnings per common unit (5)
Income (loss) from continuing operations
Net income (loss)
2013
2012
2011
2010
2009
$ 460,997
62,363
523,360
$ 434,299
73,836
508,135
$ 408,611
84,345
492,956
$ 365,253
104,675
469,928
$ 328,810
343,087
671,897
167,199
159,206
154,375
138,471
116,216
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
—
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(3,907)
97,637
(20,631)
(2,904)
74,102
0.21
0.83
0.21
0.83
$
$
$
$
$
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
(943)
—
8,894
(546)
(381)
7,967
12,353
20,320
21
20,341
507
20,848
(21,504)
(1,827)
107,003
81,639
83,213
30,300
6,122
462,652
30,304
(90,037)
5,603
(1,639)
(29,805)
(85,574)
(331)
6,710
(79,195)
(51,107)
(130,302)
2,732
(127,570)
244
(127,326)
(16,762)
—
91,705
102,302
—
28,461
6,403
367,342
102,586
(87,551)
9,682
—
—
24,717
1,376
(108)
25,985
16,714
42,699
2,829
45,528
(61)
45,467
(16,762)
—
$
$
$
$
$
(2,483) $ (144,088) $
28,705
(0.19) $
(0.04) $
(1.29) $
(2.00) $
(0.19) $
(0.04) $
(1.29) $
(2.00) $
0.18
0.44
0.18
0.44
$
$
$
$
$
74,766
336,519
—
27,813
5,259
560,573
111,324
(68,540)
5,164
—
—
47,948
(941)
(196)
46,811
14,512
61,323
—
61,323
66
61,389
(16,762)
—
44,627
0.49
0.73
0.49
0.72
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
89,036
89,093
77,689
77,689
72,564
72,564
62,553
62,886
59,981
60,458
30
Balance Sheet Data (as of year end):
Total properties, net
Total assets
Debt
Total liabilities
Redeemable noncontrolling interest
Total equity
Other Financial Data (for the year ended):
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Numerator for diluted EPU
Cash distributions declared per common unit
Property Data (as of year end):
Number of properties owned (6)
Total rentable square feet owned (6)
2013
2012
2011
2010
2009
$ 3,214,301
$ 3,622,485
$ 1,927,703
$ 2,107,478
$
17,758
$ 1,497,249
$ 3,163,044
$ 3,646,983
$ 2,019,168
$ 2,200,186
$
10,298
$ 1,436,499
$ 3,352,975
$ 3,855,967
$ 2,426,303
$ 2,641,160
$
8,908
$ 1,205,899
$ 3,445,455
$ 3,836,329
$ 2,323,681
$ 2,512,504
$
9,000
$ 1,314,825
$ 3,029,900
$ 3,373,337
$ 2,053,841
$ 2,252,051
$
—
$ 1,121,286
$
$
158,979
$ (119,790) $
$
$
$
4,590
73,688
1.10
152,149
156,460
191,838
13,744
$ (200,547) $
$
$
$
194,838
$ (260,387) $ (479,167) $ (349,076)
155,725
43,617
1.53
$
(2,952) $ (145,125) $
$
324,547
27,634
1.61
103,695
$
$
$
1.65
1.10
$
$
$
183
17,370
208
18,831
238
20,514
256
20,432
253
19,543
(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) Includes income derived from three operating properties disposed in 2010, 23 operating properties disposed in 2011, 35 operating
properties disposed in 2012 and 31 operating properties disposed in 2013 (see Note 20 to our consolidated financial statements).
(3) Reflects gain from sales of properties and unconsolidated real estate joint ventures not associated with discontinued operations.
(4) Reflects a decrease to net income available to common shareholders pertaining to the original issuance costs recognized upon the
redemption of the Series G Preferred Units in 2012 and Series J Preferred Units in 2013.
(5) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of COPLP.
(6) Amounts reported reflect only operating office properties.
31
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 prolonged 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;
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
COPT and subsidiaries is 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. COPLP and subsidiaries is the entity through which COPT, the sole general
partner of COPLP, conducts almost all of its operations and owns almost all of its assets. 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 factors such as 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
32
production. As a result of this strategy, a large concentration of our revenue is derived from several large tenants. As of
December 31, 2013, 65.1% of our annualized rental revenue (as defined below) from office properties was from our 20 largest
tenants, 41.0% from our four largest tenants and 24.8% from our largest tenant, the United States Government. In addition, as
of December 31, 2013, 69.7% of the total annualized rental revenue of our office properties 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.”
In 2013, we announced the completion of our Strategic Reallocation Plan that we commenced in 2011, which entailed the
disposition by the end of 2013 of approximately $562 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 2013, we disposed of 31 operating properties totaling 2.3 million square feet for aggregate transaction values
totaling $293.3 million, including the following:
•
•
15 properties in Colorado Springs and two in the Baltimore/Washington Corridor totaling 1.3 million square feet sold for
$146.4 million, the net proceeds of which were used to pay off $65.2 million in fixed rate secured debt due to mature in
early 2014 and the remainder primarily to pay down our Revolving Credit Facility and for general corporate purposes; and
nine properties in the Baltimore/Washington Corridor and five properties in Colorado Springs that secured a $146.5 million
non recourse loan. In December, we conveyed the properties to the holder of the loan. Upon completion of this transfer,
we recognized a gain on extinguishment of debt of $67.8 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.
Since implementing the Strategic Reallocation Plan, we completed dispositions of 89 operating properties totaling 5.5 million
square feet and non-operating land for transaction values totaling $687.1 million, including the disposition of our Colorado
Springs operating segment.
Our 2013 investing activities increased our concentration in Strategic Tenant Properties through the dispositions discussed
above and our placing into service an aggregate of 812,000 square feet in eight newly constructed properties that were 75%
leased as of December 31, 2013, all but one of which were proximate to Strategic Demand Drivers.
In 2013, we completed several significant capital transactions, including the following:
• COPLP issued the following unsecured senior notes, guaranteed by COPT, and used the net proceeds from these issuances
to repay borrowings under our Revolving Credit Facility and for general corporate purposes, including partial repayment
of certain of our unsecured debt:
•
$350.0 million aggregate principal amount of 3.600% Senior Notes in May at an initial offering price of 99.816% of
their face value. The proceeds from the offering, after deducting discounts of the initial purchasers of the notes, but
before other offering expenses, were approximately $347.1 million; and
$250.0 million aggregate principal amount of 5.250% Senior Notes in September at an initial offering price of
98.783% of their face value. The proceeds from the offering, after deducting underwriting discounts, but before other
offering expenses, were approximately $245.3 million;
•
• we repaid a $239.4 million principal amount of our 4.25% Exchangeable Senior Notes for an aggregate repayment amount
of $255.1 million, and recognized a $25.9 million loss on early extinguishment of debt, including unamortized loan
issuance costs. Most of this repayment resulted from a tender offer for the notes that was completed on June 27, 2013;
• COPT completed a public offering of 4,485,000 common shares in March at a price of $26.34 per share for net proceeds of
$118.1 million, after underwriter discounts but before offering expenses, that were contributed to COPLP in exchange for
4,485,000 common units. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate
purposes;
• COPT issued 1.5 million common shares at a weighted average price of $26.05 per share in July under its at-the-market
(“ATM”) stock offering program established in October 2012, representing its first issuance under the ATM program. Net
proceeds from the shares issued totaled $38.5 million, after payment of $586,000 in commissions to sales agents. The
proceeds from the shares issued were contributed to COPLP in exchange for 1.5 million common units, and used by
COPLP for general corporate purposes.
• COPT redeemed all of its outstanding Series J Preferred Shares at a price of $25.00 per share, or $84.8 million in the
aggregate, plus accrued and unpaid dividends thereon through the date of redemption, using proceeds from the March 2013
public offering of common shares. These shares accrued dividends equal to 7.625% of the liquidation preference. In
connection with this redemption, COPLP redeemed the Series J Preferred Units previously owned by COPT that carried
terms substantially the same as the Series J Preferred Shares. At the time of the redemption, we recognized a $2.9 million
33
decrease to net income available to common equityholders pertaining to the original issuance costs incurred on the
securities;
Due in large part to these transactions and the property dispositions completed in 2013, we increased from December 31, 2012
to December 31, 2013 each of the following: the fixed rate portion of our debt from 80% to 89% (including the effect of
variable rate loans subject to interest rate swaps); the unsecured portion of our debt from 50% to 63%; and our weighted
average debt maturity from 3.2 years to 5.0 years.
Our office property portfolio’s occupancy improved to 89.1% as of December 31, 2013, a 1.3% increase over year end
2012, due in large part to our disposition of properties in 2013 with a weighted average disposition date occupancy of 78.1%.
We completed 3.8 million square feet of leasing in 2013, including 897,000 of construction and redevelopment space. In
addition, occupancy of our Same Office Properties (defined below) increased slightly to 89.8% as of December 31, 2013 (up
from 89.5% as of December 31, 2012). As of December 31, 2013, our Strategic Tenant Properties were 91.6% occupied, down
from 92.8% as of December 31, 2012 due primarily to vacant space in certain newly constructed properties placed in service,
but still notably stronger than the 84.8% occupancy of our other properties as of December 31, 2013.
Our operations in recent years have been hindered by continuing delays in Federal budget approvals and uncertainty
regarding the potential for future reductions in government spending targeting defense. The Budget Control Act passed in
2011, which imposed caps on the Federal budget in order to achieve targeted spending levels over the 2014-2025 fiscal years,
fueled further uncertainty and eventually led to budget sequestration by the United States Government of funding levels in
2013. Ultimately, the resulting defense spending reductions did not significantly affect the knowledge-based activities of most
of our tenants. Nevertheless, the absence of approved Federal budgets and continued uncertainty disrupted the Government’s
process for awarding contracts to prospective tenants, thus delaying our ability to lease certain existing properties and new
construction proximate to Strategic Demand Drivers.
In addition, the otherwise challenging economic conditions in the United States and our regions in recent years have also
adversely affected our operations. These conditions prompted many tenants and prospective tenants to consolidate their
operations, close their businesses, downsize their space requirements or cancel or delay expansion plans in our regions, placing
downward pressure on occupancy and rental rates.
In January 2014, the 2014 Consolidated Appropriations Act was passed, establishing a budget for the 2014 fiscal year that
rolled back certain of the defense spending reductions that were to occur under the 2011 Budget Act. With the passage of this
Act, we believe that defense spending levels will be generally flat for the next three years. We believe that the passage of this
budget will enable the Government to resume a more normalized process for awarding contracts, which should improve the
leasing outlook for our Strategic Tenant Properties, particularly those proximate to Strategic Demand Drivers. We believe that
the knowledge-based activities of most of our tenants will be a priority in the defense budget as such activities are considered
increasingly critical to our national security.
In addition, 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 United
States Cyber Command), Redstone Arsenal, Fort Belvoir, San Antonio and Aberdeen Proving Ground. We have been expecting
a significant shift of jobs by defense contractors supporting these agencies in response to their relocations, but we believe that
the absence of a Federal budget and the surrounding uncertainty may have delayed the pace of that occurring. We believe that
the passage of the 2014 Consolidated Appropriations Act may enable these job shifts to take place, which could benefit our
properties located proximate to these installations.
The relative contribution to our operations by properties that are not proximate to Strategic Demand Drivers has decreased
since 2011 due to our execution of 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.
We discuss significant factors contributing to changes in our net income over the last three years in the section below
entitled “Results of Operations.” The results of operations discussion is combined for COPT and COPLP because there are no
material differences in the results of operations between the two reporting entities.
34
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.
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.
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 would 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 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
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.
35
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. If our analyses indicate that the
carrying values of operating properties, properties in development or land held for future development may be impaired, we
perform a recovery analysis 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 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
(especially our expected holding period), 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, or provide for early termination rights. In addition, certain other
leases in our portfolio provide early termination rights to tenants. 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, or continue, the lease imposes a penalty on the lessee in such amounts that renewal, or
continuation, appears, at the inception of the lease, to be reasonably assured. Factors we 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. For a number of our leases with the United States Government, we have concluded,
based on the factors above, that exercise of existing renewal options, or continuation of such leases without exercising early
termination rights, 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.
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
36
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.
Activities we conduct to monitor the credit quality of our tenants include the following: monitoring the timeliness of
tenant lease payments; reviewing credit ratings of tenants that are rated by a nationally recognized credit agency prior to such
tenants’ entry into leases, and monitoring periodically thereafter; reviewing financial statements of tenants that are publicly
available or that are required to be provided to us pursuant to the terms of such tenants’ leases; and monitoring news reports
regarding our 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.
37
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)
The Boeing Company (1)
The MITRE Corporation
CareFirst, Inc.
The Aerospace Corporation (1)
Wells Fargo & Company (1)
L-3 Communications Holdings, Inc. (1)
AT&T Corporation (1)
ITT Exelis (1)
Science Applications International Corporation (1)
Kratos Defense & Security Solution, Inc. (1)
Raytheon Company (1)
TASC Inc.
The Johns Hopkins Institutions (1)
KEYW Corporation
Unisys Corporation
Ciena Corporation
Lockheed Martin Corporation
Comcast Corporation (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,
2012
2013
2011
24.8%
6.1%
5.8%
4.4%
4.0%
2.6%
2.0%
2.0%
1.8%
1.6%
1.3%
1.3%
1.2%
1.0%
0.9%
0.9%
0.9%
0.9%
0.8%
0.8%
N/A
N/A
N/A
65.1%
34.9%
100.0%
24.2%
6.3%
5.5%
4.8%
3.6%
1.4%
1.9%
1.9%
1.7%
1.7%
1.4%
1.2%
1.7%
1.0%
1.5%
1.1%
N/A
0.8%
N/A
0.8%
1.0%
0.8%
N/A
64.5%
35.5%
100.0%
22.2%
6.9%
5.1%
4.8%
1.5%
1.3%
1.8%
1.6%
1.7%
1.7%
1.6%
1.2%
1.7%
0.9%
1.4%
1.0%
NA
0.8%
N/A
0.8%
1.1%
N/A
1.2%
60.3%
39.7%
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 our significant
dispositions of properties in which it was not a tenant and its occupancy of a significant portion of our newly-constructed
square feet placed into service.
Our Strategic Tenant Properties accounted for 69.7% of our annualized rental revenue from office properties as of
December 31, 2013. We expect to maintain a high concentration of revenue 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.”
38
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
Huntsville
Washington, DC - Capitol Riverfront
St. Mary’s and King George Counties
Greater Baltimore
Greater Philadelphia
Colorado Springs
Other
Percentage of Annualized Rental
Revenue of Office
Properties as of December 31,
2012
2011
2013
49.5%
21.3%
7.0%
1.9%
2.8%
3.7%
8.9%
2.8%
—%
2.1%
100.0%
49.2%
19.1%
6.3%
0.7%
3.1%
3.4%
8.8%
2.0%
5.4%
2.0%
100.0%
49.1%
16.0%
5.8%
0.8%
3.0%
3.4%
12.6%
1.8%
5.0%
2.5%
100.0%
2013
2011
Number of
Office Properties
as of December 31,
2012
101
19
8
1
2
19
32
3
20
3
208
92
20
8
4
2
19
32
4
—
2
183
118
17
9
1
2
19
46
2
20
4
238
The most significant changes in our regional allocations set forth above were due to: significant dispositions of properties in
2012 and 2013, including our exit from the Colorado Springs region and sales of numerous properties in the Greater Baltimore
and Baltimore/Washington Corridor regions; and newly-constructed properties placed into service primarily in the Baltimore/
Washington Corridor, Northern Virginia and Huntsville 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
Huntsville
Washington, DC - Capitol Riverfront
St. Mary’s and King George Counties
Greater Baltimore
Greater Philadelphia
Colorado Springs
Other
December 31,
2012
2013
2011
89.1%
91.7%
88.6%
96.6%
80.7%
76.4%
89.8%
77.2%
93.7%
N/A
100.0%
87.8%
89.5%
89.2%
96.4%
83.2%
89.0%
85.9%
78.6%
100.0%
77.6%
100.0%
86.2%
87.0%
84.8%
90.7%
100.0%
91.6%
87.3%
84.5%
99.7%
74.7%
97.5%
Average contractual annual rental rate per square foot at year end (1) $ 28.99
$ 27.92
$ 26.59
(1) Includes estimated expense reimbursements.
39
December 31, 2012
Square feet vacated upon lease expiration (1)
Occupancy of previously vacant space in connection with new lease (2)
Square feet constructed or redeveloped
Dispositions
Other changes
December 31, 2013
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
18,831
—
—
1,019
(2,345)
(135)
17,370
16,541
(969)
836
945
(1,830)
(39)
15,484
(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 2013 and our expectations
regarding the future outlook. As the table above reflects, much of the increase in our total occupancy from December 31, 2012
to December 31, 2013 was attributable to our disposition of properties with lower occupancy rates during 2013. Occupancy of
our Same Office Properties was 89.8% at December 31, 2013, up slightly from 89.5% at December 31, 2012. With regard to
our regional occupancy trends, including changes from December 31, 2012 to December 31, 2013:
•
•
•
•
the increase in our occupancy in the Baltimore/Washington Corridor was due primarily to our disposition in 2013 of 11
properties that were 66.5% occupied upon disposition;
the decrease in our occupancy in Huntsville was due primarily to an unoccupied 62,000 square foot property that we
placed into service in the fourth quarter. This property is located in our Redstone Gateway Business Park, which is located
at the main gate to the Redstone Arsenal, an installation that houses knowledge-based defense programs;
the decrease in our occupancy in the Washington, DC - Capitol Riverfront region was due primarily to a tenant vacating
52,000 square feet in the fourth quarter in conjunction with a long-term lease extension on 104,000 square feet; and
our occupancy in Greater Baltimore has been adversely affected by 284,000 square feet in three properties we constructed
in our North Gate Business Park that were collectively 37.9% occupied as of December 31, 2013. This park is located
proximate to Aberdeen Proving Ground, an installation that houses knowledge-based defense programs.
In 2013, we completed 3.8 million square feet of leasing, including 897,000 of construction and redevelopment space. Our
construction and redevelopment leasing was highlighted by the following: 284,000 square feet leased in two properties to the
United States Government in the Baltimore/Washington Corridor and Northern Virginia; 236,000 square feet in a Northern
Virginia single user data center; and 174,000 in redevelopment square footage in Greater Philadelphia. As of December 31,
2013, we had 1.0 million square feet under construction that were 78% leased and 376,000 under redevelopment that were 71%
leased.
In 2013, we renewed leases on 2.2 million square feet, representing 70.5% of the square footage of our lease expirations
(including the effect of early renewals). The annualized rents of these renewals (totaling $30.78 per square foot) decreased on
average by approximately 3.4% and the revenue under GAAP (totaling $31.74 per square foot) increased on average by
approximately 4.6% relative to the leases previously in place for the space. The renewed leases had a weighted average lease
term of approximately 4.3 years and the average estimated tenant improvements and lease costs associated with completing the
leasing was approximately $11.02 per square foot.
In 2013, we also completed 703,000 square feet in other leasing, consisting primarily of space previously leased by us to
tenants that was subsequently vacated. The annualized rents of this other leasing totaled $20.95 per square foot and the revenue
under GAAP totaled $21.85 per square foot; these leases had a weighted average lease term of approximately 5.9 years and the
average estimated tenant improvements and lease costs associated with completing this leasing was approximately $31.12 per
square foot.
40
Our weighted average lease term for office properties at December 31, 2013 was approximately 4.5 years. The table below
sets forth as of December 31, 2013 our scheduled lease expirations of office properties by region in terms of percentage of
annualized rental revenue:
Expiration of Annualized Rental
Revenue of Office Properties
Baltimore/Washington Corridor
Northern Virginia
San Antonio
Huntsville
Washington, DC - Capitol Riverfront
St. Mary’s and King George Counties
Greater Baltimore
Greater Philadelphia
Other
Total
2018
2017
2016
2015
2014
7.0% 7.1% 5.9% 8.0% 6.7%
4.2% 4.8% 2.3% 2.2% 2.5%
0.0% 0.0% 0.0% 0.0% 0.2%
0.7% 0.0% 0.0% 0.0% 0.6%
0.3% 0.4% 0.4% 0.0% 0.6%
1.0% 1.1% 0.4% 0.1% 0.0%
0.6% 0.5% 1.5% 1.1% 0.9%
0.7% 0.0% 0.0% 0.0% 0.1%
0.0% 0.0% 0.0% 0.0% 0.1%
14.5% 13.9% 10.5% 11.4% 11.7%
Thereafter
Total
14.8% 49.5%
5.3% 21.3%
7.0%
6.8%
1.9%
0.6%
2.8%
1.1%
3.7%
1.1%
8.9%
4.3%
2.8%
2.0%
2.1%
2.0%
38.0% 100.0%
With regard to leases expiring in 2014, we believe that the weighted average annualized rental revenue per occupied square
foot for such leases at December 31, 2013 was, on average, approximately 4% to 6% higher than estimated current market rents
for the related space, with specific results varying by market.
All of the leasing statistics set forth above assume no exercise of any early termination rights. In addition, as noted above,
most of the leases with our largest tenant, the United States Government, provide for consecutive one-year terms; 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.
Wholesale Data Center Property
Our wholesale data center property, which upon completion is expected to have a critical load of 18 megawatts, had 9.0
megawatts in operation at December 31, 2013, of which 6.3 were leased to tenants with further expansion rights of up to a
combined 7.2 megawatts. 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 2014 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 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 or redeveloped office properties placed into service that were not 100% operational throughout the two years
being compared;
two properties that we expect to convey to a mortgage holder;
office properties in the Greater Philadelphia region. In September 2012, we shortened the holding period for our properties
in the Greater Philadelphia region because they no longer met our strategic investment criteria; and
property dispositions.
You may refer to Note 20 of the consolidated financial statements for a summary of operating properties that were disposed and
therefore are included in discontinued operations.
41
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 GAAP measure for both NOI from real estate operations and NOI from service operations. Since both of these
measures exclude certain items includable in operating income, reliance on these measures has limitations; management
compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other
GAAP and non-GAAP measures.
