2014
Annual Report
41211 Merrill.indd 3
3/17/15 12:33 AM
Letter to
Shareholders
Our mandate for 2014 was three-fold: increase occupancy,
develop buildings to serve the needs of high-tech, security
conscious customers in and around our proven U.S. Government
demand drivers (our “Strategic Tenant Niche”), and remain
disciplined with our balance sheet. I am pleased to report we
met or exceeded each goal and, in doing so, have positioned
the Company to embark on a new era of strategic growth.
At the beginning of 2014, our operating portfolio consisted of
183 properties that were 89.1% occupied. Since the Bipartisan
Budget Act of 2013 was signed into law, supply and demand
fundamentals in our markets have been building towards a
more favorable leasing environment. Supply remained flat and
demand from tenants in our Strategic Tenant Niche, as well
as those in healthcare, education and professional services,
continued to firm. As a result, the volume of total leasing in 2014
resulted in higher occupancy. During the year, we also disposed
of eight buildings that, in aggregate, were approximately 50%
vacant at the time of sale. Due primarily to positive absorption
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
in our portfolio and the strategic pruning of vacancy through
property dispositions, we ended the year with 173 buildings1
that were 90.9% occupied and 92.4% leased.
Expanding demand from our high-tech, strategic niche
tenants translated into 900,000 square feet of development
leasing volume in 2014, which matched 2013’s volume and
tied that year as the third best in our corporate history (see
chart, opposite). When combined with the 1.2 million square
feet achieved in 2012, we have averaged 1 million square feet
of development leasing in each of the last three years. Our
continued development leasing success illustrates the demand
that exists for new, efficient, well-located office space in our
chosen markets.
Future demand for newly developed space at our strategic
locations is supported by the nation’s defense spending priorities.
The Pentagon continues to prioritize spending on high-tech
missions, such as cybersecurity, over manpower and heavy
equipment. The President’s fiscal 2016 budget request included
3% and 8% increases, respectively, in the Department of
Defense’s defense information technology and cyber programs.
Since most of our properties are clustered around knowledge-
based defense installations whose missions are aligned with high-
tech missions and cybersecurity, we expect demand for new,
efficient, precisely located development from Strategic Tenants
supporting these missions will continue.
Cybersecurity firms continue to emerge and grow in our markets
at a rapid pace. While U.S. Cyber Command was established
relatively recently at Ft. Meade in Annapolis Junction, Maryland,
we have already completed 1.8 million square feet of leasing with
tenants directly engaged in cybersecurity. Fulfilling the demand
for space in and around Ft. Meade is a tremendous growth
opportunity that our Company is uniquely positioned to meet. As
the map of Cyber Maryland shows (located on inside back cover),
we have five office parks and developable land that support Ft.
Meade, the largest of which are The National Business Park and
Columbia Gateway.
Maintaining the balance sheet flexibility necessary to fund
future growth remains a top priority. We sold eight operating
properties and 235 acres of non-strategic land in 2014 for total
proceeds of $57 million. Additionally, we were active in the
capital markets. We issued $300 million of 3.7% Senior Notes,
’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14
Total Leasing SF
Development Leasing SF
1The Company is in the process of disposing of two additional properties.
Continued on Inside Back Cover
41211 Merrill.indd 4
3/17/15 12:33 AM
Continued from Inside Front Cover
COLUMBIA GATEWAY
2.1M SF | 27 BUILDINGS
AIRPORT SQUARE / BWTECH
1.1M SF | 14 BUILDINGS
95
COMMONS CORPORATE CENTER
431,245 SF | 10 BUILDINGS
175
295
ARUNDEL PRESERVE
146,700 SF | 1 BUILDING
THE NATIONAL BUSINESS PARK
3.5M SF | 29 BUILDINGS
32
FORT MEADE / U.S. CYBER COMMAND / DISA
redeemed all $50 million of our 7.5% Series H Preferred Shares,
issued $149 million in common shares, and defeased $212
million of high interest rate secured debt. These transactions
strengthened our capital position and give us the capacity to
grow opportunistically within our markets going forward. Early
in 2015, we promoted our Treasurer, Anthony Mifsud, to Chief
Financial Officer. The Board and I have every confidence in
Anthony’s commitment to maintain and enhance our balance
sheet flexibility, and welcome him to the executive team.
Looking ahead, we will continue improving portfolio occupancy,
adding value through development, and remaining disciplined
with our balance sheet. In 2015, our new opportunity will be
to refine our regional office portfolio strategy. With thoughtful
execution, the regional office portfolio’s growth rate should
increase and further complement that of our Strategic Tenant
Niche in future years. Portfolio enhancement, combined
with our secure dividend yield, should translate into a higher
valuation and benefit all COPT stakeholders.