The table below reconciles NOI from real estate operations and NOI from service operations to operating income reported
on the consolidated statements of operations of COPT and subsidiaries:
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
2013
For the Years Ended December 31,
2012
2011
(in thousands)
$ 312,365
3,260
(37,272)
$ 308,012
2,706
(53,776)
$ 317,929
3,488
(24,131)
(113,214)
(5,857)
(30,869)
(5,436)
$ 141,910
(107,998)
(43,678)
(31,900)
(5,711)
89,066
$
(107,003)
(83,213)
(30,306)
(6,122)
30,298
$
Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
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 income (loss) of unconsolidated entities
Income tax expense
Income from continuing operations
Discontinued operations
Gain on sales of real estate, net of income taxes
Net income
$
42
2013
For the Years Ended December 31,
2012
(in thousands)
Variance
$
460,997
62,363
523,360
$
434,299
73,836
508,135
$
26,698
(11,473)
15,225
167,199
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
2,110
(1,978)
36,836
55,692
9,016
101,544
$
159,206
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
(943)
(546)
(381)
7,967
12,353
21
20,341
$
7,993
5,216
(11,701)
(37,821)
(1,031)
(275)
(37,619)
52,844
4,391
(3,338)
(26,087)
2,656
(1,597)
28,869
43,339
8,995
81,203
NOI from Real Estate Operations
Revenues
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Greater Philadelphia properties
Dispositions
Other
Property operating expenses
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Greater Philadelphia properties
Dispositions
Other
NOI from real estate operations
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
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,
2012
(Dollars in thousands, except per square foot data)
Variance
2013
$
$
$
399,242
15,416
6,180
20,485
11,924
37,641
7,745
498,633
143,192
4,235
1,812
7,139
3,431
14,029
6,866
180,704
256,050
11,181
4,368
13,346
8,493
23,612
879
317,929
90.2%
24.31
$
$
$
392,149
4,062
2,708
17,635
9,698
59,358
7,490
493,100
139,711
918
764
7,587
2,562
23,638
5,555
180,735
252,438
3,144
1,944
10,048
7,136
35,720
1,935
312,365
88.9%
24.19
$
$
$
7,093
11,354
3,472
2,850
2,226
(21,717)
255
5,533
3,481
3,317
1,048
(448)
869
(9,609)
1,311
(31)
3,612
8,037
2,424
3,298
1,357
(12,108)
(1,056)
5,564
1.3%
0.12
(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 $6.1 million, or 1.9%, increase in rental
revenue (including $509,000 in connection with lease terminations) and a $981,000, or 1.3%, increase in tenant recoveries and
other real estate operations revenue (most of which pertained to an increase in directly reimbursable expenses). The increase in
revenues from properties to be conveyed was attributable primarily to $2.3 million in connection with lease terminations.
The increase in property operating expenses from our Same Office Properties was primarily due to increases in expenses
reimbursable from tenants attributable mostly to a $1.4 million increase in snow removal and increases on certain properties
resulting from increased occupancy at such properties.
Our Same Office Properties pool consisted of 165 office properties, comprising 84.0% of our operating office square
footage as of December 31, 2013. Operating office properties disposed or otherwise no longer held for long-term investment
(currently two properties expected to be conveyed to lenders and our Greater Philadelphia properties) by, or as of,
December 31, 2013 were excluded from the Same Office Properties pool. This pool of properties included the following
changes from the pool used for purposes of comparing 2012 and 2011 in COPT’s 2012 Annual Report on Form 10-K and our
Current Report on Form 8-K dated July 25, 2013: the removal of 15 properties disposed in 2013, two properties expected to be
conveyed and one property approved for redevelopment; and the addition of five properties placed in service and 100%
operational by January 1, 2012 and one property acquired and fully operational by January 1, 2012. Operating office properties
43
disposed, held for sale or otherwise no longer held for long-term investment (currently two properties expected to be conveyed
to lenders and our Greater Philadelphia properties) by, or as of, December 31, 2013 were also excluded from our Same Office
Properties pool.
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,
2012
2013
(in thousands)
$ 73,836
70,576
3,260
$ (11,473)
(11,701)
228
$ 62,363
58,875
3,488
$
$
$
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. 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.
Depreciation and Amortization Associated with Real Estate Operations
Depreciation and amortization expense associated with continuing real estate operations increased due primarily to
additional expense associated with newly constructed properties placed in service.
Impairment Losses
We recognized the impairment losses described below in 2013 and 2012:
•
•
•
•
•
in connection primarily with the Strategic Reallocation Plan, we determined that the carrying amounts of certain properties
identified for disposition would 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 those properties exceeded their respective estimated fair values, plus any exit costs incurred,
of $15.2 million in 2013 (all classified as discontinued operations and including $419,000 in exit costs) and $19.0 million
in 2012 ($23.2 million classified as discontinued operations and including $4.2 million in exit costs). Most of these losses
were attributable to properties in Colorado Springs;
$11.0 million (all classified as discontinued operations and including $560,000 in exit costs) in 2013 on properties that
were conveyed to lenders;
$5.9 million in 2013 on two properties in the Greater Baltimore region that Management concluded no longer met our
strategic investment criteria. After shortening our expected holding period for these properties during the period, we
determined that the carrying amount of the properties would not likely be recovered from the cash flows from the
operations and sales of the properties over the shortened period;
in September 2012, our Board of Trustees approved a plan by Management to shorten the holding period for all of our
office properties and developable land in Greater Philadelphia because the properties no longer met our strategic
investment criteria. We determined that the carrying amounts of these properties would 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; and
in connection with construction costs incurred on a property held for future development, we recognized an impairment
loss of $1.9 million in 2012.
General, Administrative and Leasing Expenses
The decrease in general and administrative expenses was attributable in large part to expenses incurred in 2012 in
connection with our executive transition that year and staffing reductions made to adjust the size of the organization due in
large part to our property dispositions.
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.
44
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,
2013
2012
Construction, development, redevelopment, capital and tenant improvements
Leasing
Total
$
$
Interest Expense
$
(in thousands)
8,189
1,408
9,597
$
7,976
1,151
9,127
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 Unsecured Senior Notes
Interest on Exchangeable Senior Notes
Amortization of deferred financing costs
Other interest
Interest expense recognized on interest rate swaps
Interest on Revolving Credit Facility
Interest expense reclassified to discontinued operations
Capitalized interest
Total
$
$
$
Variance
For the Years Ended December 31,
2012
2013
(in thousands)
63,124
$
14,728
—
13,851
6,243
2,784
3,697
6,274
(10,397)
(13,903)
86,401
55,105
13,633
12,294
5,824
5,451
3,000
2,741
968
(8,221)
(8,785)
82,010
(8,019)
(1,095)
12,294
(8,027)
(792)
216
(956)
(5,306)
2,176
5,118
(4,391)
$
$
The decrease in interest expense included the effect of a $185.6 million decrease in our average outstanding debt from 2012 to
2013 resulting primarily from our repayments of debt using proceeds from property dispositions and equity issuances. Interest
expense for Unsecured Senior Notes increased due to our initial note issuances in 2013. Interest expense for Exchangeable
Senior Notes decreased due to our repayment of almost all of these notes during 2013. Interest expense for our Revolving
Credit Facility decreased due to our having maintained a substantially lower balance on the facility in 2013 as we used
proceeds from much of our capital activity and property dispositions to pay down borrowings. Capitalized interest decreased
due primarily to our completion of significant construction and development projects that were not immediately offset by new
projects.
Interest and Other Income
Interest and other income decreased due primarily to a $2.6 million gain that we recognized in 2012 on our disposition of
an investment accounted for using the cost method of accounting.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt in 2013 was attributable primarily to a $25.9 million loss recognized on our
repayment of a $239.4 million principal amount of our 4.25% Exchangeable Senior Notes.
Discontinued Operations
The increase in discontinued operations was due to a $67.8 million gain on early extinguishment of debt recognized on our
conveyance of properties to the lender of a non recourse loan to extinguish the loan in December 2013, the effect of which was
partially offset by an $18.3 million decrease in gain on sales of properties included in discontinued operations.
Gain on Sales of Real Estate, Net
For 2013, our gain on sales of real estate, net (excluding amounts in discontinued operations) included a $6.3 million gain
on the substantive disposition of our investment in an unconsolidated real estate joint venture (as discussed further in the
45
section below entitled “Off-Balance Sheet Arrangements”) and a $2.7 million gain from our disposition of land parcels in
White Marsh, Maryland.
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 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 of unconsolidated entities
Income tax (expense) benefit
Income (loss) from continuing operations
Discontinued operations
Gain on sales of real estate, net of income taxes
Net income (loss)
$
434,299
73,836
508,135
$
408,611
84,345
492,956
$
25,688
(10,509)
15,179
159,206
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
—
(943)
(546)
(381)
7,967
12,353
21
20,341
154,375
107,003
81,639
83,213
30,306
6,122
462,658
30,298
(90,037)
5,603
(29,805)
(1,639)
(331)
6,710
(79,201)
(51,107)
2,732
$ (127,576) $
4,831
995
(11,063)
(39,535)
1,594
(411)
(43,589)
58,768
3,636
1,569
29,805
696
(215)
(7,091)
87,168
63,460
(2,711)
147,917
$
46
NOI from Real Estate Operations
Revenues
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Greater Philadelphia properties
Dispositions
Other
Property operating expenses
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Greater Philadelphia properties
Dispositions
Other
NOI from real estate operations
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
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
$
$
$
376,109
16,237
6,574
17,635
9,698
59,358
7,489
493,100
135,900
4,040
1,450
7,587
2,562
23,638
5,558
180,735
240,209
12,197
5,124
10,048
7,136
35,720
1,931
312,365
89.3%
23.97
$
$
$
366,274
8,593
1,368
17,155
7,458
88,616
6,368
495,832
133,577
1,791
227
7,405
1,402
39,295
4,123
187,820
232,697
6,802
1,141
9,750
6,056
49,321
2,245
308,012
89.4%
23.91
$
$
$
9,835
7,644
5,206
480
2,240
(29,258)
1,121
(2,732)
2,323
2,249
1,223
182
1,160
(15,657)
1,435
(7,085)
7,512
5,395
3,983
298
1,080
(13,601)
(314)
4,353
(0.1)%
0.06
(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 $849,000 in connection with lease terminations) and a $5.3 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 159 office properties, comprising
74% of our operating office square footage as of December 31, 2012. This pool of properties changed from the pool used for
purposes of comparing 2012 and 2011 in COPT’s 2012 Annual Report on Form 10-K and our Current Report on Form 8-K
dated July 25, 2013 due to the removal of 15 properties disposed in 2013, two properties expected to be conveyed to lenders
and one property approved for redevelopment.
47
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.
Impairment Losses
We recognized the impairment losses described below in 2012 and 2011:
•
•
•
•
•
$46.1 million in 2012 related to properties in Greater Philadelphia, as discussed further above;
in connection primarily with the Strategic Reallocation Plan, we determined that the carrying amounts of certain properties
identified for disposition would 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 those properties exceeded their respective estimated fair values, plus any exit costs incurred,
of: $19.0 million in 2012 ($23.2 million classified as discontinued operations and including $4.2 million in exit costs); and
$122.5 million in 2011 ($67.8 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
General, Administrative and Leasing Expenses
For the Years Ended
December 31,
2012
2011
(in thousands)
$
$
70,263
(3,353)
66,910
$
$
70,512
80,509
151,021
In 2012, we incurred additional expenses in connection with our executive transition that year and 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.
48
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
Amortization of deferred financing costs
Interest expense recognized on interest rate swaps
Other interest
Interest expense reclassified to discontinued operations
Capitalized interest
Total
For the Years Ended December 31,
2012
2011
Variance
$ 63,124
14,728
13,851
6,274
6,243
3,697
2,784
(10,397)
(13,903)
$ 86,401
(in thousands)
$ 75,760
2,914
20,267
10,158
6,596
4,600
1,406
(14,264)
(17,400)
$ 90,037
$ (12,636)
11,814
(6,416)
(3,884)
(353)
(903)
1,378
3,867
3,497
$ (3,636)
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
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 was due primarily to a $44.6 million decrease in impairment losses and a $16.1
million increase in gain on sales of properties in 2012 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.
49
Adjusted EBITDA Interest Coverage Ratio and Adjusted EBITDA Fixed Charge Coverage Ratio
Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is net income (loss) 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 income (loss), 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 COPT.
The tables below set forth the computation of Adjusted EBITDA interest and fixed charge coverage ratios of COPT and
subsidiaries and reconciliations of Adjusted EBITDA to net income reported on the COPT’s 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
Gain on sales of non-operating properties
Net loss (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 unit distributions
Denominator for Adjusted EBITDA fixed charge coverage ratio
For the Years Ended December 31,
2011
2012
2013
(Dollars in thousands)
$
$ 101,544
90,231
1,978
119,773
32,047
(40,780)
(9,004)
(2,683)
20,341
96,798
381
124,418
66,910
(793)
(20,928)
(33)
$ (127,576)
104,301
(6,710)
136,594
151,021
2,023
(4,811)
(2,717)
206
—
—
$ 293,312
(3,589)
229
—
$ 283,734
(1,820)
156
29,805
$ 280,266
$
90,231
(5,451)
(1,015)
83,765
19,971
660
$ 104,396
$
$
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
$
Adjusted EBITDA interest coverage ratio
Adjusted EBITDA fixed charge coverage ratio
3.5x
2.8x
3.2x
2.6x
3.0x
2.6x
(1) Includes amounts included in continuing operations and discontinued operations.
(2) Includes income taxes on continuing operations and gains on sales of real estate.
50
Funds from Operations
Funds from operations (“FFO”) is defined as net income (loss) 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
51
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 COPLP 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 COPLP 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.
52
The tables appearing below and on the following page sets forth the computation of the above stated measures for the years
ended December 31, 2009 through 2013 and provides reconciliations to the GAAP measures of COPT and subsidiaries
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
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 (benefit) on impairments on other properties
Valuation allowance on tax asset associated with FFO comparability
adjustments
Loss on interest rate derivatives
(Gain) loss on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Diluted FFO comparability adjustments allocable to restricted 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,
2010
2011
2012
(Dollars and shares in thousands, except per share data)
$(127,576)
134,131
$ 45,504
123,243
$ 20,341
121,937
$ 61,299
109,386
2009
2013
$ 101,544
117,719
—
346
492
32,047
70,263
70,512
631
—
640
—
(9,004)
242,306
(20,928)
191,959
(4,811)
72,748
(1,077)
168,301
—
171,325
(660)
(3,710)
(19,971)
(2,904)
(912)
$ 214,149
—
(2,683)
—
—
1,855
—
(40,780)
2,904
168
$ 175,613
85,167
3,869
89,036
57
89,093
(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)
—
—
—
—
—
—
$ 149,240
59,611
4,608
64,219
333
64,552
(660)
(308)
(16,102)
—
(1,629)
$ 152,626
1,967
—
—
—
—
—
—
—
—
$ 154,593
55,930
5,717
61,647
477
62,124
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
$
$
2.40
1.97
$
$
2.13
2.11
$
$
0.72
2.14
$
$
2.30
2.31
$
$
2.46
2.49
53
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 impairments on other properties
Valuation allowance on tax asset associated with FFO comparability
adjustments
Loss on interest rate derivatives
(Gain) loss on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Diluted FFO comparability adjustments allocable to restricted shares
Diluted FFO, as adjusted for comparability
2013
For the Years Ended December 31,
2010
2011
2012
(Dollars and shares in thousands, except per share data)
$(136,567)
$ (2,163)
$ 25,587
2009
$ 39,217
$ 70,418
3,283
117,719
—
(87)
(8,439)
121,937
346
134,131
492
2,116
123,243
631
4,495
109,386
640
32,047
414
(927)
1,111
(912)
(9,004)
$ 214,149
—
(2,683)
—
—
1,855
—
(40,780)
2,904
168
$ 175,613
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)
(1,077)
$ 148,645
3,424
(2,829)
—
—
—
—
—
—
$ 149,240
59,944
4,608
—
64,552
—
1,010
(493)
—
(1,629)
—
$ 152,626
1,967
—
—
—
—
—
—
—
—
$ 154,593
56,407
5,717
—
62,124
Denominator for diluted EPS
Weighted average common units
Anti-dilutive EPS effect of share-based compensation awards
Denominator for diluted FFO per share measures
85,224
3,869
—
89,093
73,454
4,235
53
77,742
69,382
4,355
111
73,848
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
$ 95,246
4,280
$ 99,526
$ 81,720
4,617
$ 86,337
$ 116,717
7,173
$ 123,890
$ 98,510
7,266
$ 105,776
$ 87,596
7,962
$ 95,558
41.1%
46.5%
56.7%
45.0%
52.1%
52.6%
170.3%
233.5%
78.4%
62.8%
71.2%
70.9%
55.8%
62.6%
61.8%
54
Property Additions
The table below sets forth the major components of our additions to properties for 2013 and 2012:
Construction, development and redevelopment
Capital improvements on operating properties
Tenant improvements on operating properties (1)
Acquisition of operating properties (2)
Variance
For the Years Ended December 31,
2012
2013
(in thousands)
$ 165,523
26,827
22,068
33,684
$ 248,102
$ 207,753
22,855
19,031
—
$ 249,639
42,230
(3,972)
(3,037)
(33,684)
1,537
$
$
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment.
(2) Excludes intangible assets and liabilities associated with acquisitions.
Cash Flows
Net cash flow provided by operating activities decreased $32.9 million from 2012 to 2013 due primarily to:
•
•
•
•
$39.0 million in previously accreted interest and early extinguishment of debt costs paid in 2013 mostly in connection with
the repayment of our 4.25% Exchangeable Senior Notes;
$10.1 million decrease in cash flow from construction contract and other services attributable in large part to the timing of
cash payments and collections on construction projects; and
$19.0 million in proceeds in 2012 from our sale of stock in The KEYW Holding Corporation; offset in part by
$29.7 million in cash paid to cash settle interest rate swaps in 2012.
Net cash flow provided by investing activities decreased $133.5 million from 2012 to 2013 due mostly to a $142.0 million
decrease from sales of properties primarily in connection with the Strategic Reallocation Plan.
Net cash flow provided by financing activities in 2013 was $4.6 million and included the following:
•
•
•
•
•
•
•
•
net proceeds from the issuance of common shares (or units) of $157.4 million; and
net proceeds from borrowings of $64.9 million; offset in part by
redemption of preferred shares (or units) of $84.8 million; and
dividends and/or distributions to shareholders and/or unitholders of $119.8 million.
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;
net proceeds from the issuance of common and preferred shares (or units) of $371.1 million;
redemption of preferred shares (or units) of $55.0 million; and
dividends and/or distributions to shareholders and/or unitholders of $114.1 million.
Liquidity and Capital Resources of COPT
COPLP is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its operations and
owns almost all of its assets. COPT issues public equity from time to time, but does not otherwise generate any capital itself or
conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed
by COPLP. COPT itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of
COPLP. COPT’s principal funding requirement is the payment of dividends on its common and preferred shares. COPT’s
principal source of funding for its dividend payments is distributions it receives from COPLP.
As of December 31, 2013, COPT owned 95.6% of the outstanding common units and 96.4% of the outstanding preferred
units in COPLP; the remaining common and preferred units in COPLP were owned by third parties, which included certain
members of COPT’s Board of Trustees. As the sole general partner of COPLP, COPT has the full, exclusive and complete
responsibility for COPLP’s day-to-day management and control.
55
The liquidity of COPT is dependent on COPLP’s ability to make sufficient distributions to COPT. The primary cash
requirement of COPT is its payment of dividends to its shareholders. COPT also guarantees some of the Operating
Partnership’s debt, as discussed further in Note 11 of the notes to consolidated financial statements included elsewhere herein.
If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger COPT’s guarantee obligations, then
COPT will be required to fulfill its cash payment commitments under such guarantees. However, COPT’s only significant
asset is its investment in COPLP.
As discussed further below, we believe the Operating Partnership’s sources of working capital, specifically its cash flow
from operations, and borrowings available under its unsecured line of credit, are adequate for it to make its distribution
payments to COPT and, in turn, for COPT to make its dividend payments to its shareholders.
COPT’s short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to its
shareholders. COPT periodically accesses the public equity markets to raise capital by issuing common and/or preferred
shares.
For COPT to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually at least
90% of its ordinary taxable income. As a result of this distribution requirement, it cannot rely on retained earnings to fund its
ongoing operations to the same extent that some other companies can. COPT may need to continue to raise capital in the
equity markets to fund COPLP’s working capital needs, acquisitions and developments.
Liquidity and Capital Resources of COPLP
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, distributions to our security holders and improvements to existing
properties. As of December 31, 2013, we also had $54.4 million in cash and cash equivalents. We believe that our liquidity
and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. We
completed a significant amount of dispositions in each of the last three years since launching our Strategic Reallocation Plan,
using most of the proceeds to fund development activities and repay debt. While we completed the Strategic Reallocation Plan
in 2013, we expect to complete future dispositions opportunistically, depending on the circumstances pertaining to properties,
or groups of properties, or when capital markets otherwise warrant.
We aim to maintain an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt
(including the effect of interest rate swaps) from public markets and banks. We also use secured nonrecourse debt from
institutional lenders and banks, when appropriate. In addition, we periodically access the public equity markets to raise capital
by issuing common and/or preferred shares.
We use our Revolving Credit Facility to initially finance much of our investing activities. We subsequently pay down the
facility using proceeds from long-term borrowings, equity issuances and property sales. The lenders’ aggregate commitment
under the facility is $800.0 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 loan agreement. The Revolving Credit
Facility matures in July 2017, 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 0.15% of the total availability of the facility. As of December 31, 2013, the maximum
borrowing capacity under this facility totaled $800.0 million, of which $784.6 million was available.
We also have construction loan facilities that provide for aggregate borrowings of up to $26.2 million as of December 31,
2013, of which $12.3 million was available to fund future construction costs at specific projects.