Thank you for your commitment to and continued confidence
in COPT,
Roger A. Waesche, Jr.
President & Chief Executive Officer
COPT’s Executive Team from Left to Right: Anthony Mifsud, EVP &
Chief Financial Officer; Wayne Lingafelter, President, COPT Development
& Construction Services; Karen Singer, SVP, General Counsel & Secretary;
Roger Waesche, Jr., President & Chief Executive Officer; Stephen Budorick,
EVP & Chief Operating Officer; Holly Edington, SVP, Human Resources
41211 Merrill.indd 6
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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, 2014
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:
Common 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
(Title of Each Class)
(Name of Exchange on Which Registered
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 $1.6 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
30, 2014. 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 January 30, 2015, 93,414,408 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 $99.5 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 30, 2014.
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, 2014 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, 2014, COPT owned
approximately 96.0% of the outstanding common units and approximately 95.5% of the outstanding preferred units in COPLP. The remaining
common and preferred units are owned by a trustee 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
18
19
23
23
24
26
30
57
58
58
58
59
59
59
59
59
59
59
66
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. Future events and actual results may differ materially from those discussed 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 their contractors, most of whom are
engaged in national security and information technology 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, 2014, our
properties included the following:
•
•
•
•
173 operating office properties totaling 16.8 million square feet that were 91% occupied (excluding two properties serving
as collateral for a nonrecourse mortgage loan in default, as discussed further below in the section entitled “Significant
Developments”);
13 office properties under, or contractually committed for, construction or redevelopment that we estimate will total
approximately 1.6 million square feet upon completion;
1,464 acres of land we control that we believe are potentially developable into approximately 18.3 million square feet; and
a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of
19.25 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”).
Equity interests in COPLP are in the form of common and preferred units. As of December 31, 2014, COPT owned 96.0%
of the outstanding COPLP common units (“common units”) and 95.5% of the outstanding COPLP preferred units (“preferred
units”); the remaining common and preferred units in COPLP were owned by third parties. 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 Developments
In 2014:
• we placed into service an aggregate of 692,000 square feet in five newly constructed properties that were 94.6% leased as
of December 31, 2014;
• we finished the period with occupancy of our portfolio of operating office properties at 90.9%;
• COPLP issued a $300.0 million aggregate principal amount of 3.700% Senior Notes, which are unsecured and guaranteed
by COPT, on May 14, 2014 at an initial offering price of 99.739% of their face value. The proceeds from the offering,
after deducting underwriting discounts but before other offering expenses, were approximately $297.3 million. We used
the net proceeds of the offering to repay borrowings under our Revolving Credit Facility, repay $50.0 million under an
existing term loan facility, fund the redemption of our Series H Preferred Shares and for general corporate purposes;
• COPT redeemed all of its outstanding Series H Preferred Shares on June 16, 2014 at a price of $25.00 per share, or $50.0
million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption, using proceeds from
the 3.700% Senior Notes issuance. These shares accrued dividends equal to 7.5% of their liquidation preference. In
connection with this redemption, COPLP redeemed the Series H Preferred Units previously owned by COPT that carried
terms substantially the same as the Series H Preferred Shares. At the time of the redemption, we recognized a $1.8 million
decrease to net income available to common shareholders/unitholders pertaining to the original issuance costs of the
securities;
• COPT completed a public offering of 5.52 million common shares in November at a price of $27.30 per share for net
proceeds of $148.9 million, after underwriter discounts but before offering expenses, that were contributed to COPLP in
exchange for 5.52 million common units. The net proceeds were used primarily to fund our defeasance of, and full
satisfaction of our obligations with respect to, the secured nonrecourse mortgage loans discussed below, as well as costs
related to the defeasance and satisfaction;
• we completed in December the defeasance of, and full satisfaction of our obligations with respect to, (1) $103.0 million
•
principal amount of secured nonrecourse mortgage loan due to mature on November 6, 2015 and bearing an interest rate of
5.53% and (2) $108.5 million principal amount of secured nonrecourse mortgage loan due to mature on January 1, 2016
and bearing an interest rate of 5.56%, as well as costs related to the defeasance and satisfaction. As a result, we recognized
a loss on extinguishment of debt of $9.1 million;
a wholly owned subsidiary defaulted in April on the payment terms of a $150.0 million nonrecourse mortgage loan secured
by two operating properties in Northern Virginia with an aggregate estimated fair value that was less than the loan balance.
This loan had an interest rate of 10.65% (including the effect of default interest) and was originally scheduled to mature in
2017. In connection with the loan’s default proceedings, we expect to transfer title to the properties and be relieved of the
debt obligation plus accrued interest in early 2015; and
• we completed dispositions of eight operating properties in the Greater Baltimore region totaling 303,000 square feet that
were 48.9% occupied for $28.8 million and sold land for $28.3 million. We used most of the proceeds from these sales for
general corporate purposes.
Effective February 3, 2015, Stephen E. Riffee, our Executive Vice President and Chief Financial Officer (“CFO”), left the
Company to pursue other interests. Our Board of Trustees appointed Anthony Mifsud as Executive Vice President and CFO
effective upon Mr. Riffee’s departure.
Business and Growth Strategies
Our primary objectives are to achieve sustainable growth in results of operations and to maximize shareholder value. This
section sets forth key components of our business and growth strategies that we have in place to support these objectives.
7
Customer Strategy: We focus on serving the specialized requirements of United States Government agencies and their
contractors, most of whom are engaged in national security and information technology 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 developable land we control) proximity to defense installations and other knowledge-
based government demand drivers, and our willingness to expand to new locations with similar proximities;
extensive experience in developing secured, specialized space, with the ability to satisfy the United States Government’s
unique needs, including Sensitive Compartmented Information Facility (“SCIF”) and Anti-Terrorism Force Protection
(“ATFP”) requirements;
depth of knowledge, specialized skills and credentialed personnel in operating highly specialized space with security-
oriented needs;
strong relationships with our tenants; and
track record of 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 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.
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 supply and demand fundamentals and proximity to
growth attributes including, among others: (1) strong demand drivers; (2) diverse and growing economies marked by strong
demographics and consistent job growth; (3) major transportation routes and public transportation; (4) a wide range of
amenities and support services; (5) housing aligned with demographics of the workforce and decision makers; and/or (6) future
acquisition and development opportunities, including infill locations.
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; and (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) investing in energy systems and other equipment that reduce energy
consumption and property operating costs; and (3) adopting select LEED Existing Building (“EB”) prerequisites for much of
our portfolio, including guidelines pertaining to cleaning and recycling practices and energy reduction.
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 opportunities for favorable returns on investment given the associated risks.
We pursue development activities as market conditions and leasing opportunities support favorable risk-adjusted returns on
investment. We typically seek to make acquisitions at attractive yields and below replacement cost, or that otherwise meet our
strategic objectives. We also seek to increase operating cash flow of certain acquisitions by repositioning the properties and
capitalizing on existing below market leases and expansion opportunities.
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;
8
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 our debt level and to certain capital costs; (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.
•
•
•
•
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, 2014, 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, Anne Arundel and Prince
George’s);
• Northern Virginia (defined as the Virginia counties of Fairfax and Loudoun);
•
San Antonio, Texas;
• Huntsville, Alabama;
• Washington, DC - Capital Riverfront;
•
• 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, 2014, 155 of our office properties, or 86% 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.
All of our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual
Report on Form 10-K exclude the effect of the two properties serving as collateral for nonrecourse mortgage debt that was in
default due to the expected debt extinguishment via conveyance of such properties (totaling 665,000 square feet that were
36.1% occupied as of December 31, 2014); effective April 1, 2014, all cash flows from such properties belong to the lender.
Employees
As of December 31, 2014, we had 378 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
including, among other things, changes in economic conditions 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.
9
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, 2014, 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 prolonged 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.
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.
10
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, 2014, our 20 largest tenants accounted for 65.3% of the total annualized rental revenue of our office
properties, and the five largest of these tenants accounted for 46.0%. We calculated 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, 2014. Information regarding our five largest tenants is set forth
below:
Tenant
Annualized
Rental Revenue as of
December 31, 2014
(in thousands)
Percentage of Total
Annualized Rental
Revenue of
Office Properties
Number
of Leases
United States of America
Booz Allen Hamilton, Inc.
Northrop Grumman Corporation (1)
General Dynamics Corporation (1)
The Boeing Company (1)
$
123,117
23,927
22,397
18,736
17,171
27.6%
5.4%
5.0%
4.2%
3.8%
58
7
9
7
11
(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, 2014, 76.6% 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
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
11
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 only one such center in
2010. This may increase the likelihood of us being unsuccessful in executing our plans with respect to that center or any
similar 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, 2014, our properties located in the Greater Washington,
DC/Baltimore region accounted for a combined 85.1% 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, our portfolio of
properties is not broadly distributed geographically. 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 increasingly permit
employee telecommuting, flexible work schedules, open workplaces and teleconferencing. These practices enable businesses
to reduce their space requirements. These trends 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 with our properties for tenants. Some of the properties
competing with ours may be newer or in more desirable locations, or the competing properties’ owners may be willing to
accept lower 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,
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
12
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 occurrence of these risk outcomes 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:
•
•
•
•
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.