56
The following table summarizes our contractual obligations as of December 31, 2013 (in thousands):
2014
2015
2016
2017
2018
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
82,458
7,025
76,980
$ 389,751
6,218
70,581
$ 274,605
4,734
52,695
$ 404,110
1,505
34,768
$
— $ 758,084
5,854
139,918
1,374
30,431
$ 1,909,008
26,710
405,373
92,730
14,000
34,047
13,270
—
—
—
—
—
—
—
—
106,730
47,317
24,416
887
1,091
$ 319,634
13,836
776
425
$ 508,857
—
714
335
$ 333,083
—
708
66
$ 441,157
$
—
698
10
32,513
—
75,501
—
$ 979,357
38,252
79,284
1,927
$ 2,614,601
(1) The contractual obligations set forth in this table exclude property operations contracts that may be terminated with notice of one month
or less.
(2) Represents scheduled principal amortization payments and maturities only and therefore excludes a net discount of $8.0 million. We
expect to refinance the balloon payments that are due in 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 outstanding debt at December 31, 2013 for the terms of such debt. For variable rate debt, the amounts
reflected above used December 31, 2013 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. Properties under, or contractually
committed for, construction or approved for redevelopment as of December 31, 2013 included the following:
Activity
Construction of new office properties
Redevelopment of existing office properties
Number of
Properties
7
3
Square Feet
(in thousands)
1,049
376
Estimated
Remaining Costs
(in millions)
$
91.4
34.0
Expected Year
For Costs to be
Incurred Through
2015
2016
(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.
We expect to spend more than $280.0 million on construction and development costs and approximately $40.0 million on
improvements to operating properties (including the commitments set forth in the table above) in 2014. We expect to fund the
construction and development costs and our debt maturities in 2014 using cash on hand, 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,
2013, we were in compliance with these financial covenants.
Off-Balance Sheet Arrangements
During 2013, 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
57
venture agreement) and we control one of the management committee positions. We and our partner were to 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). Upon our initial contribution of property to the joint venture in
2005, we deferred gain recognition due to the loan guarantees discussed above. 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. As of December 31, 2012, we had
a negative investment balance of $6.4 million.
On December 6, 2013, the holder of mortgage debt encumbering all of the joint venture’s properties foreclosed on the
properties. As a result, title to the properties was transferred to the mortgage lender and the joint venture was relieved of the
debt obligation. The joint venture still had $5.6 million in nonrecourse mezzanine debt as of December 31, 2013; however, the
joint venture no longer holds any property or other assets and has ceased all business operations. Management estimates there
to be no fair value to the guarantees as of December 31, 2013 because the actions that would trigger performance are all within
our control. We recognized a gain on the substantive disposition of our investment in the joint venture in 2013 of $6.3 million,
which is included in the line entitled “gain on sales of real estate, net of income taxes” on our consolidated statements of
operations.
We had no other material off-balance sheet arrangements during 2013.
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, which are 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, 2013 related to
the reporting of the effect of significant reclassifications from accumulated other comprehensive income. This guidance
requires an entity to report, either parenthetically on the face of the financial statements or in a single footnote, changes in the
components of accumulated other comprehensive income for the period. An entity is required to separately report the amount
of such changes attributable to reclassifications (and the statements of operations line affected by such reclassifications) and the
amount of such changes attributable to current period other comprehensive income. For amounts that are not required to be
reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures
that provide additional detail about those amounts. Our adoption of this guidance did not 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 a 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.
58
The following table sets forth as of December 31, 2013 our debt obligations and weighted average interest rates for fixed
rate debt by expected maturity date (dollars in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
For the Years Ending December 31,
Debt:
Fixed rate debt (1)
Weighted average interest rate
Variable rate debt (2)
$
$
88,669
$ 109,092
$ 279,339
$ 155,615
7.21%
814
5.58%
6.56%
5.64%
$ 286,877
$
— $ 250,000
$
$
1,374
4.61%
$ 643,938
$1,278,027
4.28%
5.26%
— $ 120,000
$ 657,691
(1) Represents principal maturities only and therefore excludes net discounts of $8.0 million.
(2) As of December 31, 2013, maturities include $250.0 million in 2015 that may be extended for two one-year periods and $250.0 million
in 2017 that may be extended for one year, subject to certain conditions.
The fair value of our debt was $1.9 billion as of December 31, 2013 and $2.1 billion as of December 31, 2012. If interest
rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $81.0 million as of
December 31, 2013 and $63.0 million as of December 31, 2012.
The following table sets forth information pertaining to interest rate swap contracts in place as of December 31, 2013 and
2012 and their respective fair values (dollars in thousands):
$
Notional
Amount
100,000
100,000
100,000
100,000
37,691 (1)
100,000
100,000
100,000
100,000
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
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
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
Fair Value at December 31,
2013
2012
$
$
(279) $
(277)
(861)
(861)
(832)
(94)
(105)
3,377
3,217
3,285
$
(594)
(591)
(1,313)
(1,313)
(1,268)
(263)
(272)
(154)
(417)
(6,185)
(1) The notional amount of this instrument is scheduled to amortize to $36.2 million.
Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would
have increased by $3.6 million in 2013 and $5.0 million in 2012 if short-term interest rates were 1% higher. Interest expense in
2012 was more sensitive to a change in interest rates than 2013 due primarily to our having a higher average variable-rate debt
balance in 2012.
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, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of December 31, 2013 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.
59
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.
(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 COPT’s definitive
proxy statement relating to the 2014 Annual Meeting of COPT’s 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 Schedules. 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.
EXHIBIT
NO.
3.1.1
3.1.2
3.1.3
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).
60
EXHIBIT
NO.
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
4.3
5.1
DESCRIPTION
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).
Indenture, dated as of May 6, 2013, among Corporate Office Properties, L.P., as issuer, Corporate Office
Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current
Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
Registration Rights Agreement, dated May 6, 2013, among Corporate Office Properties, L.P., Corporate Office
Properties Trust, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC (filed with the Company’s
Current Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
61
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).
62
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
10.1.31
10.1.32
10.2.1*
10.2.2*
10.2.3*
10.3*
10.4.1*
10.4.2*
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).
Thirtieth Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated July 16, 2013 (filed with the Company’s Current Report on Form 8-K dated July 19, 2013
and incorporated herein by reference).
Thirty-First Amendment to Second Amended and Restated Limited Partnership Agreement of Corporate Office
Properties, L.P., dated September 17, 2013 (filed with the Company’s Current Report on Form 8-K dated
September 19, 2013 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).
63
EXHIBIT
NO.
10.4.3*
10.4.4*
10.5.1*
10.5.2*
10.5.3*
10.5.4*
10.5.5*
10.5.6*
10.5.7*
10.5.8*
10.6.1*
10.6.2*
10.6.3*
10.6.4*
10.7.1*
10.7.2*
10.8.1*
DESCRIPTION
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).
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 with the Company’s Annual Report on
Form 10-K dated February 12, 2013 and incorporated herein by reference).
Letter Agreement, dated March 8, 2013, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Roger A. Waesche, Jr. (filed with the Company’s Current Report on Form 8-K dated March
13, 2013 and incorporated herein by reference).
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).
64
EXHIBIT
NO.
10.9
10.10
10.11.1*
10.11.2*
10.12.1*
10.12.2*
10.13*
10.14
10.15
10.16.1
10.16.2
10.17
10.18.1
10.18.2
DESCRIPTION
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).
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).
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).
Corporate Office Properties Trust and Corporate Office Properties, L.P. Executive Change in Control and
Severance Plan (filed with the Company’s Current Report on Form 8-K dated March 13, 2013 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).
Second Amendment to Credit Agreement, dated as of July 16, 2013, 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; Capital One, N.A.,
Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s
Current Report on Form 8-K dated July 19, 2013 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).
Second Amendment to Term Loan Agreement, dated as of July 16, 2013, 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; Capital One,
N.A.; Regions Bank; Manufacturers and Traders Trust Company; and SunTrust Bank (filed with the Company’s
Current Report on Form 8-K dated July 19, 2013 and incorporated herein by reference).
65
EXHIBIT
NO.
10.18.3
10.19
10.20
10.21
10.22
10.23
12.1
12.2
21.1
21.2
23.1
31.1
31.2
31.3
31.4
32.1
32.2
32.3
DESCRIPTION
First Amendment to Term Loan Agreement, dated as of July 16, 2013, 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.; PNC Bank, National
Association; Royal Bank of Canada; and Wells Fargo Bank, National Association (filed with the Company’s
Current Report on Form 8-K dated July 19, 2013 and incorporated herein by reference).
Indenture, dated as of May 6, 2013, among Corporate Office Properties, L.P., as issuer, Corporate Office
Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s Current
Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
Registration Rights Agreement, dated May 6, 2013, among Corporate Office Properties, L.P., Corporate Office
Properties Trust, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC (filed with the Company’s
Current Report on Form 8-K dated May 7, 2013 and incorporated herein by reference).
Form of Global Note Representing $250,000,000 Aggregate Principal Amount of 5.25% Senior Notes due 2024
(filed with the Company’s Current Report on Form 8-K dated September 13, 2013 and incorporated herein by
reference).
Indenture, dated as of September 16, 2013, by and among Corporate Office Properties, L.P., as issuer, Corporate
Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed with the Company’s
Current Report on Form 8-K dated September 19, 2013 and incorporated herein by reference).
First Supplemental Indenture, dated September 16, 2013, by and among Corporate Office Properties, L.P., as
issuer, Corporate Office Properties Trust, as guarantor, and U.S. Bank National Association, as trustee (filed
with the Company’s Current Report on Form 8-K dated September 19, 2013 and incorporated herein by
reference).
COPT’s Statement regarding Computation of Earnings to Combined Fixed Charges and Preferred Share
Dividends (filed herewith).
COPLP’s Statement regarding Computation of Consolidated Ratio of Earnings to Fixed Charges (filed
herewith).
Subsidiaries of COPT (filed herewith).
Subsidiaries of COPLP (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, L.P. required by Rule 15d-14
(a) under the Securities Exchange Act of 1934, as amended (filed herewith).
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-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 Exchange 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 Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished
herewith).
Certification of the Chief Executive Officer of Corporate Office Properties, L.P. required by Rule 15d-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 Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished
herewith).
66
EXHIBIT
NO.
32.4
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
DESCRIPTION
Certification of the Chief Financial Officer of Corporate Office Properties, L.P. required by Rule 15d-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 Exchange Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended). (Furnished
herewith).
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.
67
Pursuant to the requirements of Section 13 or 15(d) 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: March 3, 2014
Date: March 3, 2014
By:
By:
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
68
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
Title
Date
/s/ Thomas F. Brady
(Thomas F. Brady)
/s/ Roger A. Waesche, Jr.
(Roger A. Waesche, Jr.)
/s/ Stephen E. Riffee
(Stephen E. Riffee)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/s/ Clay W. Hamlin, III
(Clay W. Hamlin)
/s/ Philip L. Hawkins
(Philip L. Hawkins)
/s/ Elizabeth A. Hight
(Elizabeth A. Hight)
/s/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Jay H. Shidler
(Jay H. Shidler)
/s/ Richard Szafranski
(Richard Szafranski)
/s/ Kenneth D. Wethe
(Kenneth D. Wethe)
Chairman of the Board and Trustee
March 3, 2014
President and Chief Executive Officer and Trustee March 3, 2014
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
March 3, 2014
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
69
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 3, 2014
Date: March 3, 2014
CORPORATE OFFICE PROPERTIES, L.P.
By: Corporate Office Properties Trust,
its General Partner
/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:
70
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
Title
Date
/s/ Thomas F. Brady
(Thomas F. Brady)
/s/ Roger A. Waesche, Jr.
(Roger A. Waesche, Jr.)
/s/ Stephen E. Riffee
(Stephen E. Riffee)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/s/ Clay W. Hamlin, III
(Clay W. Hamlin)
/s/ Philip L. Hawkins
(Philip L. Hawkins)
/s/ Elizabeth A. Hight
(Elizabeth A. Hight)
/s/ David M. Jacobstein
(David M. Jacobstein)
/s/ Steven D. Kesler
(Steven D. Kesler)
/s/ C. Taylor Pickett
(C. Taylor Pickett)
/s/ Jay H. Shidler
(Jay H. Shidler)
/s/ Richard Szafranski
(Richard Szafranski)
/s/ Kenneth D. Wethe
(Kenneth D. Wethe)
Chairman of the Board and Trustee
March 3, 2014
President and Chief Executive Officer and Trustee March 3, 2014
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
March 3, 2014
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
71
(This page has been left blank intentionally.)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Management’s Reports of Internal Control Over Financial Reporting
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Reports of Independent Registered Public Accounting Firm
Corporate Office Properties Trust
Corporate Office Properties, L.P.
Consolidated Financial Statements of Corporate Office Properties Trust
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012
and 2011
Consolidated Statements of Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Financial Statements of Corporate Office Properties, L.P.
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012
and 2011
Consolidated Statements of Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2013
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
F-12
F-13
F-14
F-15
F-16
F-18
F-62
F-63
F-1
Corporate Office Properties Trust 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, 2013. 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, 2013 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, 2013 based on the criteria in Internal Control-Integrated
Framework (1992) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
F-2
Corporate Office Properties, L.P. 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, 2013. 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, 2013 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, 2013 based on the criteria in Internal Control-Integrated
Framework (1992) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
F-3
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, 2013 and December 31, 2012, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present 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, 2013, based on
criteria established in Internal Control - Integrated Framework (1992) 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 schedules, 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 schedules, 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
March 3, 2014
F-4
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Unitholders of Corporate Office Properties, L.P.:
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, L.P. at December 31, 2013 and December 31, 2012, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedules listed in the accompanying index present 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, 2013, based on criteria established in Internal
Control - Integrated Framework (1992) 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 schedules, 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 schedules, 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
March 3, 2014
F-5
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 $2,976 and $4,694, respectively)
Deferred rent receivable (net of allowance of $2,126 and $913, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing and financing costs, net
Mortgage and other investing receivables
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 23)
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 87,394,512 at December 31, 2013 and 80,952,986 at December 31,
2012)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive income (loss)
Total Corporate Office Properties Trust’s shareholders’ equity
Noncontrolling interests in subsidiaries:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interest and equity
See accompanying notes to consolidated financial statements.
F-6
December 31,
2013
2012
$ 2,702,693
511,608
3,214,301
—
54,373
11,448
27,000
89,456
59,258
66,267
53,663
54,186
$ 3,629,952
$ 2,597,666
565,378
3,163,044
140,229
10,594
21,557
16,845
85,802
75,879
59,952
35,798
44,059
$ 3,653,759
$ 1,927,703
98,785
31,492
29,080
10,369
—
3,309
14,207
2,114,945
$ 2,019,168
97,922
27,632
28,698
11,995
6,420
6,185
8,942
2,206,962
17,758
10,298
249,083
333,833
874
1,814,015
(641,868)
3,480
1,425,584
809
1,653,672
(617,455)
(5,435)
1,365,424
53,468
8,800
9,397
71,665
1,497,249
$ 3,629,952
52,122
8,800
10,153
71,075
1,436,499
$ 3,653,759
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 income (loss) of
unconsolidated entities and income taxes
Equity in income (loss) 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 (income) loss attributable to noncontrolling interests:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Net income (loss) attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Net income (loss) attributable to COPT common shareholders
Net income (loss) attributable to COPT:
Income (loss) from continuing operations
Discontinued operations, net
Net income (loss) attributable to COPT
Basic earnings per common share (1)
Income (loss) from continuing operations
Discontinued operations
Net income (loss) attributable to COPT common shareholders
Diluted earnings per common share (1)
Income (loss) from continuing operations
Discontinued operations
Net income (loss) attributable to COPT common shareholders
For the Years Ended December 31,
2013
2012
2011
$ 377,611
83,386
62,363
523,360
$ 353,080
81,219
73,836
508,135
$ 332,856
75,755
84,345
492,956
167,199
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
—
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(3,283)
(660)
(3,894)
93,707
(19,971)
(2,904)
70,832
41,366
52,341
93,707
0.21
0.62
0.83
0.21
0.62
0.83
159,206
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
(943)
—
8,894
(546)
(381)
7,967
12,353
20,320
21
20,341
154,375
107,003
81,639
83,213
30,306
6,122
462,658
30,298
(90,037)
5,603
(1,639)
(29,805)
(85,580)
(331)
6,710
(79,201)
(51,107)
(130,308)
2,732
(127,576)
8,439
87
(660)
(660)
369
1,209
(119,428)
20,977
(16,102)
(20,844)
(1,827)
—
(1,694) $ (135,530)
9,297
11,680
20,977
$ (71,341)
(48,087)
$ (119,428)
(0.19) $
0.16
(0.03) $
(0.19) $
0.16
(0.03) $
(1.28)
(0.69)
(1.97)
(1.28)
(0.69)
(1.97)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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-7
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income/Loss
(in thousands)
Net income (loss)
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives
Losses on interest rate derivatives included in interest expense
Unrealized equity in other comprehensive income of equity method investee
Realized equity in other comprehensive income of equity method investee
Loss on interest rate derivatives upon discontinuing hedge accounting
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to COPT
For the Years Ended December 31,
2013
$ 101,544
2012
20,341
2011
$ (127,576)
$
6,791
2,740
1,070
(1,070)
—
9,531
111,075
(8,453)
$ 102,622
$
(7,676)
3,697
—
—
—
(3,979)
16,362
961
17,323
(31,531)
4,601
—
—
28,430
1,500
(126,076)
8,132
$ (117,944)
See accompanying notes to consolidated financial statements.
F-8
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
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 ownership of COPLP
Comprehensive loss
Dividends
Distributions to owners of common and preferred units in COPLP
Contributions from noncontrolling interests in other consolidated entities
Distributions to noncontrolling interest in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interest
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 ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Distributions to noncontrolling interests in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interest
Tax benefit from share-based compensation
Balance at December 31, 2012 (80,952,986 common shares outstanding)
Redemption of preferred shares (3,390,000 shares)
Conversion of common units to common shares (311,343 shares)
Common shares issued to the public (4,485,000 shares)
Common shares issued under at-the-market program (1,500,000 shares)
Acquisition of property and noncontrolling interest in other consolidated entity for COPLP
common units
Preferred
Shares
Common
Shares
$
$ 216,333
—
—
—
—
—
—
—
—
—
—
—
—
—
216,333
—
172,500
—
(55,000)
—
—
—
—
—
—
—
—
—
—
333,833
(84,750)
—
—
—
—
669
1
46
2
2
—
—
—
—
—
—
—
—
—
720
2
—
86
—
—
1
—
—
—
—
—
—
—
—
809
—
3
45
15
—
Additional
Paid-in
Capital
$ 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
2,904
3,994
117,916
38,432
(1,296)
Exercise of share options (39,331 shares)
Share-based compensation
Restricted common share redemptions (78,440 shares)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP
Comprehensive income
Dividends
Distributions to owners of common and preferred units in COPLP
Contributions from noncontrolling interests in other consolidated entities
Distributions to noncontrolling interests in other consolidated entities
Adjustment to arrive at fair value of redeemable noncontrolling interest
Tax loss from share-based compensation
Balance at December 31, 2013 (87,394,512 common shares outstanding)
—
—
—
—
—
—
—
—
—
—
—
$ 249,083
See accompanying notes to consolidated financial statements.
779
7,603
(2,002)
(744)
—
—
—
—
—
(7,121)
(122)
$ 1,814,015
—
2
—
—
—
—
—
—
—
—
—
874
$
F-9
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
$
$
(281,794) $
—
—
—
—
—
—
(119,428)
(132,819)
—
—
—
—
—
(534,041)
—
—
—
(1,827)
—
—
—
—
20,977
(102,564)
—
—
—
—
(617,455)
(2,904)
—
—
—
—
—
—
—
—
93,707
(115,216)
—
—
—
—
—
(641,868) $
(4,163) $
—
—
—
—
—
—
2,430
—
—
—
—
—
—
(1,733)
—
—
—
—
—
—
—
—
(3,702)
—
—
—
—
—
(5,435)
—
—
—
—
—
—
—
—
—
8,915
—
—
—
—
—
—
3,480
$
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
—
(3,997)
—
—
2,665
—
—
—
744
7,077
—
(4,940)
86
(1,045)
—
—
71,665
Total
$ 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
(84,750)
—
117,961
38,447
1,369
779
7,605
(2,002)
—
109,699
(115,216)
(4,940)
86
(1,045)
(7,121)
(122)
$ 1,497,249
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
Construction, development and redevelopment
Tenant improvements on operating properties
Other capital improvements on operating properties
Acquisitions of operating properties
Proceeds from dispositions of properties
Mortgage and other loan receivables funded
Mortgage and other loan receivables payments received
Leasing costs paid
Decrease (increase) in restricted cash associated with investing activities
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility
Unsecured senior notes
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
Common share dividends paid
Preferred share dividends paid
Distributions paid to noncontrolling interests in COPLP
Restricted share redemptions
Other
Net cash provided by (used in) 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,
2013
2012
2011
$ 482,763
63,647
(176,243)
(63,853)
(28,022)
(81,575)
(11,116)
—
298
(979)
(27,909)
1,962
6
158,979
$ 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
(201,808)
(21,950)
(23,940)
—
148,569
(14,077)
144
(14,429)
8,178
(477)
(119,790)
504,000
592,413
94,049
(504,000)
(9,481)
(612,093)
(9,361)
—
157,444
(84,750)
(93,474)
(21,335)
(4,958)
(2,002)
(1,862)
4,590
43,779
(165,275)
(27,103)
(20,066)
(48,308)
290,603
(14,232)
10,113
(13,278)
(872)
2,162
13,744
(232,667)
(37,195)
(16,906)
(32,856)
79,638
(23,377)
16,759
(15,997)
(2,232)
4,446
(260,387)
329,000
—
403,117
1,180,000
—
456,206
(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)
10,594
54,373
$
5,559
10,594
$
10,102
5,559
$
See accompanying notes to consolidated financial statements.