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.
13
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 interest rates were to rise, our debt service payments on debt with variable interest rates would increase, which would
adversely affect our financial position, results of operations, cash flows and ability to make expected distributions to our
equityholders.
As of December 31, 2014, our scheduled debt maturities over the next five years were as of follows:
Year
Amount (1)
(in thousands)
2015
2016
2017
2018
2019
$
343,545
171,399
339,247
2,036
122,094
(1) Represents principal maturities only and therefore excludes net discounts. As of December 31, 2014, maturities in 2015 include $150.0 million pertaining
to a nonrecourse mortgage loan secured by two operating properties the title for which we expect to transfer to extinguish our debt obligation. Maturities
also include $150.0 million in 2015 that may be extended for two one-year periods and $333.0 million in 2017 that may be extended for one year, subject
to certain conditions.
14
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. COPLP’s
Senior Notes are currently rated investment grade by the three major rating agencies. These credit ratings are subject to
ongoing evaluation by the credit rating agencies and can change. 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 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 equityholders 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:
•
•
•
•
•
•
•
•
•
•
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 prolonged 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 a number of things discussed elsewhere herein,
including 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 limit 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 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, 2014, 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.
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 exists 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
15
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 upon dissolution the rights 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. We may issue
additional common 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
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
16
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, 2015. 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 and other significant disruptions of our information technology networks and
related systems, which are essential to our business operations. Such breaches and disruptions may occur 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. Because of our concentration on serving United States Government
agencies and their contractors with a general focus on national security and information technology, we may be especially
likely to be targeted by cyber attacks, including by governments, organizations or persons hostile to our government. 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 our operations in
numerous ways, including by creating difficulties for our tenants that may reflect poorly on us, 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
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.
17
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
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.
Item 1B. Unresolved Staff Comments
None
18
Item 2. Properties
The following table provides certain information about our office property markets and submarkets as of December 31, 2014,
excluding the effect of the two properties serving as collateral for nonrecourse mortgage debt that was in default and
expected to be extinguished via conveyance of such properties (totaling 665,000 square feet that were 36.1% occupied as of
December 31, 2014):
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
Herndon, Tysons Corner and Merrifield, VA
Other
Subtotal / Average
San Antonio:
Sentry Gateway - San Antonio, TX
Other
Subtotal / Average
Huntsville
Washington DC-Capitol Riverfront
St. Mary’s & King George Counties
Greater Baltimore:
White Marsh, MD and Timonium, MD
Baltimore City, MD
North Gate Business Park - Aberdeen, MD
Subtotal / Average
Greater Philadelphia, Pennsylvania
Other Region
Total
Number of
Buildings
Rentable
Square Feet
Occupancy (1)
Annualized
Rental
Revenue (2)
(in thousands)
Annualized Rental
Revenue per
Occupied Square
Foot (2)(3)
29
27
14
10
11
91
7
1
9
3
20
6
2
8
5
2
18
20
1
3
24
3
2
3,485,071
2,141,654
1,090,111
431,246
1,119,849
8,267,931
769,035
239,272
1,701,754
543,765
3,253,826
792,454
120,054
912,508
562,757
360,326
874,408
984,186
480,348
284,907
1,749,441
513,347
295,842
95.7 % $
91.3 %
86.4 %
91.1 %
98.2 %
93.4% $
121,378
47,510
23,639
9,322
31,632
233,481
75.5 % $
51.3 %
92.6 %
100.0 %
86.8% $
100.0 % $
73.8 %
96.6% $
16,048
4,995
51,546
5,856
78,445
33,907
1,709
35,616
80.8% $
9,628
74.4% $
12,388
90.8% $
15,530
93.2 % $
97.9 %
46.0 %
86.8% $
20,150
15,927
4,037
40,114
96.2% $
11,827
100.0% $
9,555
173
16,790,386
90.9% $
446,584
$36.38
24.29
25.10
23.73
28.78
$30.22
$27.64
40.67
32.71
10.77
$27.79
$42.79
19.29
$40.42
$21.17
$46.22
$19.56
$21.97
33.86
30.82
$26.41
$23.96
$32.30
$29.27
(1) This percentage is based upon all rentable square feet under lease terms that were in effect as of December 31, 2014.
(2) Annualized rental revenue is the monthly contractual base rent as of December 31, 2014 (ignoring free rent then in effect) 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, 2014. 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: $29.09; Baltimore/Washington Corridor: $30.11; and Northern Virginia: $27.61.
19
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, 2014 (dollars in thousands):
Property and Location
Submarket
Estimated
Rentable
Square Feet
Upon
Completion
Percentage
Leased
Calendar
Quarter of
Anticipated
Completion
Costs
Incurred to
Date (1)
Estimated
Costs to
Complete (1)
Under Construction
Baltimore/Washington Corridor:
310 Sentinel Way
National
191,464
0 %
1Q 2016
$
36,324
$
20,976
Annapolis Junction, MD
Business Park
7880 Milestone Parkway
Hanover, MD
Subtotal / Average
Northern Virginia:
NOVA Office A
Northern Virginia
Ashburn Crossing - DC 10
Ashburn, Virginia
NOVA Office B
Northern Virginia
NOVA Office D
Northern Virginia
Subtotal / Average
San Antonio:
Sentry Gateway - Z
San Antonio, TX
Huntsville:
7400 Redstone Gateway
Huntsville, AL
Arundel
Preserve
119,980
74 %
3Q 2016
17,929
13,606
311,444
28 %
Other Northern
159,300
100 %
1Q 2015
$
$
54,253
$
34,582
44,067
493
Virginia
Ashburn
Crossing
Other Northern
Virginia
Other Northern
Virginia
120,000
100 %
1Q 2015
12,815
3,460
161,030
0 %
1Q 2016
22,927
18,573
240,000
100 %
2Q 2017
8,365
38,160
680,330
76 %
San Antonio
160,466
100 %
1Q 2015
Huntsville
69,191
100 %
3Q 2015
Total Under Construction
1,221,431
69%
Under Redevelopment
Baltimore/Washington Corridor:
6708 Alexander Bell Drive
Columbia, MD
Howard County
Perimeter
921 Elkridge Landing Road (AS 5)
Airport
Linthicum, MD
1201 Winterson Road (AS 13)
Linthicum, MD
Subtotal / Average
St. Mary’s County
44417 Pecan Court
California, MD
Square
Airport
Square
St. Mary’s
County
Greater Philadelphia:
731 Arbor Way (Hillcrest III)
Blue Bell, PA
Greater
Philadelphia
52,000
56,452
67,450
175,902
0 %
1Q 2016
To be
determined
3Q 2016
0 %
0 %
0 %
27,122
0 %
3Q 2015
140,765
100 %
2Q 2015
Total Under Redevelopment
343,789
41%
(1) Includes land, construction, leasing costs and allocated portion of structured parking and other shared infrastructure, if applicable.
20
$
$
$
$
$
$
$
$
$
$
88,174
25,157
$
$
60,686
9,558
4,841
$
5,167
172,425
$
109,993
6,713
$
4,756
3,787
4,813
To be
determined
11,950
15,313
2,689
$
$
16,706
2,688
13,211
$
14,821
31,213
$
34,215
The following table provides certain information about our land held or under pre-construction as of December 31, 2014,
including properties under ground lease to us:
Market/Submarket and Location
Land Held for Future Development
Baltimore/Washington Corridor:
National Business Park
Arundel Preserve
Columbia Gateway
M Square
Airport Square
Subtotal
Northern Virginia
San Antonio
Huntsville (1)
St. Mary’s & King George Counties
Greater Baltimore
Greater Philadelphia (2)
Acres
Estimated
Developable
Square Feet
193
83
27
49
5
357
71
69
434
44
49
41
1,976
960
630
525
84
4,175
1,860
1,033
4,103
109
1,478
720
Total land held for future development
1,065
13,478
Other Land
Baltimore/Washington Corridor
Greater Baltimore
Colorado Springs
Other
Total other land held
Total land held
Land held for sale
Land held, net
6
115
171
107
399
1,464
(56)
1,408
60
1,242
2,540
1,000
4,842
18,320
(632)
17,688
(1) 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.
(2) Includes a property that was removed from service and placed under redevelopment in March 2014. This property will be reported as land
held until its redevelopment plan is finalized and market demand supports commencement of such redevelopment.
The following table provides certain information about our wholesale data center property as of December 31, 2014:
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
19.25
9.00
6.56
(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”)).
21
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, 2014, 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 256,646 square feet executed
but yet to commence as of December 31, 2014.