F-10
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:
(Increase) decrease in accounts receivable
Decrease in restricted cash and marketable securities
(Increase) decrease in prepaid expenses and other assets
Increase (decrease) in accounts payable, accrued expenses and other liabilities
Increase (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:
Increase (decrease) 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 transfer of property in settlement of debt
Decrease in debt in connection with transfer of property in settlement of debt
Increase in fair value of derivatives applied to accumulated other comprehensive
income (loss) and noncontrolling interests
Dividends/distribution payable
COPLP common units issued to acquire property and noncontrolling interest in
other consolidated entity
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 COPLP
ownership
Increase in redeemable noncontrolling interest and decrease in shareholders’
equity to carry redeemable noncontrolling interest at fair value
For the Years Ended December 31,
2013
2012
2011
$ 101,544
$
20,341
$ (127,576)
119,773
31,068
—
(11,116)
5,451
(5,196)
1,159
(11,687)
—
6,530
(68,689)
(3,093)
124,418
62,702
—
—
6,243
(11,776)
3,155
(20,961)
—
9,982
(3,430)
(4,551)
136,594
151,021
29,805
(17,314)
6,596
(10,102)
5,540
(7,528)
(2,452)
11,920
1,670
(1,165)
(10,334)
576
(5,128)
3,960
4,161
—
$ 158,979
8,049
14,934
8,550
4,101
(1,916)
(28,003)
$ 191,838
(6,243)
2,160
(687)
(18,041)
(2,055)
—
$ 152,143
2,947
$
$
$
73,780
$ 146,500
$
— $
$
$
$
$
$
$
$
$
9,470
29,080
5,194
3,997
744
7,121
$
$
$
$
$
$
(1,227) $
— $
$
$
12,042
16,304
11,719
3,040
—
—
4,040
28,698
$
$
1,438
35,038
— $
—
2,814
4,627
3,955
$
$
$
1,521
2,798
1,315
See accompanying notes to consolidated financial statements.
F-11
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except unit 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 $2,976 and $4,694, respectively)
Deferred rent receivable (net of allowance of $2,226 and $913, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing and financing costs, net
Mortgage and other investing receivables
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
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 23)
Redeemable noncontrolling interest
Equity:
Corporate Office Properties, L.P.’s equity:
Preferred units
General partner, 9,431,667 preferred units outstanding at December 31, 2013 and 12,821,667
preferred units outstanding at December 31, 2012
Limited partner, 352,000 preferred units outstanding at December 31, 2013 and 2012
Common units, 87,394,512 and 80,952,986 held by the general partner and 3,977,700 and
4,067,542 held by limited partners at December 31, 2013 and 2012, respectively
Accumulated other comprehensive income (loss)
Total Corporate Office Properties, L.P.’s equity
Noncontrolling interests in subsidiaries
Total equity
Total liabilities, redeemable noncontrolling interest and equity
See accompanying notes to consolidated financial statements.
December 31,
2013
2012
$ 2,702,693
511,608
3,214,301
—
54,373
3,981
27,000
89,456
59,258
66,267
53,663
54,186
$ 3,622,485
$ 2,597,666
565,378
3,163,044
140,229
10,594
14,781
16,845
85,802
75,879
59,952
35,798
44,059
$ 3,646,983
$ 1,927,703
98,785
31,492
29,080
10,369
—
3,309
6,740
2,107,478
$ 2,019,168
97,922
27,632
28,698
11,995
6,420
6,185
2,166
2,200,186
17,758
10,298
249,083
8,800
333,833
8,800
1,226,318
3,605
1,487,806
9,443
1,497,249
$ 3,622,485
1,089,391
(5,708)
1,426,316
10,183
1,436,499
$ 3,646,983
F-12
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per unit 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 income (loss) of
unconsolidated entities and income taxes
Equity in income (loss) 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 (income) loss attributable to noncontrolling interests in consolidated entities
Net income (loss) attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income (loss) attributable to COPLP common unitholders
Net income (loss) attributable to COPLP:
Income (loss) from continuing operations
Discontinued operations, net
Net income (loss) attributable to COPLP
Basic earnings per common unit (1)
Income (loss) from continuing operations
Discontinued operations
Net income (loss) attributable to COPLP common unitholders
Diluted earnings per common unit (1)
Income (loss) from continuing operations
Discontinued operations
Net income (loss) attributable to COPLP common unitholders
For the Years Ended December 31,
2013
2012
2011
$ 377,611
83,386
62,363
523,360
$ 353,080
81,219
73,836
508,135
$ 332,856
75,755
84,345
492,956
167,199
113,214
58,875
5,857
30,869
5,436
381,450
141,910
(82,010)
3,834
(27,030)
—
36,704
2,110
(1,978)
36,836
55,692
92,528
9,016
101,544
(3,907)
97,637
(20,631)
(2,904)
74,102
42,875
54,762
97,637
0.21
0.62
0.83
0.21
0.62
0.83
$
$
$
$
$
$
$
159,206
107,998
70,576
43,678
31,900
5,711
419,069
89,066
(86,401)
7,172
(943)
—
154,375
107,003
81,639
83,213
30,300
6,122
462,652
30,304
(90,037)
5,603
(1,639)
(29,805)
(85,574)
8,894
(331)
(546)
(381)
6,710
(79,195)
7,967
(51,107)
12,353
(130,302)
20,320
2,732
21
(127,570)
20,341
244
507
(127,326)
20,848
(16,762)
(21,504)
(1,827)
—
(2,483) $ (144,088)
9,194
11,654
20,848
$ (76,082)
(51,244)
$ (127,326)
(0.19) $
0.15
(0.04) $
(0.19) $
0.15
(0.04) $
(1.29)
(0.71)
(2.00)
(1.29)
(0.71)
(2.00)
$
$
$
$
$
$
$
(1) Basic and diluted earnings per common unit are calculated based on amounts attributable to common unitholders of Corporate Office
Properties, L.P.
See accompanying notes to consolidated financial statements.
F-13
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Comprehensive Income/Loss
(in thousands)
Net income (loss)
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives
Losses on interest rate derivatives included in interest expense
Unrealized equity in other comprehensive income of equity method investee
Realized equity in other comprehensive income of equity method investee
Loss on interest rate derivatives upon discontinuing hedge accounting
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income (loss) attributable to COPLP
For the Years Ended December 31,
2013
$ 101,544
2012
20,341
2011
$ (127,570)
$
6,791
2,740
1,070
(1,070)
—
9,531
111,075
(4,125)
$ 106,950
$
(7,676)
3,697
—
—
—
(3,979)
16,362
615
16,977
(31,531)
4,601
—
—
28,430
1,500
(126,070)
244
$ (125,826)
See accompanying notes to consolidated financial statements.
F-14
Corporate Office Properties, L.P. and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Limited Partner
Preferred Units
General Partner
Preferred Units
Common Units
Balance at December 31, 2010
Issuance of common units resulting from public issuance of common shares
Issuance of common units resulting from exercise of share options
Share-based compensation
Restricted common unit redemptions
Issuance of common units to COPT to balance units owned with common shares
Comprehensive loss
Distributions to owners of common and preferred units
Contributions from noncontrolling interests in subsidiaries
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interest
Tax benefit from share-based compensation
Balance at December 31, 2011
Issuance of preferred units resulting from public issuance of preferred shares
Redemption of preferred units resulting from redemption of preferred shares
Issuance of common units resulting from public issuance of common shares
Issuance of common units resulting from exercise of share options
Share-based compensation
Restricted common unit redemptions
Comprehensive income
Distributions to owners of common and preferred units
Distributions to noncontrolling interests in subsidiaries
COPT contribution to COPLP of distribution from subsidiary
Adjustment to arrive at fair value of redeemable noncontrolling interest
Tax benefit from share-based compensation
Balance at December 31, 2012
Redemption of preferred units resulting from redemption of preferred shares
Issuance of common units resulting from public issuance of common shares
Issuance of common units resulting from common shares issued under COPT at-
the-market program
Acquisition of property and noncontrolling interest in subsidiary for COPLP
common units
Issuance of common units resulting from exercise of share options
Share-based compensation
Restricted common unit redemptions
Comprehensive income
Distributions to owners of common and preferred units
Contributions from noncontrolling interests in subsidiaries
Distributions to noncontrolling interests in subsidiaries
Adjustment to arrive at fair value of redeemable noncontrolling interest
Tax loss from share-based compensation
Balance at December 31, 2013
Units
352,000
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
Amount
$216,333
Amount
$ 8,800
—
—
—
—
—
660
(660)
—
—
—
—
8,800
Units
69,668,226
— 4,600,000
191,264
—
302,226
—
—
(114,687)
— 1,666,083
Amount
Units
$1,083,963
8,121,667
145,367
—
2,461
—
14,267
—
(3,990)
—
—
—
— (144,088)
—
16,102
— (124,582)
— (16,102)
(23)
—
—
—
—
—
—
—
(1,315)
—
—
—
47
—
—
—
972,107
76,313,112
216,333
8,121,667
(6,848)
—
172,500
— 6,900,000
—
—
— (2,200,000)
(55,000)
204,696
— 8,625,000
—
—
61,624
—
928
—
—
11,184
160,643
—
—
—
(3,379)
(139,851)
—
—
—
—
—
660
(656)
20,844
(86,337)
—
— (20,844)
(660)
—
—
—
—
—
1,608
—
—
—
—
(3,955)
—
—
—
—
—
43
—
—
—
1,089,391
85,020,528
333,833
12,821,667
8,800
— (3,390,000)
—
—
(84,750)
117,961
— 4,485,000
—
—
Accumulated
Other
Comprehensive
Income (Loss)
$
Noncontrolling
Interests in
Subsidiaries
Total
Equity
$1,314,825
145,367
2,461
14,267
(3,990)
—
(124,664)
(141,344)
261
(16)
(1,315)
47
1,205,899
165,652
(55,000)
204,696
928
11,184
(3,379)
18,927
(107,841)
(655)
—
(3,955)
43
1,436,499
(84,750)
117,961
10,176
—
—
—
—
—
52
—
284
(16)
—
—
10,496
—
—
—
—
—
—
1,950
—
(655)
(1,608)
—
—
10,183
—
—
(4,447) $
—
—
—
—
—
2,610
—
—
—
—
—
(1,837)
—
—
—
—
—
—
(3,871)
—
—
—
—
—
(5,708)
—
—
—
—
—
— 1,500,000
38,447
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
660
(660)
—
—
—
—
$ 8,800
—
—
—
—
—
—
—
—
—
19,971
— (19,971)
—
—
—
—
—
—
—
—
$249,083
9,431,667
221,501
39,331
184,292
(78,440)
—
—
—
—
—
—
91,372,212
3,899
779
7,605
(2,002)
77,006
(99,525)
—
—
(7,121)
(122)
$1,226,318
$
—
—
—
—
—
9,313
—
—
—
—
—
3,605
$
—
38,447
(2,530)
—
—
—
2,749
—
86
(1,045)
—
—
9,443
1,369
779
7,605
(2,002)
109,699
(120,156)
86
(1,045)
(7,121)
(122)
$1,497,249
See accompanying notes to consolidated financial statements.
F-15
Corporate Office Properties, L.P. 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
Construction, development and redevelopment
Tenant improvements on operating properties
Other capital improvements on operating properties
Acquisitions of operating properties
Proceeds from dispositions of properties
Mortgage and other loan receivables funded
Mortgage and other loan receivables payments received
Leasing costs paid
Decrease (increase) in restricted cash associated with investing activities
Other
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility
Unsecured senior notes
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 units
Net proceeds from issuance of common units
Redemption of preferred units
Common unit distributions paid
Preferred unit distributions paid
Restricted unit redemptions
Other
Net cash provided by (used in) 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,
2013
2012
2011
$ 482,763
63,647
(176,243)
(63,853)
(28,022)
(81,575)
(11,116)
—
298
(979)
(27,909)
1,962
6
158,979
$ 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)
(28,021)
(93,715)
(17,314)
—
—
—
(353)
698
(160)
152,149
(201,808)
(21,950)
(23,940)
—
148,569
(14,077)
144
(14,429)
8,178
(477)
(119,790)
504,000
592,413
94,049
(504,000)
(9,481)
(612,093)
(9,361)
—
157,444
(84,750)
(97,772)
(21,995)
(2,002)
(1,862)
4,590
43,779
(165,275)
(27,103)
(20,066)
(48,308)
290,603
(14,232)
10,113
(13,278)
(872)
2,162
13,744
(232,667)
(37,195)
(16,906)
(32,856)
79,638
(23,377)
16,759
(15,997)
(2,232)
4,446
(260,387)
329,000
—
403,117
1,180,000
—
456,206
(991,000)
(11,684)
(124,386)
(3,371)
165,652
205,425
(55,000)
(94,329)
(19,747)
(3,379)
(845)
(200,547)
5,035
(813,000)
(13,755)
(698,100)
(13,113)
—
147,828
—
(121,864)
(16,762)
(3,990)
245
103,695
(4,543)
10,594
54,373
$
5,559
10,594
$
10,102
5,559
$
See accompanying notes to consolidated financial statements.
F-16
Corporate Office Properties, L.P. 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:
(Increase) decrease in accounts receivable
Decrease in restricted cash and marketable securities
(Increase) decrease in prepaid expenses and other assets
Increase (decrease) in accounts payable, accrued expenses and other liabilities
Increase (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:
Increase (decrease) 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 transfer of property in settlement of debt
Decrease in debt in connection with transfer of property in settlement of debt
Increase in fair value of derivatives applied to accumulated other comprehensive
income (loss) and noncontrolling interests
Distributions payable
COPLP common units issued to acquire property and noncontrolling interest in
other consolidated entity
Increase in redeemable noncontrolling interest and decrease in equity to carry
redeemable noncontrolling interest at fair value
For the Years Ended December 31,
2013
2012
2011
$ 101,544
$
20,341
$ (127,570)
119,773
31,068
—
(11,116)
5,451
(5,196)
1,159
(11,687)
—
6,530
(68,689)
(3,093)
124,418
62,702
—
—
6,243
(11,776)
3,155
(20,961)
—
9,982
(3,430)
(4,551)
136,594
151,021
29,805
(17,314)
6,596
(10,102)
5,540
(7,528)
(2,452)
11,920
1,670
(1,165)
(10,334)
1,267
(5,128)
3,269
4,161
—
$ 158,979
8,049
14,122
8,550
4,913
(1,916)
(28,003)
$ 191,838
(6,243)
1,560
(687)
(17,441)
(2,055)
—
$ 152,149
2,947
$
$
73,780
$
$ 146,500
$
— $
$
$
$
$
$
$
9,470
29,080
5,194
7,121
$
$
$
$
(1,227) $
— $
$
$
12,042
16,304
4,040
28,698
$
$
11,719
3,040
—
—
1,438
35,038
— $
—
3,955
$
1,315
See accompanying notes to consolidated financial statements.
F-17
Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
1.
Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-
managed real estate investment trust (“REIT”). Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the
“Operating Partnership”) is the entity through which COPT, the sole general partner of COPLP, conducts almost all of its
operations and owns almost all of its assets. Unless otherwise expressly stated or the context otherwise requires, “we”, “us”
and “our” as used herein refer to each of the Company and the Operating Partnership. We focus 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, 2013, our properties
included the following:
•
•
•
•
183 operating office properties totaling 17.4 million square feet;
10 office properties under, or contractually committed for, construction or approved for redevelopment that
we estimate will total approximately 1.4 million square feet upon completion, including two partially operational properties
included above;
land held or under pre-construction totaling 1,708 acres (including 56 acres controlled but not owned) that we believe are
potentially developable into approximately 20.0 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.
COPLP owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). In
addition to owning real estate, COPLP 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. Some of these services are
performed by a taxable REIT subsidiary (“TRS”).
Interests in COPLP are in the form of common and preferred units. As of December 31, 2013, COPT owned 95.6% of the
outstanding COPLP common units (“common units”) and 96.4% of the outstanding COPLP preferred units (“preferred units”);
the remaining common and preferred units in COPLP were owned by third parties. Three of COPT’s trustees controlled, either
directly or through ownership by other entities or family members, 3.4% of COPLP’s common units as of December 31, 2013.
Common units in COPLP not owned by COPT carry certain redemption rights. The number of common units in COPLP owned
by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the
entitlement of all COPLP common units to quarterly distributions and payments in liquidation is substantially the same as those
of COPT common shareholders. Similarly, in the case of each series of preferred units in COPLP held by COPT, there is a
series of preferred shares of beneficial interest (“preferred shares”) in COPT that is equivalent in number and carries
substantially the same terms as such series of COPLP preferred units. COPT’s common shares are publicly traded on the New
York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.
Because COPLP is managed by COPT, and COPT conducts substantially all of its operations through COPLP, we refer to
COPT’s executive officers as COPLP’s executive officers, and although, as a partnership, COPLP does not have a board of
trustees, we refer to COPT’s Board of Trustees as COPLP’s Board of Trustees.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and
other entities in which COPT has a majority voting interest and control. The COPLP consolidated financial statements include
the accounts of COPLP, its subsidiaries and other entities in which COPLP has 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 they are deemed to be the primary beneficiary of such entities. We eliminate all significant
intercompany balances and transactions in consolidation.
F-18
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its
operations.
Reclassifications
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, including the following:
•
•
amounts associated with our mortgage and other investing receivables were reclassified to a separate line reported on our
consolidated balance sheets; and
amounts on our consolidated statements of operations were reclassified in conjunction with the transfer of properties to, and
from, discontinued operations during 2013. We provide disclosure regarding our discontinued operations in Note 20.
Out of Period Adjustment
During the second quarter of 2013, we identified an error related to the estimated fair value of a redeemable noncontrolling
interest in a real estate joint venture. Changes in such fair value are reported as changes in equity with no impact to net income
or comprehensive income. The error resulted in an understatement of the line entitled “redeemable noncontrolling interest” in
the mezzanine section of our consolidated balance sheet and an overstatement of the line entitled “additional paid-in capital” in
the equity section of our consolidation balance sheet of $3.7 million as of December 31, 2012. We have determined that this
adjustment was not material to our financial statements for 2012 or 2013. Accordingly, this change is reported as an out-of-
period adjustment in the year ended December 31, 2013.
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
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;
F-19
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
•
•
•
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. 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. 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
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. If our analyses indicate that the carrying values
F-20
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
of 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 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 dispose of an operating property and determine that we have no significant continuing involvement in such
property, or determine that an operating property is held for sale, we classify the results of operations for such property as
discontinued operations and classify the assets as held for sale. 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.
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; on our statements of cash flows, we classify cash flows from these securities as operating activities. We report
investments in marketable securities classified as available-for-sale securities at fair value, with net unrealized gains or losses
deferred to accumulated other comprehensive income (loss) (“AOCI”) and realized gains and losses resulting from sales of such
investments recognized through earnings; on our statements of cash flows, we classify cash flows from interest and dividends
earned on these securities as operating activities and cash flows from purchases, sales and maturities of these securities as
investing activities.
F-21
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
COPT’s consolidated noncontrolling interests are comprised of interests in COPLP not owned by COPT (discussed further
in Note 15) and consolidated real estate joint ventures (discussed further in Note 6). COPLP’s consolidated noncontrolling
interests are comprised primarily of interests in our consolidated real estate joint ventures. Also included in COPLP’s
consolidated noncontrolling interests are interests in several real estate entities owned directly by COPT, or a wholly owned
subsidiary of COPT, that generally do not exceed 1%. We evaluate whether noncontrolling interests are subject to redemption
features outside of our control. For noncontrolling interests that are currently redeemable for cash at the option of the holders of
such interests 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 COPT’s consolidated balance sheets or common units
on COPLP’s balance sheet, 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-22
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Revenue Recognition
We recognize minimum rents, net of abatements, on a straight-line basis over the term of tenant leases. The term of a lease
generally includes periods when a tenant: (1) may not terminate its lease obligation early; (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; (3)
possesses renewal rights and the tenant’s failure to exercise such rights imposes a penalty on the tenant material enough such that
renewal appears reasonably assured; and (4) possesses bargain renewal options for such periods. 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.
As discussed above, when we are required to provide improvements under the terms of a lease, we determine whether the
improvements constitute landlord assets or tenant assets; if the improvements are tenant assets, we defer the cost of
improvements funded by us as a lease incentive asset. 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.
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 AOCI 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 AOCI, 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. We made an
accounting policy election to use an exception provided for in the applicable accounting guidance with respect to measuring
counterparty credit risk for derivative instruments; this election enables us to measure the fair value of groups of assets and
F-23
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
liabilities associated with derivative instruments consistently with how market participants would price the net risk exposure as
of the measurement date.
Please refer to Note 12 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 COPT common shares (“restricted shares”) and COPT
performance share units (“PSUs”). We also issued options to purchase COPT common shares (“options”) in prior years. We
account for share-based compensation in accordance with authoritative guidance provided by the Financial Accounting
Standards Board (“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.
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 COPT 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 COPT’s common shares.
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
F-24
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Recurring Fair Value Measurements
The assets held in connection with a non-qualified elective deferred compensation plan held by COPT (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 COPT’s 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 COPT’s consolidated balance sheets. The offsetting liability associated with the deferred
compensation plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and
reported in other liabilities on COPT’s consolidated balance sheets. The assets of the non-qualified elective deferred
compensation plan and other marketable securities that we hold are classified in Level 1 of the fair value hierarchy. The
liability associated with the deferred compensation plan is classified in Level 2 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, 2013, 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.
As of December 31, 2013 and 2012, 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 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 as of December 31, 2011. We sold all of these 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 and $780,000 in 2011.
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 15.5% as of December 31, 2013 and 15.6% as of December 31, 2012. The discount rates 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-25
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing
receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short
maturities of these instruments. As discussed in Note 9, we estimated the fair values of our mortgage and other investing
receivables 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 11,
we estimated the fair value of our unsecured senior notes and exchangeable senior notes based on quoted market rates 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
made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.
Settlement at 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 11 for debt and Note 12
for interest rate derivatives.