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
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2030
120
85
79
75
85
63
33
17
17
15
14
2
1
2
1,819,685
1,472,752
1,882,897
2,146,343
1,977,815
1,918,184
696,253
917,287
649,529
577,677
1,034,020
58,500
16,200
88,217
11.9 % $
9.7 %
12.3 %
14.1 %
13.0 %
12.6 %
4.6 %
6.0 %
4.3 %
3.8 %
6.8 %
0.4 %
0.1 %
0.6 %
52,780
42,776
56,291
63,543
58,955
56,270
21,313
27,764
12,927
15,460
34,901
1,040
435
2,129
11.8%
9.6%
12.6%
14.2%
13.2%
12.6%
4.8%
6.2%
2.9%
3.5%
7.8%
0.2%
0.1%
0.5%
$29.01
29.04
29.90
29.61
29.81
29.33
30.61
30.27
19.90
26.76
33.75
17.78
26.86
24.13
Total/Weighted Average
608
15,255,359
100.0 % $
446,584
100.0%
$29.27
With regard to leases expiring in 2015, we believe that the weighted average annualized rental revenue per occupied square
foot for such leases at December 31, 2014 was, on average, approximately 2% to 4% 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, 2014:
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
2
1
7
9,437
1,283
6,374
11,122
5,590
33,806
2.00
0.26
1.00
2.30
1.00
6.56
1.00
0.26
1.00
2.00
1.00
5.26
Annualized
Rental Revenue
of Expiring
Leases (2)
(in thousands)
$
$
1,140
528
2,184
4,623
1,475
9,950
(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, 2014 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.
22
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 or the Operating Partnership (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.
23
PART II
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
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:
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
Low
$24.75
$23.81
$22.40
$21.48
High
$27.52
$29.95
$28.85
$25.37
Price Range
Low
$23.55
$26.18
$25.53
$25.29
High
$27.28
$29.09
$29.44
$29.24
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 507 as of December 31, 2014. 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.
There is no established public trading market for COPLP’s partnership units. Quarterly common unit distributions per unit
were the same as quarterly common dividends per share declared by COPT. As of December 31, 2014, there were 37 holders
of record of COPLP’s common units.
Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2014, 23,000 of COPLP’s common units were exchanged for 23,000 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.
24
COPT’s Common Shares Performance Graph
The graph and the table set forth below assume $100 was invested on December 31, 2009 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
12/31/09
$ 100.00
100.00
100.00
$
12/31/10
99.52
115.06
127.95
$
12/31/11
64.47
117.49
138.55
$
12/31/12
79.40
136.3
165.84
$
12/31/13
78.69
180.44
170.58
$
12/31/14
98.11
205.14
218.38
Period Ended
25
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, 2010 through 2014. 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)
2014
2013
2012
2011
2010
$ 479,725
106,748
586,473
$ 460,997
62,363
523,360
$ 434,299
73,836
508,135
$ 408,611
84,345
492,956
$ 365,253
104,675
469,928
179,934
167,199
159,206
154,375
138,471
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
—
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(4,951)
40,255
(15,939)
(1,769)
22,547
0.25
0.25
0.25
0.25
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
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
88,092
88,263
85,167
85,224
73,454
73,454
69,382
69,382
59,611
59,944
26
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)
2014
2013
2012
2011
2010
$ 3,296,914
$ 3,670,257
$ 1,920,057
$ 2,130,956
$
18,417
$ 1,520,884
$ 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
$
193,885
158,979
152,143
$
$
$
$ (209,689) $ (119,790) $
$
$
$
$
$
(32,492) $
$
22,115
$
155,296
$
1.69
$
1.10
4,590
70,418
214,149
2.40
1.10
191,838
13,744
$ (200,547) $
$
$
$
$
$
156,436
$ (260,387) $ (479,167)
324,571
25,587
148,645
2.30
1.61
$
(2,163) $ (136,567) $
$
$
$
165,720
2.13
1.10
53,062
0.72
1.65
103,701
$
$
$
173
16,790
183
17,370
208
18,831
238
20,514
256
20,432
(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, Series J Preferred Shares in 2013 and Series H Preferred Shares in 2014.
(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.
27
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)
2014
2013
2012
2011
2010
$ 479,725
106,748
586,473
$ 460,997
62,363
523,360
$ 434,299
73,836
508,135
$ 408,611
84,345
492,956
$ 365,253
104,675
469,928
179,934
167,199
159,206
154,375
138,471
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
—
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(3,276)
41,930
(16,599)
(1,769)
23,562
0.25
0.25
0.25
0.25
$
$
$
$
$
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
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
91,989
92,160
89,036
89,093
77,689
77,689
72,564
72,564
62,553
62,886
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 EPU
Cash distributions declared per common unit
Property Data (as of year end):
Number of properties owned (6)
Total rentable square feet owned (6)
2014
2013
2012
2011
2010
$ 3,296,914
$ 3,664,375
$ 1,920,057
$ 2,125,074
$
18,417
$ 1,520,884
$ 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
158,979
193,885
$
$
$
$ (209,689) $ (119,790) $
$
$
$
(32,492) $
$
23,130
$
1.10
4,590
73,688
1.10
152,149
191,838
13,744
$ (200,547) $
$
$
$
156,460
$ (260,387) $ (479,167)
324,547
27,634
1.61
$
(2,952) $ (145,125) $
$
103,695
1.10
1.65
$
$
173
16,790
183
17,370
208
18,831
238
20,514
256
20,432
(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, Series J Preferred Units in 2013 and Series H Preferred Units in 2014.