F-26
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPT and Subsidiaries
The tables below set forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on
a recurring basis as of December 31, 2013 and 2012 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2013:
Assets:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Marketable securities in deferred compensation plan (1)
Mutual funds
Common stocks
Other
Common stock (1)
Interest rate derivatives (2)
Warrants to purchase common stock in KEYW (2)
Total Assets
Liabilities:
Deferred compensation plan liability (3)
Interest rate derivatives
Total Liabilities
Redeemable noncontrolling interest
December 31, 2012:
Assets:
Marketable securities in deferred compensation plan (1)
Mutual funds
Common stocks
Other
Common stock (1)
Warrants to purchase common stock in KEYW (2)
Total Assets
Liabilities:
Deferred compensation plan liability (3)
Interest rate derivatives
Total Liabilities
Redeemable noncontrolling interest
$
$
$
$
$
$
$
$
$
$
7,090
176
201
298
—
—
7,765
$
$
— $
—
— $
— $
6,275
298
203
809
—
7,585
$
$
— $
—
— $
— $
— $
—
—
—
6,594
301
6,895
$
$
7,467
3,309
10,776
$
— $
— $
—
—
—
294
294
$
$
6,776
6,185
12,961
$
— $
— $
—
—
—
—
—
— $
— $
—
— $
$
17,758
— $
—
—
—
—
— $
— $
—
— $
$
10,298
7,090
176
201
298
6,594
301
14,660
7,467
3,309
10,776
17,758
6,275
298
203
809
294
7,879
6,776
6,185
12,961
10,298
(1) Included in the line entitled “restricted cash and marketable securities” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on COPT’s consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.
F-27
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPLP and Subsidiaries
The tables below set forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value
on a recurring basis as of December 31, 2013 and 2012 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2013:
Assets:
Common stock (1)
Interest rate derivatives (2)
Warrants to purchase common stock in KEYW (2)
Total Assets
Liabilities:
Interest rate derivatives
Redeemable noncontrolling interest
December 31, 2012:
Assets:
Common stock (1)
Warrants to purchase common stock in KEYW (2)
Total Assets
Liabilities:
Interest rate derivatives
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
$
$
$
$
$
$
$
$
298
—
—
298
$
$
— $
— $
809
—
809
$
$
— $
— $
— $
6,594
301
6,895
$
3,309
$
— $
— $
294
294
$
6,185
$
— $
— $
—
—
— $
298
6,594
301
7,193
— $
$
17,758
3,309
17,758
— $
—
— $
809
294
1,103
— $
$
10,298
6,185
10,298
(1) Included in the line entitled “restricted cash and marketable securities” on COPLP’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on COPLP’s consolidated balance sheet.
Nonrecurring Fair Value Measurements
2013 Impairment Losses
We recognized impairment losses in 2013 in connection with the following:
•
•
•
for certain of our operating properties that served as collateral for a non recourse loan, we expected that the cash flows to
be generated by the properties would be insufficient to fund debt service requirements on the loan. While we sought to
negotiate various alternatives with the lender, on December 23, 2013, we conveyed the properties to the lender to
extinguish the loan. We recognized non-cash impairment losses of $11.0 million (all classified as discontinued operations
and including $560,000 in exit costs) on these properties in 2013 resulting primarily from the carrying amount of certain of
these properties located in Colorado Springs, Colorado (“Colorado Springs”) exceeding their fair value;
$15.2 million (all classified as discontinued operations and including $419,000 in exit costs) in connection with properties
and land no longer aligned with our strategy that we sold, mostly in Colorado Springs; and
$5.9 million on two properties in the Greater Baltimore region that Management concluded no longer met our strategic
investment criteria. After shortening our expected holding period for these properties during the period, we determined
that the carrying amount of the properties would not likely be recovered from the cash flows from the operations and sales
of the properties over the shortened period.
F-28
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining the fair values of the
properties (dollars in thousands):
Fair Value of Properties Held as of December 31, 2013
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Impairment
Losses
Recognized in
2013 (1)
Description
Assets
Properties, net
$
— $
— $
4,459
$
4,459
$
31,068
(1) Represents aggregate impairment losses on non recurring fair value measurements resulting in impairment losses, excluding exit
costs incurred of $979,000.
The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value
measurements reported above as of December 31, 2013 (dollars in thousands):
Valuation Technique
Fair Value on
Measurement Date
Unobservable Input
Discounted cash flow $
4,459 Discount rate
Range (Weighted Average)
10.0% (1)
Terminal
capitalization rate
Market rent growth
rate
Expense growth rate
(1) Only one value applied for this unobservable input.
2012 Impairment Losses
9.5% (1)
3.0% (1)
3.0% (1)
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 met our strategic investment
criteria. We determined that the carrying amounts of these properties would 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 contemplated our expectation that we would incur
future cash expenditures of approximately $25.0 million to complete the redevelopment of certain of these properties;
properties sold, or identified for sale, that are no longer aligned with our strategy of $19.0 million ($23.2 million classified
as discontinued operations and including $4.2 million in exit costs), including $6.9 million pertaining to certain properties
in Colorado Springs 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 fair value hierarchy of the valuation techniques used by us in determining the fair values of the
properties (dollars in thousands):
Fair Value of Properties Held as of December 31, 2012
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Impairment
Losses
Recognized in
2012 (1)
Description
Assets (2):
Properties, net
$
— $
— $
173,949
$ 173,949
$
62,702
(1) Represents aggregate impairment losses on non recurring fair value measurements resulting in impairment losses, excluding exit
costs incurred of $4.2 million.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.
F-29
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value
measurements reported above as of December 31, 2012 (dollars in thousands):
Valuation Technique
Fair Value on
Measurement Date
Unobservable Input
Discounted cash flow $
166,650 Discount rate
Range (Weighted Average)
10.0% to 11.0% (10.3%)
Terminal
capitalization rate
8.7% to 10.0% (8.9%)
Market rent growth
rate
Expense growth rate
Yield Analysis
$
2,356 Yield
Market rent rate
Leasing costs
(1) Only one value applied for this unobservable input.
4.
Concentration of Rental Revenue
3.0% (1)
3.0% (1)
12% (1)
$8.50 per square foot (1)
$20.00 per square foot (1)
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 (1)
Five largest tenants
For the Years Ended December 31,
2013
2012
2011
18%
8%
6%
5%
41%
18%
7%
6%
5%
39%
17%
8%
6%
N/A
38%
(1) Includes affiliated organizations and agencies and predecessor companies.
Our rental revenue from the United States Government was earned primarily from properties in the Baltimore/Washington
Corridor, San Antonio, Texas (“San Antonio”), St. Mary’s & King George Counties and Colorado Springs regions. 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 18. Several of these regions, including the Baltimore/Washington
Corridor, Northern Virginia, Washington, DC - Capitol Riverfront, St. Mary’s & King George Counties and Greater Baltimore,
Maryland (“Greater Baltimore”), are within close proximity to each other, and all but three of our regions with real estate
operations (San Antonio, Huntsville, Alabama (“Huntsville”) and Colorado Springs) are located in the Mid-Atlantic region of
the United States.
F-30
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5.
Properties, net
Operating properties, net consisted of the following (in thousands):
Land
Buildings and improvements
Less: accumulated depreciation
Operating properties, net
December 31,
$
2013
430,472
2,869,870
(597,649)
$ 2,702,693
$
2012
427,766
2,725,875
(555,975)
$ 2,597,666
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
2013 Dispositions
December 31,
2013
245,676
265,932
511,608
$
$
2012
236,324
329,054
565,378
$
$
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
additional properties. We completed dispositions of the following properties in 2013 primarily in connection with the Strategic
Reallocation Plan (dollars in thousands):
Project Name
920 Elkridge Landing Road
Location
Linthicum, MD
4230 Forbes Boulevard
Lanham, MD
Date of Sale
6/25/2013
12/11/2013
December 2013 Colorado Springs
Colorado Springs, CO
12/12/2013
Portfolio Disposition
December 2013 Portfolio
Conveyance
Colorado Springs, CO and
12/23/2013
Linthicum, MD
Number
of
Buildings
1
Total
Rentable
Square Feet
103,000
Transaction
Value
$
6,900
Gain on
Disposition
—
$
1
15
14
31
56,000
5,600
1,165,000
133,925
1,021,000
146,876
1,507
1,164
—
2,345,000
$ 293,301
$
2,671
Each of the above dispositions represents property sales except for the December 2013 Portfolio Conveyance, the disposition of
which was completed in connection with a debt extinguishment, as described further below. We also had a disposition of a non-
operating property in 2013 for an aggregate transaction value of $3.5 million. In addition to the gains on dispositions reflected
above, we also recognized impairment losses on certain of these sales that are disclosed in Note 3.
On December 23, 2013, the mortgage lender on a $146.5 million nonrecourse mortgage loan that was secured by the
December 2013 Portfolio Conveyance accepted a deed in lieu of foreclosure on the properties. As a result, we transferred title
to the properties 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 $74 million. Upon completion of this transfer, we recognized a gain on
extinguishment of debt of $67.8 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
impairment losses) and related closing costs.
F-31
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2013 Construction Activities
During 2013, we placed into service an aggregate of 812,000 square feet in eight newly constructed office properties
located in the Baltimore/Washington Corridor, Northern Virginia and Huntsville. As of December 31, 2013, we had seven
office properties under construction, or for which we were contractually committed to construct, that we estimate will total 1.0
million square feet upon completion, including three in Northern Virginia, two in the Baltimore/Washington Corridor, one in
Huntsville and one in San Antonio. We also had redevelopment underway, or otherwise approved, for three office properties
that we estimate will total 376,000 square feet upon completion, including two in Greater Philadelphia and one in the
Baltimore/Washington Corridor.
2012 Dispositions
We completed dispositions of the following properties in 2012 primarily in connection with the Strategic Reallocation Plan
(dollars in thousands):
Project Name
White Marsh Portfolio
Disposition
1101 Sentry Gateway
222 and 224 Schilling Circle
15 and 45 West Gude Drive
11800 Tech Road
400 Professional Drive
Location
White Marsh, MD
San Antonio, TX
Hunt Valley, MD
Rockville, MD
Silver Spring, MD
Gaithersburg, MD
July 2012 Portfolio Disposition 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
Total
Rentable
Square Feet
163,000
Transaction
Value
$ 19,100
Gain on
Disposition
2,445
$
1
2
2
1
1
95,000
56,000
231,000
240,000
130,000
13,500
4,400
49,107
21,300
16,198
1,739
102
—
—
—
23
1,387,000
161,901
16,900
35
2,302,000
$ 285,506
$ 21,186
Each of the above dispositions represents 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 in 2012 for aggregate transaction values totaling $28.1 million. In addition to the gains on dispositions reflected
above, we also recognized impairment losses on certain of these sales that are disclosed in Note 3.
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 impairment losses) and related closing costs.
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
F-32
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
6.
Real Estate Joint Ventures
Consolidated Real Estate Joint Ventures
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures as of
December 31, 2013 (dollars in thousands):
Date
Acquired
LW Redstone Company, LLC 3/23/2010
M Square Associates, LLC
6/26/2007
COPT-FD Indian Head, LLC 10/23/2006
Nominal
Ownership
% as of
12/31/2013
85%
50%
75%
Nature of Activity
Operates three buildings and developing others (2)
Operates two buildings and developing others (3)
Holding land parcel (4)
December 31, 2013 (1)
Encumbered
Assets
$
67,487
48,705
—
Total
Liabilities
39,845
$
41,009
—
Total
Assets
$132,170
60,919
6,436
(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 Baltimore/Washington Corridor).
(4) 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.
$199,525
$
116,192
$
80,854
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, 2013, we had advanced $44.1 million to the City
to fund such costs (included in mortgage and other investing receivables on our consolidated balance sheets, and including
accrued interest thereon). 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. Disclosure regarding activity for this redeemable noncontrolling interest is included in Note
F-33
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. 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 COPT-FD Indian Head, LLC, net cash flows will be distributed to the partners in proportion to their respective
ownership interests.
•
•
The ventures discussed above include only ones in which parties other than COPLP and COPT own interests. During the
periods included herein, we also owned investments in the following consolidated real estate joint ventures:
• Arundel Preserve #5, LLC, a joint venture owning property in Hanover Maryland (in the Baltimore/Washington Corridor)
and in which we had a 50% nominal ownership interest. On September 17, 2013, we acquired our partner’s noncontrolling
interest, along with incremental additional land value in the venture, in exchange for 221,501 common units in COPLP
valued at $5.2 million; and
• MOR Forbes 2 LLC, a joint venture owning property in Lanham, Maryland (in the Baltimore/Washington Corridor) and in
which we had a 50% nominal ownership interest. On December 11, 2013, the joint venture sold the property, after which
the proceeds were distributed to the partners and there was substantially no remaining business operations or property.
We consolidate the real estate joint ventures described above 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 23.
Unconsolidated Real Estate Joint Venture
During the periods included herein, we had a 20% ownership interest in an unconsolidated real estate joint venture that
operated 16 operating properties, and in which we had a negative investment balance of $6.4 million as of December 31, 2012.
We historically accounted for the investment in the joint venture using the equity method of accounting primarily because:
(1) we shared 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 had 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 23, 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 the mortgage debt notified us of the
debt’s default, initiated foreclosure proceedings and terminated responsibility that we carried for management of the properties;
accordingly, we discontinued recognition of losses on this investment under the equity method effective in October 2012 due to
our having neither the obligation nor intent to support the joint venture. 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 as of December 31, 2012 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 loss
recognition under the equity method effective October 2012.
On December 6, 2013, the holder of mortgage debt encumbering all of the joint venture’s properties foreclosed on the
properties. As a result, title to the properties was transferred to the mortgage lender and the joint venture was relieved of the
debt obligation. The joint venture still had $5.6 million in nonrecourse mezzanine debt as of December 31, 2013; however, the
joint venture no longer holds any property or other assets and has ceased all business operations. We continue to be subject to
standard nonrecourse loan guarantees relating to this joint venture that are described further in Note 23; however, we assessed
the nature of these guarantees and determined that the likelihood of us incurring any liability from these guarantees was remote.
Therefore, we recognized a gain on the substantive disposition of our investment in the joint venture in 2013 of $6.3 million,
which is included in the line entitled “gain on sales of real estate, net of income taxes” on our consolidated statements of
operations.
F-34
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Under the terms of the agreements governing the joint venture, net cash flows were to be distributed to the partners in
proportion to their respective ownership interests. We did not recognize fees from the joint venture for property management,
construction and leasing services we provided in 2012 and 2011.
The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture as of December 31,
2012 (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
72,693
(9,857)
62,836
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
Gain on early extinguishment of debt
Net income (loss)
For the Years Ended December 31,
2013
2012
2011
$
6,519
(2,818)
(10,463)
(2,067)
23,013
$ 14,184
$
$
$
7,316
(2,829)
(7,672)
(2,283)
—
(5,468) $
7,577
(3,673)
(3,913)
(2,463)
—
(2,472)
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
Below-market cost arrangements
Above-market leases
Market concentration premium
December 31, 2013
December 31, 2012
Gross
Carrying
Amount
125,504
44,414
12,416
8,925
1,333
192,592
$
$
Accumulated
Amortization
93,885
$
25,962
5,136
7,970
381
133,334
$
Net
Carrying
Amount
Gross
Carrying
Amount
$
$
31,619
18,452
7,280
955
952
59,258
$
$
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
$
$
41,602
23,482
8,316
1,493
986
75,879
Amortization of the intangible asset categories set forth above totaled: $16.2 million in 2013; $21.4 million in 2012; and $28.3
million in 2011. The approximate weighted average amortization periods of the categories set forth above follow: in-place
lease value: six years; tenant relationship value: seven years; below-market cost arrangements: 29 years; above-market leases:
three years; and market concentration premium: 29 years. The approximate weighted average amortization period for all of the
categories combined is 10 years. Estimated amortization expense associated with the intangible asset categories set forth above
for the next five years is: $12.2 million for 2014; $9.9 million for 2015; $8.9 million for 2016; $6.7 million for 2017; and $4.2
million for 2018.
F-35
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Mortgage and Other Investing Receivables
December 31,
2013
$ 110,711
36,390
(80,834)
66,267
$
2012
97,852
30,520
(68,420)
59,952
$
$
Mortgage and other investing receivables, including accrued interest thereon, consisted of the following (in thousands):
Notes receivable from City of Huntsville
Mortgage loans receivable
December 31,
2013
44,055
9,608
53,663
$
$
2012
35,654
144
35,798
$
$
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, 2013, 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 our mortgage
and other investing receivables as of December 31, 2013 or December 31, 2012. The fair value of these receivables
approximated their carrying amounts as of December 31, 2013 and December 31, 2012.
10.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
Prepaid expenses
Lease incentives
Interest rate derivatives
Furniture, fixtures and equipment, net
Deferred tax asset, net (1)
Construction contract costs incurred in excess of billings
Other equity method investments
Other assets
Prepaid expenses and other assets
(1) See Note 19 for further disclosure.
December 31,
2013
19,308
8,435
6,594
6,556
4,305
2,462
2,258
4,268
54,186
$
$
2012
19,270
5,578
—
7,991
6,612
—
2,425
2,183
44,059
$
$
Other assets, as reported above, include operating notes receivable due from tenants with terms exceeding one year totaling
$1.7 million as of December 31, 2013 and $271,000 as of December 31, 2012; we carried allowances for estimated losses for
$87,000 of the December 31, 2013 balance and most of the December 31, 2012 balance.
F-36
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11.
Debt
Debt Summary
Our debt consisted of the following (dollars in thousands):
Maximum
Availability at
December 31,
2013
Carrying Value at
December 31,
2013
December 31,
2012
Stated Interest Rates at
December 31, 2013
Scheduled Maturity
as of
December 31, 2013
Mortgage and Other Secured Loans:
Fixed rate mortgage loans (1)
Variable rate secured loan
Other construction loan facilities
Total mortgage and other secured loans
(2)
$
675,060
$
948,414
3.96% - 7.87% (3)
2014-2024
37,691
—
38,475
29,557
712,751
1,016,446
LIBOR + 2.25% (4)
November 2015
N/A
N/A
Revolving Credit Facility (5)
$
800,000
—
— LIBOR + 0.975% to 1.75%
Term Loan Facilities (5)
Unsecured Senior Notes (5)
3.600% Senior Notes
5.250% Senior Notes
Unsecured notes payable
4.25% Exchangeable Senior Notes (5)
(6)
620,000
770,000
LIBOR + 1.10% to 2.60% (7)
347,244
245,445
1,700
563
—
—
1,788
230,934
3.60%
5.25%
0% (8)
4.25%
July 2017
2015-2019
May 2023
February 2024
2026
April 2030
Total debt
$
1,927,703
$ 2,019,168
(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 $69,000 at December 31, 2013 and $1.3 million at December 31, 2012.
(2) Includes $13.9 million balance on construction loans with maximum available borrowings of $26.2 million.
(3) The weighted average interest rate on these loans was 6.14% at December 31, 2013.
(4) The interest rate on the loan outstanding was 2.42% at December 31, 2013.
(5) Refer to the paragraphs below for further disclosure.
(6) As discussed below, we have the ability to borrow an aggregate of an additional $180.0 million under these term loan facilities, provided
that there is no default under the facilities and subject to the approval of the lenders.
(7) The weighted average interest rate on these loans was 1.79% at December 31, 2013.
(8) 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 $761,000 at December 31,
2013 and $873,000 at December 31, 2012.
All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed our
Revolving Credit Facility, Term Loan Facilities, Unsecured Senior Notes and 4.25% Exchangeable Senior Notes.
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. In addition, the terms
of some of COPLP’s debt may limit its ability to make certain types of payments and other distributions to COPT in the event
of default or when such payments or distributions may prompt failure of debt covenants. As of December 31, 2013, we were
within the compliance requirements of these financial covenants.
F-37
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our debt matures on the following schedule (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
$
89,483
395,969 (1)
279,339
405,615 (2)
1,374
763,938
$
1,935,718 (3)
(1) Includes $250.0 million that may be extended for two one-year periods at our option, subject to certain conditions.
(2) Includes $250.0 million that may be extended for one year at our option, subject to certain conditions.
(3) Represents scheduled principal amortization and maturities only and therefore excludes net discounts of $8.0 million.
We capitalized interest costs of $8.8 million in 2013, $13.9 million in 2012 and $17.4 million in 2011.
The following table sets forth information pertaining to the fair value of our debt (in thousands):
Fixed-rate debt
Unsecured Senior Notes
4.25% Exchangeable Senior Notes
Other fixed-rate debt
Variable-rate debt
Revolving Credit Facility
December 31, 2013
December 31, 2012
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
592,689
563
676,760
657,691
1,927,703
$
$
575,374
575
650,997
657,527
1,884,473
$
$
— $
230,934
950,202
838,032
2,019,168
$
—
240,282
968,180
845,558
2,054,020
In 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. We subsequently amended the Revolving Credit Facility on July
16, 2013. The lenders’ aggregate commitment under the facility is $800.0 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 July 1, 2017, 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 0.15% of the total availability under the facility. The interest rate on
the facility is based on LIBOR (customarily the 30-day rate) plus 0.975% to 1.750%, as determined by the credit ratings
assigned to COPLP by Standard & Poor’s Rating Services, Moody’s Investor Services, Inc. or Fitch Ratings Ltd. (collectively,
the “Ratings Agencies”). The facility also carries a quarterly fee that is based on the lenders’ aggregate commitment under the
facility multiplied by a per annum rate of 0.125% to 0.350%, as determined by the credit ratings assigned to COPLP by the
Ratings Agencies. As of December 31, 2013, the maximum borrowing capacity under this facility totaled $800.0 million, of
which $784.6 million was available.
Weighted average borrowings under our Revolving Credit Facilities totaled $55.5 million in 2013 and $276.5 million in
2012. The weighted average interest rate on our Revolving Credit Facilities was 1.74% in 2013 and 2.27% in 2012.
Term Loan Facilities
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 and subject to the approval of the lenders. In 2013, we amended this term
loan and terminated all but $250.0 million of the loan balance. The term loan matures on September 1, 2015, and may be
extended by two one-year periods at our option, provided that there is no default and we pay an extension fee of 0.15% of the
F-38
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
total availability of the agreement. The variable interest rate on the term loan is based on LIBOR rate (customarily the 30-day
rate) plus 1.10% to 2.00%, as determined by the credit ratings assigned to COPLP by the Ratings Agencies.
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. In 2013, we amended this term loan. The term loan matures on February 14, 2017, and may be
extended by one year at our option, provided that there is no default and we pay an extension fee of 0.15% of the total
availability of the agreement. The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate)
plus 1.10% to 2.00%, as determined by the credit ratings assigned to COPLP by the Ratings Agencies.
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.
Unsecured Senior Notes
In 2013, we issued the following senior notes:
•
•
a $350.0 million aggregate principal amount of 3.600% Senior Notes at an initial offering price of 99.816% of their face
value on May 6, 2013, resulting in proceeds, after deducting discounts of the initial purchasers of the notes, but before
other offering expenses, of $347.1 million. The notes mature on May 15, 2023. The carrying value of these notes reflects
an unamortized discount totaling $2.8 million at December 31, 2013. The effective interest rate under the notes, including
amortization of the issuance costs, was 3.70%; and
a $250.0 million aggregate principal amount of 5.250% Senior Notes at an initial offering price of 98.783% of their face
value on September 16, 2013, resulting in proceeds, after deducting underwriting discounts, but before other offering
expenses, of $245.3 million. The notes mature on February 15, 2024. The carrying value of these notes reflects an
unamortized discount totaling $4.6 million at December 31, 2013. The effective interest rate under the notes, including
amortization of the issuance costs, was 5.49%.
We may redeem these notes, in whole at any time or in part from time to time, at our option, at a redemption price equal to the
greater of (1) the aggregate principal amount of the notes being redeemed and (2) the sum of the present values of the
remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued
as of the date of redemption) discounted to its present value, on a semi-annual basis at an adjusted treasury rate plus a spread
(30 basis points for the 3.600% Senior Notes and 40 basis points for the 5.250% Senior Notes), plus, in each case, accrued and
unpaid interest thereon to the date of redemption. However, in each case, if this redemption occurs on or after three months
prior to the maturity date, the redemption price will be equal to 100% of the principal amount of the notes being redeemed, plus
accrued and unpaid interest thereon to, but not including, the applicable redemption date. These notes are unconditionally
guaranteed by COPT.
Exchangeable Senior Notes
In 2010, COPLP issued a $240.0 million aggregate principal amount of 4.25% Exchangeable Senior Notes due 2030. In
2013, we repaid $239.4 million principal amount of these notes and recognized a $25.9 million loss on early extinguishment of
debt. The carrying value of these notes included a principal amount of $575,000 and an unamortized discount totaling $12,000
as of December 31, 2013 and a principal amount of $240.0 million and an unamortized discount totaling $9.1 million as of
December 31, 2012. 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 COPLP’s
discretion, COPT 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, 2013 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, COPLP 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,
F-39
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 COPLP and rank equally in right of payment with all other senior unsecured indebtedness of COPLP and
are guaranteed by COPT. The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%.
Because the closing price of COPT’s common shares at December 31, 2013 and 2012 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 (in thousands):
Interest expense at stated interest rate
Interest expense associated with amortization of
discount
Total
For the Years Ended December 31,
2013
4,208
2012
$ 10,200
2011
$ 10,200
1,615
5,823
3,651
$ 13,851
3,437
$ 13,637
$
$
Until September 15, 2011, COPLP 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 COPT’s 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 for 2011:
Interest expense at stated interest rate
Interest expense associated with amortization of
discount
Total
$
4,013
2,617
6,630
$
12.
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
37,691 (1)
100,000
100,000
100,000
100,000
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
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
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
$
$
Fair Value at
December 31,
2013
2012
(279) $
(277)
(861)
(861)
(832)
(94)
(105)
3,377
3,217
3,285
$
(594)
(591)
(1,313)
(1,313)
(1,268)
(263)
(272)
(154)
(417)
(6,185)
(1) The notional amount of this instrument is scheduled to amortize to $36.2 million.
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.
F-40
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. 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 sheets (in thousands):
Derivatives
Interest rate swaps designated as cash flow hedges
Interest rate swaps designated as cash flow hedges
December 31, 2013
December 31, 2012
Balance Sheet Location
Prepaid expenses and
other assets
Interest rate derivatives
Fair Value
$ 6,594
(3,309)
Balance Sheet Location
Prepaid expenses and
other assets
Interest rate derivatives
Fair Value
—
$
(6,185)
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and
comprehensive income (in thousands):
Amount of gains (losses) recognized in accumulated other
comprehensive income (loss) (“AOCI”) (effective portion)
Amount of losses reclassified from AOCI into interest expense
(effective portion)
For the Years Ended December 31,
2012
2011
2013
$
6,791
$
(7,676) $
(31,531)
(2,740)
(3,697)
(4,601)
Amount of loss reclassified from AOCI 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
—
—
—
—
28,430
1,375
Over the next 12 months, we estimate that approximately $2.7 million will be reclassified from AOCI 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, 2013, the fair value of
interest rate derivatives in a liability position related to these agreements was $3.3 million, excluding the effects of accrued
interest. As of December 31, 2013, 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 $3.6 million.
13.
Redeemable Noncontrolling Interest
The table below sets forth activity in a redeemable noncontrolling interest in a consolidated real estate joint venture
described in Note 6 (in thousands):
For the Years Ended December 31,
2012
2011
2013
Beginning balance
Distribution to noncontrolling interest
Net income (loss) attributable to noncontrolling interest
Adjustment to arrive at fair value of interest
Ending balance
$
$
10,298
(1,037)
1,376
7,121
17,758
$
$
8,908
—
(2,565)
3,955
10,298
$
$
9,000
—
(1,407)
1,315
8,908
F-41
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
14.
Equity - COPT and Subsidiaries
Preferred Shares
As of December 31, 2013, COPT had 25.0 million preferred shares authorized at $0.01 par value. The table below sets
forth additional information pertaining to COPT’s outstanding preferred shares (dollars in thousands, except per share data):
Series
Series H
Series K
Series L
# of Shares
Issued
2,000,000
531,667
6,900,000
9,431,667
Aggregate
Liquidation
Preference
$
Month of Issuance
50,000 December 2003
January 2007
26,583
172,500
June 2012
$ 249,083
Annual
Annual
Dividend
Dividend
Per Share
Yield
7.500% $1.87500
5.600% $2.80000
7.375% $1.84375
Earliest
Redemption
Date
12/18/2008
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 COPT’s
option on or after the earliest redemption date. The Series K Cumulative Redeemable Preferred Shares are also convertible,
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 the Board of Trustees). In the
case of each series of preferred shares, there is a series of COPLP preferred units owned by COPT that carries substantially the
same terms.
On June 27, 2012, COPT 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. COPT contributed the net proceeds from the sale to COPLP 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.
During 2012 and 2013, COPT redeemed all of the outstanding shares of its following series of preferred shares:
•
•
the 8% Series G Preferred Shares on August 6, 2012 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, and recognized a $1.8 million decrease to net
income available to common shareholders pertaining to the shares’ original issuance costs at the time of the redemption.
the 7.625% Series J Preferred Shares on April 22, 2013 at a price of $25.00 per share, or $84.8 million in the aggregate,
plus accrued and unpaid dividends thereon through the date of redemption, and recognized a $2.9 million decrease to net
income available to common shareholders pertaining to the shares’ original issuance costs incurred at the time of the
redemption.
Common Shares
During 2012 and 2013, COPT completed the following public offerings of common shares:
•
•
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; and
4.485 million common shares in March 2013 at a public offering price of $26.34 per share for net proceeds of $118.1
million after underwriter discounts but before offering expenses.
COPT contributed the net proceeds from these issuances to COPLP in exchange for an equal number of units in COPLP.
In October 2012, COPT established an at-the-market (“ATM”) stock offering program under which it 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. On July 15, 2013, COPT issued 1.5 million common shares at a weighted average price of $26.05 per share under the
ATM program; net proceeds from the shares issued totaled $38.5 million, after payment of $586,000 in commissions to sales
agents. The proceeds from these shares were contributed to COPLP in exchange for an equal number of common units in
COPLP. COPT’s remaining capacity under the ATM Plan is an aggregate gross sales price of $110.9 million in stock sales.
F-42
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Holders of COPLP common units converted their units into COPT common shares on the basis of one common share for
each common unit in the amount of 311,343 in 2013 and 234,246 in 2012.
COPT declared dividends per common share of $1.10 in 2013, $1.10 in 2012 and $1.65 in 2011.
See Note 16 for disclosure of common share activity pertaining to our share-based compensation plans.
15.
Equity - COPLP and Subsidiaries
General Partner Preferred Units
The table below sets forth information pertaining to preferred units in COPLP held by COPT at December 31, 2013
(dollars in thousands, except per unit data):
Series
Series H
Series K
Series L
# of Units
Issued
2,000,000
531,667
6,900,000
9,431,667
Aggregate
Liquidation
Preference
$
Month of Issuance
50,000 December 2003
January 2007
26,583
172,500
June 2012
$ 249,083
Annual
Annual
Distributio
Distributi
on Yield
n Per Unit
7.500% $1.87500
5.600% $2.80000
7.375% $1.84375
Earliest
Redemption
Date
12/18/2008
1/9/2017
6/27/2017
In the case of each series of preferred units, COPT had preferred shares that carry substantially the same terms. Each series of
preferred units are redeemable for cash in the amount of its liquidation preference at our option on or after the earliest
redemption date. The Series K Preferred Units are also convertible, subject to certain conditions, into common units on the
basis of 0.8163 common units for each preferred unit. COPT, as holder of these preferred units, is entitled to cumulative
distributions, payable quarterly (as and if declared by the Board of Trustees).
On June 27, 2012, in connection with COPT’s public offering of 6.9 million 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, COPT contributed the
net proceeds from the sale to COPLP 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.
In 2012 and 2013, COPLP redeemed all of the outstanding units of its following series of preferred units held by COPT:
•
•
the 8% Series G Preferred Units on August 6, 2012 at a price of $25.00 per unit, or $55.0 million in the aggregate, plus
accrued and unpaid distributions thereon through the date of redemption, and recognized a $1.8 million decrease to net
income available to common unitholders pertaining to the units’ original issuance costs at the time of the redemption.
the 7.625% Series J Preferred Units on April 22, 2013 at a price of $25.00 per unit, or $84.8 million in the aggregate, plus
accrued and unpaid distributions thereon through the date of redemption, and recognized a $2.9 million decrease to net
income available to common unitholders pertaining to the units’ original issuance costs at the time of the redemption.
Limited Partner Preferred Units
COPLP 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 COPLP at COPLP’s 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 COPT common shares in accordance with the terms of COPLP’s agreement of limited
partnership.
F-43
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Common Units
COPT owned 95.6% of COPLP’s common units as of December 31, 2013 and 95.2% as of December 31, 2012. Three of
COPT’s trustees also controlled, either directly or through ownership by other entities or family members, an additional 3.4% of
COPLP’s common units as of December 31, 2013.
During 2012 and 2013, COPT acquired additional common units through the following public offerings of common shares:
•
•
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) that were contributed to COPLP in exchange for an equal
number of common units in COPLP; and
4.485 million common shares in March 2013 at a public offering price of $26.34 per share for net proceeds of $118.1
million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for an equal
number of common units in COPLP.
On July 15, 2013, COPT issued 1.5 million common shares at a weighted average price of $26.05 per share, representing
its first issuance under the ATM program. Net proceeds from the shares issued totaled $38.5 million, after payment of $586,000
in commissions to sales agents. The common shares were contributed to COPLP in exchange for 1.5 million common units.
Limited partners in COPLP holding common units have the right to require COPLP to redeem all or a portion of their
common units. COPLP (or COPT as the general partner) has the right, in its sole discretion, to deliver to such redeeming
limited partners for each partnership unit either one COPT common share (subject to anti-dilution adjustment) or a cash
payment equal to the then fair market value of such share (so adjusted) (based on the formula for determining such value set
forth in the partnership agreement). Limited partners holding common units redeemed their units into common shares on the
basis of one common share for each common unit in the amount of 311,343 in 2013 and 234,246 in 2012.
We declared distributions per common unit of $1.10 in 2013, $1.10 in 2012 and $1.65 in 2011.
16.
Share-Based Compensation and Employee Benefit Plans
Share-Based Compensation Plans
In May 2010, COPT adopted the Amended and Restated 2008 Omnibus Equity and Incentive Plan. COPT 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 in COPT 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, COPT 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 the share-based compensation
plans are issued under registration statements on Form S-8 that became effective upon filing with the Securities and Exchange
Commission. In connection with awards of common shares granted by COPT under such share-based compensation plans,
COPLP issues to COPT an equal number of equity instruments with identical terms.
F-44
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table summarizes restricted share transactions under the share-based compensation plans for 2011, 2012 and
2013:
Unvested at December 31, 2010
Granted
Forfeited
Vested
Unvested at December 31, 2011
Granted
Forfeited
Vested
Unvested at December 31, 2012
Granted
Forfeited
Vested
Unvested at December 31, 2013
Restricted shares expected to vest
Weighted
Average
Grant Date
Fair Value
32.77
33.68
34.23
32.86
33.13
23.64
31.43
32.72
29.67
25.91
27.59
30.97
26.96
27.02
Shares
669,858
320,284
(18,058)
(323,706)
648,378
177,662
(17,019)
(374,378)
434,643
193,833
(9,541)
(241,487)
377,448
361,064
$
$
$
The aggregate intrinsic value of restricted shares that vested was $6.3 million in 2013, $9.0 million in 2012 and $11.2
million in 2011.
Our Board of Trustees made the following grants of 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 COPT’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, 2013;
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, 2013; and
69,579 PSUs on March 1, 2013, (the “2013 PSU Grants”) with an aggregate grant date fair value of $1.9 million which
were all outstanding at December 31, 2013.
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 us 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 COPT’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
F-45
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of
fully-vested COPT common shares equal to the sum of:
•
•
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 us 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 the PSUs granted in 2011, 2012 and 2013 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,
2011
2012
2013
$ 49.15
$ 32.77
$ 26.84
$ 35.17
$ 24.39
$ 25.85
29.5%
0.33%
43.2%
0.41%
61.1%
1.32%
F-46
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table summarizes option transactions under the share-based compensation plans for 2011, 2012 and 2013
(dollars in thousands, except per share data):
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
Forfeited/Expired – 2013
Exercised – 2013
Outstanding at December 31, 2013
Exercisable at December 31, 2011
Exercisable at December 31, 2012
Exercisable at December 31, 2013
Shares
1,188,284
(51,598)
(191,264)
945,422
(85,588)
(61,624)
798,210
(117,952)
(39,331)
640,927
945,422
798,210
640,927
Range of Exercise
Price per Share
$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
$18.08 - $51.62
$13.60 - $26.24
$19.63 - $56.00
(1)
(2)
(3)
Weighted
Average
Exercise
Price per
Share
$
$
$
$
$
$
$
$
$
$
$
$
$
33.07
42.82
12.82
36.63
42.98
15.08
37.62
40.91
19.67
38.11
36.63
37.62
38.11
Weighted
Average
Remaining
Contractual
Term
(in Years)
5
4
3
2
Aggregate
Intrinsic
Value
$ 7,987
$
510
$
325
$
68
(1) 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.
(2) 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.
(3) 171,288 of these options had an exercise price ranging from $19.63 to $30.04; 145,187 had an exercise price ranging from
$30.05 to $41.28; 160,402 had an exercise price ranging from $41.29 to $42.74; and 164,050 had an exercise price ranging
from $42.75 to $56.00.
The aggregate intrinsic value of options exercised was $258,000 in 2013, $553,000 in 2012 and $4.0 million in 2011.
We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax (loss)
benefit of $(122,000) in 2013, $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,
2013
2012
2011
$
$
5,412
1,118
1,075
7,605
$
$
8,611
1,371
1,202
11,184
$
$
9,077
2,843
2,347
14,267
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 2013 and 2012; and 0% to 4% for restricted
shares for 2011.
As of December 31, 2013, all of our options are vested and fully expensed. As of December 31, 2013, there was $6.1
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, 2013, there was $2.1 million of unrecognized
F-47
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 matching contributions after one year of credited
service and 100% vested after two years of credited service. We fund all contributions with cash. In 2013, 2012 and 2011, our
matching contributions under the plan totaled approximately $1.1 million each year. The 401(k) plan is fully funded as of
December 31, 2013.
Deferred Compensation Plan
COPT has 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 $7.5 million as of December 31, 2013 and $6.8 million as of
December 31, 2012, and is included in the accompanying COPT consolidated balance sheets.
17.
Operating Leases
We lease our properties to tenants under operating leases with various expiration dates extending to the year 2030. Gross
minimum future rentals on noncancelable leases in our properties as of December 31, 2013 were as follows (in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
$
344,809
310,035
256,228
213,894
163,011
351,111
$ 1,639,088
F-48
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
18.
Information by Business Segment
We have ten reportable operating office property segments (comprised of: the Baltimore/Washington Corridor; Northern Virginia; San Antonio; Huntsville; Washington, DC —
Capitol Riverfront; St. Mary’s and King George Counties; Greater Baltimore; Greater Philadelphia; Colorado Springs; and Other). We also have an operating wholesale data center
segment. In 2013, we made the following revisions to our reportable segments: (1) commenced the reporting of Huntsville (previously grouped into the Other segment) as a
separate segment; (2) reclassified certain properties once included in a segment referred to as Suburban Maryland into the Baltimore/Washington Corridor and Other segments; and
(3) reclassified a property once previously included in the Colorado Springs segment into the Other segment. 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
Huntsville
Washington,
DC - Capitol
Riverfront
St. Mary’s &
King George
Counties
Greater
Baltimore
Greater
Philadelphia
Colorado
Springs
Other
Operating
Wholesale
Data Center
Total
Operating Office Property Segments
Year Ended December 31, 2013
Property operating expenses
NOI from real estate operations
Revenues from real estate operations
$ 237,869
80,554
$ 157,315
28,087
$
Additions to long-lived assets
50,105
Transfers from non-operating properties $
$1,243,099
Segment assets at December 31, 2013
$ 92,010
31,973
$ 60,037
$ 13,090
$ 61,434
$ 616,082
Year Ended December 31, 2012
$
5,050
$ 33,060
1,282
17,631
3,768
$ 15,429
335
$
3,563
— $ 48,799
$
$ 77,773
$118,299
$
$
$
$
$
$
$
$
16,863
7,844
9,019
2,604
98,962
$
$
— $
$
Property operating expenses
NOI from real estate operations
Revenues from real estate operations
$ 238,488
83,050
$ 155,438
25,921
$
Additions to long-lived assets
65,108
Transfers from non-operating properties $
$1,267,357
Segment assets at December 31, 2012
$ 79,574
29,103
$ 50,471
$ 65,157
$ 44,250
$ 569,860
$ 32,018
16,499
$ 15,519
280
$
$
468
$119,369
$
$
3,867
689
$
3,178
26
$
— $
$
$
$
$
$ 28,730
$
16,697
7,555
$
9,142
317
$
— $
$
104,544
Year Ended December 31, 2011
Property operating expenses
NOI from real estate operations
Revenues from real estate operations
$ 237,162
86,782
$ 150,380
33,142
$
Additions to long-lived assets
67,752
Transfers from non-operating properties $
$1,350,678
Segment assets at December 31, 2011
$ 74,214
28,518
$ 45,696
$ 14,770
$
4
$ 484,392
$
$ 30,066
14,371
$ 15,695
$
$ 17,638
$131,412
$
1,368
226
1,142
— $ 26,837
$
$
$
— $
$
$
$ 32,341
17,878
6,762
11,116
2,794
$
$
$
— $
$
111,318
16,568
5,028
11,540
2,341
14
96,143
16,392
4,745
11,647
1,844
289
98,027
$ 42,653
16,583
$ 26,070
2,913
$
$
360
$ 303,823
$ 52,616
19,917
$ 32,699
$
9,690
$ 37,558
$ 320,548
14,366
4,142
10,224
1,638
16,858
100,818
$ 70,668
29,543
$ 41,125
$ 21,086
$ 16,307
$ 402,067
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
F-49
11,924
3,431
8,493
406
28,034
104,657
$ 25,290
9,002
$ 16,288
2,940
$
$
5,438
$
$ 10,075
1,016
9,059
$
7,271
6,360
911
598
70,106
$ 166,790
$
— $
— $
$
$
$
$ 498,633
180,704
$ 317,929
$
56,877
$ 264,290
$2,905,630
— $ 80,002
9,698
2,562
7,136
286
10,626
78,798
$ 24,987
9,231
$ 15,756
2,929
$
$
4,295
$175,830
$ 12,116
2,569
9,547
$
152
$
$
394
$ 82,090
$
6,647
4,815
1,832
$
199
$
$
58,009
$ 100,777
$ 493,100
180,735
$ 312,365
$ 106,801
$ 220,997
$2,945,930
7,458
1,402
6,056
516
5,446
102,572
$ 23,675
8,758
$ 14,917
4,085
$
$
214
$181,384
$
$ 13,923
3,887
$ 10,036
$
$
182
$
— $
$
$
$ 98,808
5,054
3,429
1,625
59
20,169
43,650
$ 495,832
187,820
$ 308,012
$ 105,109
$ 144,388
$3,039,440
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. 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 20)
Total revenues
For the Years Ended December 31,
2013
$ 498,633
62,363
(37,636)
$ 523,360
2012
$ 493,100
73,836
(58,801)
$ 508,135
2011
$ 495,832
84,345
(87,221)
$ 492,956
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 20)
Total property operating expenses
For the Years Ended December 31,
2011
2012
2013
$ 187,820
$ 180,735
$ 180,704
(33,445)
(21,529)
(13,505)
$ 154,375
$ 159,206
$ 167,199
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):
For the Years Ended December 31,
2011
2012
2013
$ 84,345
$ 73,836
$ 62,363
(81,639)
(70,576)
(58,875)
2,706
3,260
3,488
$
$
$
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
F-50
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table reconciles our NOI from real estate operations for reportable segments and NOI from service
operations to income (loss) from continuing operations as reported on the consolidated statements of operations of COPT and
subsidiaries (in thousands):
NOI from real estate operations
NOI from service operations
Interest and other income
Equity in income (loss) 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
COPT consolidated income (loss) from continuing operations
For the Years Ended December 31,
2011
2012
2013
$ 308,012
$ 312,365
$ 317,929
2,706
3,260
3,488
5,603
7,172
3,834
(331)
(546)
2,110
(381)
(1,978)
6,710
—
(113,214)
(5,857)
(30,869)
(5,436)
(82,010)
(24,131)
—
(27,030)
$ 36,836
(107,998)
(43,678)
(31,900)
(5,711)
(86,401)
(37,272)
—
(943)
7,967
$
(107,003)
(83,213)
(30,306)
(6,122)
(90,037)
(53,776)
(29,805)
(1,639)
$ (79,201)
The following table reconciles our segment assets to the consolidated total assets of COPT and subsidiaries (in thousands):
Segment assets
Non-operating property assets
Other assets
Total COPT consolidated assets
As of December 31,
2013
$ 2,905,630
517,564
206,758
$ 3,629,952
2012
$ 2,945,930
570,402
137,427
$ 3,653,759
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, impairment losses and gain and loss on early extinguishment of
debt 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, loss on interest rate derivatives, equity in income (loss) of unconsolidated entities, income taxes and noncontrolling
interests because these items represent general corporate or non-operating property items not attributable to segments.