(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.
29
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
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 variables such as employment
levels, business confidence, competition, general economic conditions of the markets in which we operate and governmental
actions and initiatives.
Our strategy for operations and growth focuses on serving the specialized requirements of United States Government
agencies and their contractors, most of whom are engaged in national security and information technology related activities.
These tenants’ missions generally pertain more to knowledge-based activities (such as cyber security, research and development
and other highly technical security and information technology related areas) than to force structure (troops) and weapon
system production. As a result of this strategy, a large concentration of our revenue is derived from several large tenants. As of
December 31, 2014, 65.3% of our annualized rental revenue (as defined below) from office properties was from our 20 largest
tenants, 46.0% from our five largest tenants and 27.6% from our largest tenant, the United States Government. In addition,
most 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
30
otherwise at least 50% leased by United States Government agencies or their contractors; we refer to these properties herein as
“Strategic Tenant Properties.”
We began 2014 with a smaller, yet more strategic, portfolio of properties, an improved capital position and an improved
outlook for the leasing environment of our Strategic Tenant Properties due to:
•
•
•
•
•
•
•
the completion in 2013 of our Strategic Reallocation Plan, a plan we commenced in 2011 that entailed the disposition of
office properties and land no longer closely aligned with our strategy, and the use of the resulting proceeds to invest
primarily in Strategic Tenant Properties and repay borrowings. While this plan was in place, 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. As a result, we started 2014 with a smaller
portfolio of properties and a higher concentration of Strategic Tenant Properties relative to when we commenced the plan;
our execution of an initiative from 2011 to 2013 focused on improving our capital position, pursuant to which we repaid
existing borrowings using proceeds from property sales under the Strategic Reallocation Plan, public offerings of common
and preferred shares and new unsecured, longer term debt borrowings. Due to this initiative, we increased the fixed-rate
portion of our debt, the unsecured portion of our debt and our weighted average debt term; and
a return to a more normalized operating environment for our United States Government agency and Government contractor
tenants. For an extended number of years, continuing delays in Federal budget approvals and uncertainty regarding the
potential for future reductions in government spending targeting defense had disrupted the Government’s process for
awarding contracts to prospective tenants, which delayed our ability to lease certain existing properties and new
construction proximate to Strategic Demand Drivers. 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, defense spending levels were essentially unchanged in
2014 and are expected to remain flat through September 30, 2015. The passage of the budget enabled the Federal
Government to resume a more normalized process for awarding contracts by mid-2014. See the discussion below
regarding our expectations for periods after September 2015.
We further improved the strategic focus of our portfolio in 2014 by:
placing into service an aggregate of 692,000 square feet in five newly constructed properties that were 94.6% leased as of
December 31, 2014;
selling eight operating properties in the Greater Baltimore region totaling 303,000 square feet that were 48.9% occupied
for $28.8 million and selling land for $28.3 million. We used most of the proceeds from these sales for general corporate
purposes;
choosing in April not to provide support to a wholly owned subsidiary with a $150.0 million nonrecourse mortgage loan
secured by two operating properties in Northern Virginia with an aggregate estimated fair value that was less than the loan
balance. As a result, the subsidiary defaulted on the loan’s payment terms. The loan had an interest rate of 10.65%
(including the effect of default interest of 5.0%) and was originally scheduled to mature in 2017. In connection with the
loan’s default proceedings, we expect to transfer title to the properties and be relieved of the debt obligation plus accrued
interest in early 2015; and
leasing 3.0 million square feet, including 893,000 of construction and redevelopment space.
Due in large part to these activities, we:
•
•
improved occupancy of our office property portfolio to 90.9% as of December 31, 2014, a 1.8% increase over year end
2013, due in large part to our sale, or removal from operations for redevelopment, of low occupancy operating properties
and our achievement of strong occupancy on newly constructed or redeveloped space;
increased occupancy of our Same Office Properties (defined below) to 91.3% as of December 31, 2014 (up slightly from
91.0% as of December 31, 2013);
• maintained occupancy of our Strategic Tenant Properties at 91.6% as of December 31, 2014, or unchanged from year end
2013;
increased the percentage of our total annualized rental revenue of our office properties derived from Strategic Tenant
Properties to 76.6% as of December 31, 2014, an increase of 6.9% from year end 2013; and
commenced construction on six new Strategic Tenant Properties in 2014 that were 57.4% leased as of December 31, 2014.