19.
Income Taxes
COPT elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT,
COPT must meet a number of organizational and operational requirements, including a requirement that it distribute at least
90% of the Company’s adjusted taxable income to its shareholders. As a REIT, COPT generally will not be subject to Federal
income tax on taxable income that it distributes to its shareholders. If COPT fails to qualify as a REIT in any tax year, it will be
subject to Federal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four
subsequent tax years.
COPLP is a limited partnership and is not subject to federal income tax. Its partners are required to report their respective
share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating
Partnership’s taxable income is reported on COPT’s income tax return.
F-51
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The differences between taxable income reported on our income tax returns (estimated 2013 and actual 2012 and 2011) and
net income as reported on our consolidated statements of operations are set forth below (in thousands):
COPLP consolidated 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
Interest expense
Income from unconsolidated entities
COPLP consolidated noncontrolling interests
Other
COPLP consolidated taxable income
Noncontrolling interests, other
Other
COPT consolidated taxable income
For the Years Ended December 31,
2011
2012
2013
(Estimated)
$ 101,544
(973)
10,051
(1,718)
(53,545)
32,047
—
—
1,224
1,978
23,824
1,159
(1,462)
(3,907)
(624)
$ 109,598
(4,930)
—
$ 104,668
$
20,341
$ (127,570)
(10,794)
(2,669)
1,158
(74,858)
66,910
(29,805)
7,854
1,500
381
24,804
3,978
(725)
(636)
(70)
7,369
(622)
741
7,488
(10,708)
(1,298)
751
1,154
151,021
29,805
4,447
(12,078)
6,710
44,070
5,548
(374)
(1,919)
80
89,639
(5,583)
(6)
84,050
$
$
$
$
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 COPT’s 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,
2012
33.2%
0.0%
66.8%
2013
71.8%
22.4%
5.8%
2011
56.9%
9.4%
33.7%
Preferred Shares
For the Years Ended December 31,
2012
100%
0.0%
0.0%
2013
76.2%
23.8%
0.0%
2011
85.9%
14.1%
0.0%
We distributed all of COPT’s REIT taxable income in 2013, 2012 and 2011 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 $324 million lower than
the amount reported on our consolidated balance sheet at December 31, 2013, which is primarily related to differences in basis
for net properties, intangible assets on property acquisitions and deferred rent receivable.
F-52
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We own a TRS that is subject to Federal and state income taxes. Our TRS had income (loss) before income taxes under
GAAP of $330,000 in 2013, $11.3 million in 2012 and $(27.7) million in 2011. Our TRS’ provision for income tax consisted of
the following (in thousands):
Deferred
Federal
State
Current
Federal
State
For the Years Ended December 31,
2011
2012
2013
$ (1,742) $
(236)
(1,978)
(312) $
(69)
(381)
5,510
1,219
6,729
—
—
—
—
—
—
(381) $
(16)
(3)
(19)
6,710
Total income tax (expense) benefit
$ (1,978) $
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
Increase in deferred tax asset valuation allowance
Other
Effective tax rate
For the Years Ended December 31,
2012
34.0%
4.6%
0.0%
0.0%
38.6%
2013
34.0 %
4.5 %
562.9 %
(1.1)%
600.3 %
2011
34.0%
4.6%
0.0%
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, 2013, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $14
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):
Operating loss forward
Share-based compensation
Accrued payroll
Property
Valuation allowance
Deferred tax asset, net
December 31,
2013
2012
$
$
5,382
869
221
(105)
(2,062)
4,305
$
$
6,014
904
12
(111)
(207)
6,612
We recognize a valuation allowance on our deferred tax asset if we believe all or some portion of the deferred tax asset
may not be realized. An increase or decrease in the valuation allowance resulting from a change in circumstances that causes a
change in our judgment about the realizability of our deferred tax asset is included in income. In 2013, we recognized a $1.9
million increase in our deferred tax asset valuation allowance due to a decrease in future projected operating income in our TRS
resulting primarily from our dispositions of certain properties to which the TRS provided amenity services and our planned
reduction in amenity services provided by the TRS at certain other properties. We believe it is more likely than not that the
results of future operations in our TRS will generate sufficient taxable income to realize our December 31, 2013 net deferred
tax asset.
F-53
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
20.
Discontinued Operations and Assets Held for Sale
Income from discontinued operations primarily includes revenues and expenses associated with the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 the Baltimore/Washington Corridor that were sold on May 2, 2012;
11800 Tech Road in the Baltimore/Washington Corridor that was sold on June 14, 2012;
400 Professional Drive in the Baltimore/Washington Corridor for which the title to the property was transferred to the
mortgage lender on July 2, 2012;
23 operating properties primarily in the Baltimore/Washington Corridor and Greater Baltimore regions that were sold on
July 24, 2012;
920 Elkridge Landing Road in the Baltimore/Washington Corridor that was sold on June 25, 2013 (added to discontinued
operations in 2013);
4230 Forbes Boulevard in the Baltimore/Washington Corridor that was sold on December 11, 2013;
15 operating properties in Colorado Springs that were sold on December 12, 2013; and
nine operating properties in the Baltimore/Washington Corridor and five operating properties in Colorado Springs for
which the title to the properties was transferred to the mortgage lender on December 23, 2013 (added to discontinued
operations in 2013).
The table below sets forth the components of discontinued operations reported on our consolidated statements of operations
(in thousands):
$
$
For the Years Ended December 31,
2011
2012
2013
87,221
58,801
37,636
(33,445)
(21,529)
(13,505)
(27,128)
(13,939)
(4,505)
(67,808)
(23,232)
(26,190)
(20)
(3)
(4)
(75)
(24)
—
(14,264)
(10,397)
(8,221)
4,796
20,940
2,671
(384)
67,810
1,736
$ (51,107)
12,353
55,692
$
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
$
$
F-54
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
December 31, 2012
128,740
$
4,068
4,409
2,923
89
140,229
$
21.
Earnings Per Share (“EPS”) and Earnings Per Unit (“EPU”)
COPT and Subsidiaries EPS
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 COPT 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-55
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. 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
(Income) loss 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
Discontinued operations
Discontinued operations attributable to noncontrolling interests
Numerator for basic and diluted EPS on net income (loss)
attributable to COPT common shareholders
Denominator (all weighted averages):
Denominator for basic EPS (common shares)
Dilutive effect of share-based compensation awards
Denominator for basic and diluted EPS (common shares)
Basic EPS:
Income (loss) from continuing operations attributable to COPT
common shareholders
Discontinued operations attributable to COPT common
shareholders
Net income (loss) attributable to COPT common shareholders
Diluted EPS:
Income (loss) from continuing operations attributable to COPT
common shareholders
Discontinued operations attributable to COPT common
shareholders
Net income (loss) attributable to COPT common shareholders
For the Years Ended December 31,
2011
2012
2013
$
$
36,836
9,016
(19,971)
(2,904)
(4,486)
(414)
$
7,967
21
(20,844)
(1,827)
$ (79,201)
2,732
(16,102)
—
1,309
(469)
5,128
(1,037)
18,077
55,692
(3,351)
$ (13,843) $ (88,480)
(51,107)
3,020
12,353
(673)
$
70,418
$
(2,163) $ (136,567)
85,167
57
85,224
73,454
—
73,454
69,382
—
69,382
$
$
$
$
0.21
$
(0.19) $
(1.28)
0.62
0.83
$
0.16
(0.03) $
(0.69)
(1.97)
0.21
$
(0.19) $
(1.28)
0.62
0.83
$
0.16
(0.03) $
(0.69)
(1.97)
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 Series I preferred units
Conversion of Series K preferred shares
Weighted Average Shares Excluded from
Denominator for the Years Ended
December 31,
2013
2012
2011
3,869
176
434
4,235
176
434
4,355
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 385,000 for 2013, 461,000 for 2012 and 638,000 for 2011; and
• weighted average options of 636,000 for 2013, 772,000 for 2012 and 712,000 for 2011, respectively.
As discussed in Note 11, 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 COPT’s common shares during each of the periods was
less than the exchange prices per common share applicable for such periods.
F-56
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
COPLP and Subsidiaries EPU
We present both basic and diluted EPU. We compute basic EPU by dividing net income available to common unitholders
allocable to unrestricted common units under the two-class method by the weighted average number of unrestricted common
units outstanding during the period. Our computation of diluted EPU is similar except that:
•
•
the denominator is increased to include: (1) the weighted average number of potential additional common units that would
have been outstanding if securities that are convertible into our common units were converted; and (2) the effect of dilutive
potential common units 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 units that we added to the denominator.
Summaries of the numerator and denominator for purposes of basic and diluted EPU calculations are set forth below (in
thousands, except per unit data):
Numerator:
Income (loss) from continuing operations
Gain on sales of real estate, net
Preferred unit distributions
Issuance costs associated with redeemed preferred units
(Income) loss from continuing operations attributable to
noncontrolling interests
Income from continuing operations attributable to restricted units
Numerator for basic and diluted EPU from continuing operations
attributable to COPLP common unitholders
Discontinued operations
Discontinued operations attributable to noncontrolling interests
Numerator for basic and diluted EPU on net income (loss)
attributable to COPLP common unitholders
Denominator (all weighted averages):
Denominator for basic EPU (common units)
Dilutive effect of share-based compensation awards
Denominator for basic and diluted EPU (common units)
Basic EPU:
Income (loss) from continuing operations attributable to COPLP
common unitholders
Discontinued operations attributable to COPLP common
unitholders
Net income (loss) attributable to COPLP common unitholders
Diluted EPU:
Income (loss) from continuing operations attributable to COPLP
common unitholders
Discontinued operations attributable to COPLP common
unitholders
Net income (loss) attributable to COPLP common unitholders
For the Years Ended December 31,
2013
2012
2011
$
$
36,836
9,016
(20,631)
(2,904)
(2,977)
(414)
$
7,967
21
(21,504)
(1,827)
$ (79,195)
2,732
(16,762)
—
1,206
(469)
381
(1,037)
18,926
55,692
(930)
$ (14,606) $ (93,881)
(51,107)
(137)
12,353
(699)
$
73,688
$
(2,952) $ (145,125)
89,036
57
89,093
77,689
—
77,689
72,564
—
72,564
$
$
$
$
0.21
$
(0.19) $
(1.29)
0.62
0.83
$
0.15
(0.04) $
(0.71)
(2.00)
0.21
$
(0.19) $
(1.29)
0.62
0.83
$
0.15
(0.04) $
(0.71)
(2.00)
F-57
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Our diluted EPU computations do not include the effects of the following securities since the conversions of such securities
would increase diluted EPU for the respective periods (in thousands):
Conversion of Series I preferred units
Conversion of Series K preferred units
Weighted Average Units Excluded from
Denominator for the Years Ended
December 31,
2013
2012
2011
176
434
176
434
176
434
The following share-based compensation securities were excluded from the computation of diluted EPU because their effect
was antidilutive:
• weighted average restricted units of 385,000 for 2013, 461,000 for 2012 and 638,000 for 2011; and
• weighted average options of 636,000 for 2013, 772,000 for 2012 and 712,000 for 2011.
As discussed in Note 11, we have outstanding senior notes that have an exchange settlement feature but did not affect our
diluted EPU reported above since the weighted average closing price of COPT’s common shares during each of the periods was
less than the exchange prices per common share applicable for such periods.
22.
Quarterly Data (Unaudited)
COPT and Subsidiaries
The tables below set forth selected quarterly information for the years ended December 31, 2013 and 2012 (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.
Revenues
Operating income
Income (loss) from continuing operations
Discontinued operations
Net income (loss)
Net (income) loss 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
Diluted earnings per common share
For the Year Ended December 31, 2013
First
Quarter
$ 126,219
36,165
$
11,662
$
1,261
$
15,277
$
(257)
15,020
(6,106)
—
8,914
0.11
0.11
$
$
$
Second
Quarter
$ 136,527
$ 40,229
(232)
$
(4,502)
$
(4,405)
$
(960)
(5,365)
(4,885)
(2,904)
$ (13,154)
(0.16)
$
(0.16)
$
Third
Quarter
$ 131,812
$ 30,673
$ 10,974
$ (12,974)
(2,000)
$
(964)
(2,964)
(4,490)
—
(7,454)
(0.09)
(0.09)
$
$
$
Fourth
Quarter
$ 128,802
34,843
$
14,432
$
71,907
$
92,672
$
(5,656)
87,016
(4,490)
—
82,526
0.94
0.94
$
$
$
F-58
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
Diluted earnings per common share
COPLP and Subsidiaries
For the Year Ended December 31, 2012
First
Quarter
$ 127,359
34,651
$
13,184
$
(2,949)
$
10,235
$
60
10,295
(4,025)
—
6,270
0.09
0.09
$
$
$
Second
Quarter
$ 123,074
$ 32,069
$ 10,336
$
1,504
$ 11,861
(556)
11,305
(4,167)
—
7,138
0.10
0.10
$
$
$
Third
Quarter
$ 125,067
$ (10,844)
$ (32,048)
$ 11,283
$ (20,765)
1,603
(19,162)
(6,546)
(1,827)
$ (27,535)
(0.39)
$
(0.39)
$
Fourth
Quarter
$ 132,635
33,190
$
16,495
$
$
2,515
19,010
$
(471)
18,539
(6,106)
—
12,433
0.16
0.16
$
$
$
The tables below set forth selected quarterly information for the years ended December 31, 2013 and 2012 (in thousands,
except per share data).
Revenues
Operating income
Income (loss) from continuing operations
Discontinued operations
Net income (loss)
Net loss (income) attributable to noncontrolling interests
Net income (loss) attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income (loss) attributable to COPLP common unitholders
Basic earnings per common unit
Diluted earnings per common unit
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 COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income (loss) attributable to COPLP common unitholders
Basic earnings per common unit
Diluted earnings per common unit
For the Year Ended December 31, 2013
First
Quarter
$ 126,219
36,165
$
11,662
$
1,261
$
15,277
$
336
15,613
(6,271)
—
9,342
0.11
0.11
$
$
$
Second
Quarter
$ 136,527
$ 40,229
(232)
$
(4,502)
$
(4,405)
$
(1,473)
(5,878)
(5,050)
(2,904)
$ (13,832)
(0.16)
$
(0.16)
$
Third
Quarter
$ 131,812
$ 30,673
$ 10,974
$ (12,974)
(2,000)
$
(1,035)
(3,035)
(4,655)
—
(7,690)
(0.09)
(0.09)
$
$
$
Fourth
Quarter
$ 128,802
34,843
$
14,432
$
71,907
$
92,672
$
(1,735)
90,937
(4,655)
—
86,282
0.94
0.94
$
$
$
For the Year Ended December 31, 2012
First
Quarter
$ 127,359
34,651
$
13,184
$
(2,949)
$
10,235
$
570
10,805
(4,190)
—
6,615
0.09
0.09
$
$
$
Second
Quarter
$ 123,074
$ 32,069
$ 10,336
$
1,504
$ 11,861
1
11,862
(4,332)
—
7,530
0.10
0.10
$
$
$
Third
Quarter
$ 125,067
$ (10,844)
$ (32,048)
$ 11,283
$ (20,765)
(404)
(21,169)
(6,711)
(1,827)
$ (29,707)
(0.39)
$
(0.39)
$
Fourth
Quarter
$ 132,635
33,190
$
16,495
$
$
2,515
19,010
$
340
19,350
(6,271)
—
13,079
0.16
0.16
$
$
$
F-59
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
23.
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).
On December 6, 2013, the holder of mortgage debt encumbering all of the joint venture’s properties foreclosed on the
properties. As a result, title to the properties was transferred to the mortgage lender and the joint venture was relieved of the
debt obligation plus accrued interest and penalties. The joint venture still had $5.6 million in nonrecourse mezzanine debt as of
December 31, 2013; however, the joint venture no longer holds any property and has ceased all business operations.
Management estimates there to be no fair value to the guarantees as of December 31, 2013 because the actions that would
trigger performance are all within our control.
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 $2.5 million liability
through December 31, 2013 representing our estimated 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.
F-60
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 2013 follow (in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
$
675
686
686
687
689
75,501
$ 78,924
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-61
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2013, 2012 and 2011
(Dollars in thousands)
Balance at
Beginning
of Year
Charged to
Costs and
Expenses (1)
Charged to
Other
Accounts (2) Deductions (3)
Balance at
End of Year
Accounts Receivables-Allowance for
doubtful accounts
Year ended December 31, 2013
Year ended December 31, 2012
Year ended December 31, 2011
Allowance for Deferred Rent Receivable
Year ended December 31, 2013
Year ended December 31, 2012
Year ended December 31, 2011
Allowance for Deferred Tax Asset
Year ended December 31, 2013
Year ended December 31, 2012
Year ended December 31, 2011
$
$
$
$
$
$
$
$
$
4,694
3,546
2,796
913
703
578
207
207
207
$
$
$
$
$
$
$
$
$
(65) $
$
$
1,532
1,021
— $
$
$
232
125
(1,653) $
(616) $
(396) $
2,976
4,694
3,546
— $
— $
— $
1,213
416
162
$
$
$
— $
(206) $
(37) $
2,126
913
703
1,855
$
— $
— $
— $
— $
— $
— $
— $
— $
2,062
207
207
(1) Amounts charged to costs and expenses are net of recoveries.
(2) Allowances for certain accounts receivables were charged to service company revenue. Deferred rent receivable
allowances were charged to rental revenue.
(3) Deductions reflect adjustments to reserves due to actual write-offs of accounts.
F-62
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2013
(Dollars in thousands)
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)
$
11,960 $
— $
20,435 $
— $
— $
20,435 $
20,435 $
Property (Type) (1)
Location
1000 Redstone Gateway (O)
1100 Redstone Gateway (O)
Huntsville, AL
Huntsville, AL
114 National Business Parkway (O)
Annapolis Junction, MD
11751 Meadowville Lane (O)
1200 Redstone Gateway (O)
1201 M Street (O)
1201 Winterson Road (O)
1220 12th Street, SE (O)
1243 Winterson Road (L)
1302 Concourse Drive (O)
1304 Concourse Drive (O)
1306 Concourse Drive (O)
Richmond, VA
Huntsville, AL
Washington, DC
Linthicum, MD
Washington, DC
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
5,809
—
—
8,080
—
—
—
—
—
—
—
—
364
1,305
—
—
1,288
—
630
2,078
1,999
2,796
1,906
2,917
131 National Business Parkway (O)
Annapolis Junction, MD
132 National Business Parkway (O)
Annapolis Junction, MD
6,785
—
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
— 10,428
9,079
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)
13454 Sunrise Valley Road (O)
Hanover, MD
Hanover, MD
Hanover, MD
Herndon, VA
Herndon, VA
—
—
—
—
—
135 National Business Parkway (O)
Annapolis Junction, MD
11,692
1362 Mellon Road (O)
13857 McLearen Road (O)
Hanover, MD
Herndon, VA
140 National Business Parkway (O)
Annapolis Junction, MD
—
—
—
141 National Business Parkway (O)
Annapolis Junction, MD
12,155
14280 Park Meadow Drive (O)
1460 Dorsey Road (L)
14840 Conference Center Drive (O)
14850 Conference Center Drive (O)
14900 Conference Center Drive (O)
Chantilly, VA
Hanover, MD
Chantilly, VA
Chantilly, VA
Chantilly, VA
—
—
—
—
—
905
306
193
1,386
2,899
2,484
1,706
3,507
3,407
2,398
3,731
1,800
1,572
1,615
3,436
—
46
112
—
2,508
460
933
—
4,598
1,616
4,546
2,946
2,977
13,985
4,950
697
2,459
2,314
1,466
601
405
3,345
4,059
4,472
32
1,906
643
2,995
1,525
—
266
1,224
4,104
—
364
1,305
—
—
1,288
—
630
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
2,398
3,731
1,800
1,572
1,615
3,436
20,877
3,155
52,210
21,974
52,293
5,614
43,397
—
12,911
14,550
15,732
10,569
15,236
55,696
15,018
3,044
3,947
9,831
5,086
1,824
1,179
8,921
16,045
14,222
8,702
32,083
24,810
12,585
17,478
—
8,441
9,582
18,506
20,877
3,519
53,515
21,974
52,293
6,902
43,397
630
14,989
16,549
18,528
12,475
18,153
66,124
17,535
3,631
4,683
13,515
5,991
2,130
1,372
10,307
18,944
16,706
10,408
35,590
28,217
14,983
21,209
1,800
10,013
11,197
21,942
20,877
3,109
52,098
21,974
49,785
5,154
42,464
—
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
8,670
30,177
24,167
9,590
15,953
—
8,175
8,358
14,402
F-63
(412)
—
(959)
(8,583)
(37)
(5,656)
(2,228)
(5,724)
—
(5,078)
(5,115)
(5,513)
(4,284)
(6,929)
(21,768)
(6,856)
(1,047)
(1,744)
(4,500)
(2,131)
(794)
(516)
(3,160)
(5,332)
(5,299)
(1,055)
(3,071)
(6,432)
(4,970)
(5,080)
—
(3,579)
(3,702)
(6,558)
2013
(7)
2002
2007
2013
2001
1985
2003
(8)
1996
2002
1990
1990
2000
2002
1997
1989
1989
1999
1989
1989
1989
1998
1998
1998
2006
2007
2003
1990
1999
(8)
2000
2000
1999
3/23/2010
3/23/2010
6/30/2000
9/15/2006
3/23/2010
9/28/2010
4/30/1998
9/28/2010
12/19/2001
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
9/28/1998
9/29/2004
2/28/2006
7/25/2003
7/25/2003
7/25/2003
Property (Type) (1)
Location
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
15395 John Marshall Highway (O)
Haymarket, 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)
1751 Pinnacle Drive (O)
1753 Pinnacle Drive (O)
201 Technology Drive (O)
206 Research Boulevard (O)
209 Research Boulevard (O)
210 Research Boulevard (O)
21267 Smith Switch Road (O)
21271 Smith Switch Road (O)
22289 Exploration Drive (O)
22299 Exploration Drive (O)
22300 Exploration Drive (O)
22309 Exploration Drive (O)
Linthicum, MD
McLean, VA
San Antonio, TX
San Antonio, TX
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
Dahlgren, VA
McLean, VA
McLean, VA
Lebanon, VA
Aberdeen, MD
Aberdeen, MD
Aberdeen, MD
Ashburn, VA
Ashburn, VA
Lexington Park, MD
Lexington Park, MD
Lexington Park, MD
Lexington Park, MD
23535 Cottonwood Parkway (O)
California, MD
2500 Riva Road (O)
Annapolis, MD
2691 Technology Drive (O)
2701 Technology Drive (O)
2711 Technology Drive (O)
2720 Technology Drive (O)
2721 Technology Drive (O)
2730 Hercules Road (O)
2900 Towerview Road (O)
300 Sentinel Drive (O)
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Herndon, VA
Annapolis Junction, 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
Date
Acquired (6)
54,000
5,193
— 27,964
96,000
—
—
—
3,500
4,415
5,753
2,479
— 14,071
—
—
—
—
—
—
—
—
—
5,595
1,097
2,299
613
1,856
522
688
773
436
— 10,486
—
—
—
—
—
—
—
—
—
—
—
—
—
24,000
23,177
18,027
23,592
—
36,002
—
—
8,275
726
1,813
1,045
1,065
4,192
7,291
1,422
1,362
1,094
2,243
692
2,791
2,098
1,737
2,251
3,863
4,611
8,737
3,207
1,517
—
19,251
5,193
4,473
27,964
498
726
1,715
—
3,500
4,415
5,753
2,479
— 14,071
116
357
11
578
164
201
1,469
1,367
156
5,595
1,097
2,299
613
1,856
522
688
773
436
16,116
10,486
9,554
60
—
32
—
—
—
1,371
853
300
782
223
1
5,107
2,389
1,443
105
1,091
6,498
5,967
114
52
8,275
726
1,813
1,045
1,065
4,192
7,291
1,422
1,362
1,094
2,243
692
2,791
2,098
1,737
2,251
3,863
4,611
8,737
3,207
1,517
—
66,296
56,618
42,419
21,091
15,330
20,939
16,930
26,328
4,127
6,556
3,160
7,589
2,291
4,329
4,461
1,898
58,455
43,907
31,151
17,484
16,119
13,161
2,849
15,909
7,090
6,644
5,338
11,201
3,274
12,146
22,441
17,655
23,054
29,377
15,688
38,110
22,346
44,638
14,177
71,489
84,582
45,919
25,506
21,083
23,418
31,001
31,923
5,224
8,855
3,773
9,445
2,813
5,017
5,234
2,334
68,941
52,182
31,877
19,297
17,164
14,226
7,041
23,200
8,512
8,006
6,432
13,444
3,966
14,937
24,539
19,392
25,305
33,240
20,299
46,847
25,553
46,155
14,177
(22,908)
(8,191)
(7,571)
(8,041)
(5,418)
—
(2,450)
(3,000)
(784)
(1,326)
(956)
(1,835)
(647)
(1,460)
(1,332)
(414)
(18,299)
(12,131)
(4,800)
(542)
(1,261)
(848)
—
(43)
(2,206)
(2,221)
(1,748)
(3,695)
(928)
(3,729)
(6,052)
(5,814)
(8,732)
(6,839)
(5,316)
(12,973)
(4,830)
(3,785)
(1,714)
1989
2006
2006
1997
2000
(7)
2009
2002
1985/2007
1985/2006
2002
2000
2002
1990
1996
2002
1989/1995
1976/2004
2007
2012
2010
2010
(7)
2013
2000
1998
1997
1984/1997
1984
2000
2005
2001
2002
2004
2000
1990
1982/2008
2009
2009
11/30/2001
10/27/2009
11/30/2001
8/14/2002
8/14/2002
5/7/2013
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
9/23/2004
9/23/2004
10/5/2007
9/14/2007
9/14/2007
9/14/2007
12/27/2012
12/27/2012
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
1/31/2002
10/21/1999
9/28/1998
12/20/2005
11/14/2003
11/14/2003
47,045
52,145
41,921
20,365
13,615
20,939
16,930
26,212
3,770
6,545
2,582
7,425
2,090
2,860
3,094
1,742
42,339
34,353
31,091
17,484
16,087
13,161
2,849
15,909
5,719
5,791
5,038
10,419
3,051
12,145
17,334
15,266
21,611
29,272
14,597
31,612
16,379
44,524
14,125
F-64
300 Sentinel Drive Garage (O)
Annapolis Junction, MD
12,424
Property (Type) (1)
Location
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
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
375 West Padonia Road (O)
Timonium, MD
410 National Business Parkway (O)
Annapolis Junction, MD
420 National Business Parkway (O)
Annapolis Junction, 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)
5026 Campbell Boulevard (O)
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
525 Babcock Road (O)
Colorado Springs, CO
5325 Nottingham Drive (O)
5355 Nottingham Drive (O)
5520 Research Park Drive (O)
5522 Research Park Drive (O)
White Marsh, MD
White Marsh, MD
Catonsville, MD
Catonsville, 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
Date
Acquired (6)
22,244
24,856
16,688
—
—
—
—
—
—
21,800
—
22,199
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
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
700
355
816
761
—
—
—
29,687
24,917
22,592
26,197
26,531
18,133
35,606
1,325
38,228
28,426
21,623
22,827
23,018
10,415
23,552
23,412
20,758
1,583
1,619
1,939
890
3,506
13,808
5,796
7,199
11,558
3,858
771
945
3,136
1,924
2,420
2,138
397
3,976
3,562
20,072
4,550
22,522
F-65
409
138
150
—
110
—
5,863
—
139
—
—
—
—
4,852
11
—
10
460
336
88
126
1,299
—
1,250
664
21
1,079
62
111
784
417
643
44
79
485
1,758
38
—
11
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
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
700
355
816
761
—
—
—
30,096
25,055
22,742
26,197
26,641
18,133
41,469
1,325
38,367
28,426
21,623
22,827
23,018
15,267
23,563
23,412
20,768
2,043
1,955
2,027
1,016
4,805
32,744
28,466
26,002
27,619
26,902
21,271
48,332
2,579
41,115
30,611
23,690
25,432
24,674
17,750
25,394
25,782
22,620
2,860
2,360
2,461
1,360
6,114
13,808
16,080
7,046
7,863
8,452
9,063
11,579
13,457
4,937
833
1,056
3,920
2,341
3,063
2,182
476
4,461
5,320
20,110
4,550
22,533
6,316
2,141
2,355
4,934
2,965
3,830
2,882
831
5,277
6,081
20,110
4,550
22,533
(4,421)
(5,007)
(4,112)
(1,740)
(3,202)
—
(3,813)
(182)
(1,634)
(5,559)
(3,229)
(4,001)
(1,927)
(6,086)
(539)
(24)
(966)
(258)
(558)
(712)
(145)
(1,202)
(712)
(2,409)
(1,325)
(2,669)
(1,094)
(7)
(25)
(840)
(595)
(790)
(448)
(124)
(919)
(1,614)
(2,182)
(728)
(2,681)
2007
2005
2006
2010
2009
(7)
2008
2008
2011
2005
2007
2006
2010
1986
2012
2013
2011
1986
1986
1989
1989
1997
2011
2002
2005
2004
1990
1983
1985
1986-1988
1986-1988
1986-1988
1986-1988
1967
2002
2005
2009
2007
2008
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
12/21/1999
6/29/2006
6/29/2006
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
1/9/2007
7/12/2007
1/9/2007
1/9/2007
4/4/2006
3/8/2006
1/29/2008
5825 University Research Court (O)
College Park, MD
15,960
Property (Type) (1)
Location
5850 University Research Court (O)
College Park, MD
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
7130 Columbia Gateway Drive (O)
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
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)
7467 Ridge Road (O)
7700 Potranco Road (O)
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Huntsville, AL
Columbia, MD
Columbia, MD
Hanover, MD
Hanover, MD
Hanover, MD
Hanover, 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
Date
Acquired (6)
21,731
4,000
6,320
—
—
17,512
10,939
—
—
—
—
—
17,300
—
15,800
2,204
—
—
—
—
—
—
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
6,519
2,949
5,406
6,280
4,850
—
—
—
—
—
—
—
5,081
—
7,000
—
1,350
704
1,104
1,342
1,032
1,821
2,732
1,283
1,788
—
4,089
1,367
1,479
972
905
1,629
30,273
7,019
3,907
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
4,388
7,006
3,096
7,042
4,921
16,356
16,280
6,300
3,888
3,570
6,517
38,804
F-66
57
5,385
1,591
312
3,244
13
368
1,946
3,147
114
3,222
2,564
3,894
2,694
1,137
826
1,137
1,074
1,245
2,468
279
8,586
1,784
299
1,961
2,721
333
999
1,540
642
—
—
3,067
—
1,988
871
3,209
2,065
—
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
1,821
2,732
1,283
1,788
—
4,089
1,367
1,479
972
905
1,629
13
14,020
30,330
12,404
5,498
23,551
8,213
34,103
5,407
21,044
8,843
1,825
15,683
6,125
13,810
16,963
13,240
6,919
4,231
4,758
5,008
14,291
407
55,580
6,143
2,270
5,479
6,699
3,762
5,387
8,546
3,738
7,042
4,921
19,423
16,280
8,288
4,759
6,779
8,582
38,817
30,330
14,159
6,395
26,234
9,455
35,856
5,856
23,851
10,267
2,500
16,946
7,015
17,355
20,559
16,371
8,977
4,960
5,660
5,927
16,120
3,768
72,706
7,493
2,974
6,583
8,041
4,794
7,208
11,278
5,021
8,830
4,921
23,512
17,647
9,767
5,731
7,684
10,211
52,837
1/29/2008
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
1/10/2007
1/10/2007
1/10/2007
(2,995)
(4,972)
(2,596)
(4,135)
(3,661)
(4,085)
(1,946)
(7,214)
(4,275)
(249)
(6,406)
(2,756)
(5,809)
(6,425)
(3,646)
(2,424)
(1,539)
(2,173)
(2,137)
(4,893)
2008
1988
1988
2006-2007
1990
2009
2001
2002
1992
2008
2001
1991
1999
1998
1999
1999
2000
2000
2000
2001
— 1973/1999 (8)
1973/1999
1989
1990
1990
1994
1991
2000
2000
2000
(12,358)
(1,949)
(569)
(2,495)
(1,867)
(959)
(1,457)
(2,857)
(1,007)
(43)
(9)
(7,341)
(298)
(2,018)
(1,725)
(1,837)
(3,710)
(6,674)
1996/2013
07/27/2005
2013
1986
2013
1991/1996
1984
1983
1990
1982/1985
3/23/2010
10/13/1998
7/27/2005
1/10/2007
4/16/1999
4/4/2002
4/28/1999
3/30/2005
7125 Columbia Gateway Drive (O)
Columbia, MD
— 17,126
San Antonio, TX
— 14,020
Property (Type) (1)
7700-1 Potranco Road (O)
7700-5 Potranco Road (O)
Location
San Antonio, TX
San Antonio, TX
7740 Milestone Parkway (O)
Hanover, MD
7770 Backlick Road (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 (O)
8110 Corporate Drive (O)
8140 Corporate Drive (O)
8621 Robert Fulton Drive (O)
8661 Robert Fulton Drive (O)
8671 Robert Fulton Drive (O)
870 Elkridge Landing Road (O)
891 Elkridge Landing Road (O)
900 Elkridge Landing Road (O)
901 Elkridge Landing Road (O)
911 Elkridge Landing Road (O)
921 Elkridge Landing Road (O)
938 Elkridge Landing Road (O)
939 Elkridge Landing Road (O)
940 Elkridge Landing Road (L)
9651 Hornbaker Road (D)
9690 Deereco Road (O)
Springfield, VA
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
Columbia, MD
Columbia, MD
Columbia, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Linthicum, MD
Manassas, VA
Timonium, MD
9900 Franklin Square Drive (O)
White Marsh, MD
9910 Franklin Square Drive (O)
White Marsh, MD
4,870
9920 Franklin Square Drive (O)
White Marsh, MD
9930 Franklin Square Drive (O)
9940 Franklin Square Drive (O)
White Marsh, MD
White Marsh, MD
Aerotech Commerce (L)
Colorado Springs, CO
—
—
—
—
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)
—
—
19,712
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,000
6,200
7,600
18,900
—
—
—
—
—
—
—
—
—
—
—
—
—
3,825
6,387
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
2,317
1,510
1,718
2,003
1,165
1,993
1,156
1,215
1,044
1,163
939
1,104
6,050
3,415
979
1,219
1,058
1,137
1,052
900
1,066
1,884
34,365
73,964
21,178
1,611
3,336
3,262
1,536
1,116
1,898
3,767
1,603
21,298
3,716
3,651
5,001
10,117
8,457
12,642
3,764
4,280
9,442
4,772
7,972
4,437
4,861
4,176
4,748
3,756
4,725
203,609
13,723
3,466
6,590
5,293
3,921
3,382
—
F-67
—
—
275
8
—
191
315
1,706
1,809
250
738
2,199
5
—
375
639
—
987
2,252
199
1,042
1,941
6,764
2,000
3,350
1,985
2,024
718
1,131
2,036
170
844
6,100
361
209
1,429
225
281
—
—
—
3,825
6,387
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
2,317
1,510
1,718
2,003
1,165
1,993
1,156
1,215
1,044
1,163
939
1,104
6,050
3,415
979
1,219
1,058
1,137
1,052
900
1,066
1,884
34,640
73,972
21,178
1,802
3,651
4,968
3,345
1,366
2,636
5,966
1,608
1,066
1,884
38,465
80,359
23,142
2,413
5,085
6,317
3,987
1,812
3,316
8,150
2,259
21,298
23,262
4,091
4,290
5,001
11,104
10,709
12,841
4,806
6,221
16,206
6,772
11,322
6,422
6,885
4,894
5,879
5,792
4,895
6,051
6,087
6,965
13,389
12,867
15,158
6,316
7,939
18,209
7,937
13,315
7,578
8,100
5,938
7,042
6,731
5,999
204,453
210,503
19,823
23,238
3,827
6,799
6,722
4,146
3,663
—
4,806
8,018
7,780
5,283
4,715
900
(135)
(202)
(3,128)
(1,558)
(1,678)
(351)
(823)
(1,061)
(600)
(366)
(652)
(1,226)
(312)
(1,680)
(958)
(690)
—
(2,527)
(3,381)
(2,664)
(1,662)
(2,451)
(7,553)
(2,965)
(5,230)
(2,386)
(3,014)
(2,114)
(1,757)
(2,677)
(4,884)
(6,637)
(8,717)
(854)
(1,705)
(1,789)
(890)
(853)
—
2007
2009
2009
2012
2010
1999
1995
1998
1990
1990
1990
1997
1990
2010
1998
1998
(7)
2001
2003
2005-2006
2002
2002
1981
1984
1982
1984
1985
1983
1984
1983
(8)
2010
1988
1999
2005
2006
2001
2000
(8)
3/30/2005
3/30/2005
7/2/2007
3/10/2010
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
6/10/2005
12/30/2003
12/30/2003
8/3/2001
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
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
5/19/2006
Property (Type) (1)
Location
Arborcrest (O)
Arundel Preserve (L)
Ashburn Crossing (L)
Canton Crossing Land (L)
Blue Bell, PA
Hanover, MD
Ashburn, VA
Baltimore, MD
Canton Crossing Util Distr Ctr (O)
Baltimore, MD
Columbia Gateway - Southridge (L)
Columbia, MD
Dahlgren Technology Center (L)
Dahlgren, VA
Expedition VII (L)
Indian Head (L)
InterQuest (L)
Lexington Park, MD
Bryans Road, MD
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)
Northwest Crossroads (L)
NOVA Office A (O)
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)
Aberdeen, MD
San Antonio, TX
Chantilly, VA
Columbia, MD
Colorado Springs, CO
Springfield, VA
Huntsville, AL
Frederick, MD
San Antonio, TX
Linthicum, MD
Chantilly, VA
Chantilly, VA
White Marsh, MD
Herndon, VA
Other Developments, including
intercompany eliminations (V)
Various
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
1,194
21,968
98,186
120,154
— 21,968
—
—
5,425
4,311
— 16,085
—
—
—
—
—
7,300
6,387
978
705
6,436
— 14,382
—
—
—
2,372
— 27,766
—
—
—
—
—
6,486
7,430
2,096
1,637
8,768
— 18,517
—
—
—
—
—
8,703
8,275
1,441
— 23,745
—
7,141
— 26,589
9,614
—
—
96,992
7,125
2,646
490
15,556
2,940
178
726
—
8
4,311
7,391
28,000
10,910
836
9,963
5,500
248
14,166
13,974
501
3,645
88
3,902
1,379
12,492
81
—
—
5,425
4,311
— 16,085
878
—
—
—
—
7,300
6,387
978
705
6,436
— 14,382
—
—
—
2,372
— 27,766
—
—
—
2,103
—
6,486
7,430
2,096
1,637
8,768
— 18,517
—
—
—
—
—
8,703
8,275
1,441
— 23,745
—
7,141
— 26,589
—
9,614
12,550
6,957
16,575
23,734
9,327
1,156
1,431
6,436
14,390
4,311
9,763
55,766
17,396
8,266
12,059
9,240
9,016
32,683
13,974
9,204
11,920
1,529
27,647
8,520
39,081
9,695
7,125
2,646
490
16,434
2,940
178
726
—
8
4,311
7,391
28,000
10,910
836
9,963
7,603
248
14,166
13,974
501
3,645
88
3,902
1,379
12,492
81
106
Year Built or
Renovated
Date
Acquired (6)
1991-1996
10/14/1997
(8)
(8)
(8)
2006
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(7)
7/2/2007
12/27/2012
10/27/2009
10/27/2009
9/20/2004
3/16/2005
3/24/2004
10/23/2006
9/28/2005
1/29/2008
11/14/2003
6/29/2006
9/14/2007
1/20/2006
7/31/2002
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
(5,842)
—
—
—
(2,183)
—
—
—
—
—
—
—
—
—
—
—
(2,546)
—
—
—
—
—
—
—
—
—
—
8
(155)
261
8
114
(9)
Various
Various
$
697,902 $676,148 $
2,843,246 $
292,556 $ 676,148 $
3,135,802 $3,811,950 $
(597,649)
(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 $620.0 million, unsecured senior notes of $592.7 million, exchangeable senior notes of $563,000, unsecured notes payable of $1.7 million, a letter of credit on a mortgage loan of
$14.8 million, and net premiums on the remaining loans of $69,000.
(3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.3 billion at December 31, 2013.
(4) As discussed in Note 3 to our Consolidated Financial Statements, we recognized impairment losses of $5.9 million in connection with two properties in the Greater Baltimore region that we determined no longer met
our strategic investment criteria.
(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, 2013.
(8) Held or under pre-construction at December 31, 2013.
F-68
The following table summarizes our changes in cost of properties for the years ended December 31, 2013, 2012 and 2011 (in thousands):
Beginning balance
Acquisitions of operating properties
Improvements and other additions
Sales
Impairments
Other dispositions
Other
Ending balance
2013
2012
2011
$ 3,859,960
$ 4,038,932
$ 3,948,487
—
249,639
(141,045)
(45,931)
(110,673)
—
33,684
214,418
(291,491)
(121,557)
(13,891)
(135)
26,887
304,079
(75,315)
(165,206)
—
—
$ 3,811,950
$ 3,859,960
$ 4,038,932
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
2013
2012
2011
$
568,176
$
577,601
$
503,032
92,677
(9,542)
(14,863)
(38,799)
—
93,158
(40,346)
(58,855)
(3,247)
(135)
99,173
(9,640)
(15,039)
—
75
$
597,649
$
568,176
$
577,601
F-69
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Corporate Information
Annual Meeting
The 2014 annual meeting of shareholders will be held at 9:30 a.m. Eastern Time on May 8, 2014, at the corporate
headquarters of Corporate Office Properties Trust at 6711 Columbia Gateway Drive, Suite 300, Columbia, Maryland 21046.
Investor Relations
For help with questions about the
Company, or for additional corporate
information, please contact:
Stephanie Krewson-Kelly
Vice President, Investor Relations
Corporate Office Properties Trust
6711 Columbia Gateway Drive, Suite 300
Columbia, Maryland 21046
Telephone: 443.285.5400
Facsimile: 443.285.7640
Email: ir@copt.com
Board of Trustees
Thomas F. Brady
Chairman
Roger A. Waesche, Jr.
President & CEO
Robert L. Denton
Clay W. Hamlin, III
Philip L. Hawkins
Elizabeth A. Hight
David M. Jacobstein
Steven D. Kesler
C. Taylor Pickett
Jay H. Shidler
Richard Szafranski
Kenneth D. Wethe
Executive Officers
Roger A. Waesche, Jr.
President & Chief Executive Officer
Stephen E. Budorick
Executive Vice President &
Chief Operating Officer
Holly G. Edington
Senior Vice President,
Human Resources
Wayne H. Lingafelter
Executive Vice President,
Development & Construction
Stephen E. Riffee
Executive Vice President &
Chief Financial Officer
Karen M. Singer
Senior Vice President,
General Counsel & Secretary
Executive Offices
6711 Columbia Gateway Drive, Suite 300
Columbia, Maryland 21046
Telephone: 443.285.5400 | Facsimile: 443.285.7650
www.COPT.com | NYSE: OFC