•
•
As discussed above, the passage of the budget in January enabled the Federal Government to resume a more normalized
process for awarding contracts, which improved the leasing outlook for our Strategic Tenant Properties, particularly those
proximate to Strategic Demand Drivers. These demand drivers include Fort George G. Meade (which also houses the United
States Cyber Command), Redstone Arsenal, Fort Belvoir, San Antonio and Aberdeen Proving Ground. We believe that the
31
knowledge-based activities of most of our tenants will continue to be a priority in the defense budget as such activities are
considered increasingly critical to our national security. Absent passage of further related legislation, budgetary sequestration
of funding levels by the United States Government will go into effect on October 1, 2015; if this occurs, our operations may be
adversely effected, particularly those of our Strategic Tenant Properties. However, we believe that Federal budget discussions
will eventually lead to defense spending levels remaining flat or increasing at the rate of inflation for the next two to three
years.
In addition to the effect of the uncertainty in Federal spending discussed above, 2014 also followed an extended period of
otherwise challenging economic conditions in the United States and our region that 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, and ultimately placed downward pressure on our occupancy and rental rates. Our properties that are not
proximate to Strategic Demand Drivers tend to be more subject to general market conditions. We believe that general market
conditions improved in 2014, as traditional office tenants in healthcare, education and professional services industries
supported some growth in demand in many of our submarkets in the Baltimore/Washington Corridor. We expect a slow, but
continued, recovery to pre-recession occupancy levels for our properties not proximate to Strategic Demand Drivers.
We financed our construction activities while maintaining our capital position in 2014 through:
• COPLP’s issuance of a $300.0 million aggregate principal amount of 3.700% Senior Notes, which are unsecured and
guaranteed by COPT, on May 14, 2014 at an initial offering price of 99.739% of their face value. The proceeds from the
offering, after deducting underwriting discounts but before other offering expenses, were approximately $297.3 million.
We used the net proceeds of the offering to repay borrowings under our Revolving Credit Facility, repay $50.0 million
under an existing term loan facility, fund the redemption of our Series H Preferred Shares and for general corporate
purposes;
• COPT’s redemption of all of its outstanding Series H Preferred Shares on June 16, 2014 at a price of $25.00 per share, or
$50.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption, using proceeds
from the 3.700% Senior Notes issuance. These shares accrued dividends equal to 7.5% of the liquidation preference. In
connection with this redemption, COPLP redeemed the Series H Preferred Units previously owned by COPT that carried
terms substantially the same as the Series H Preferred Shares. At the time of the redemption, we recognized a $1.8 million
decrease to net income available to common shareholders/unitholders pertaining to the original issuance costs of the
securities;
• COPT’s completion of a public offering of 5.52 million common shares in November at a price of $27.30 per share for net
proceeds of $148.9 million, after underwriter discounts but before offering expenses, that were contributed to COPLP in
exchange for 5.52 million common units. The net proceeds were used primarily to fund our defeasance of, and full
satisfaction of our obligations with respect to, the secured nonrecourse mortgage loans discussed below, as well as costs
related to the defeasance and satisfaction; and
the defeasance in December of, and full satisfaction of our obligations with respect to, (i) $103.0 million principal amount
of secured nonrecourse mortgage loan due to mature on November 6, 2015 and bearing an interest rate of 5.53% and (ii)
$108.5 million principal amount of secured nonrecourse mortgage loan due to mature on January 1, 2016 and bearing an
interest rate of 5.56%, as well as costs related to the defeasance and satisfaction. As a result, we recognized an early
extinguishment loss of $9.1 million.
•
Due in large part to these transactions and the property dispositions completed in 2014, as of December 31, 2014:
•
•
•
the fixed-rate portion of our debt was 89% (including the effect of variable rate loans subject to interest rate swaps),
virtually unchanged from year end 2013;
our weighted average debt maturity was 5.1 years, virtually unchanged from year end 2013; and
the unsecured portion of our debt increased from 63% to 78%.
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.
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.
32
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
(ignoring free rent then in effect). 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.
All of our operating portfolio square footage, occupancy and leasing statistics included below and elsewhere in this Annual
Report on Form 10-K exclude the effect of the two properties serving as collateral for debt that was in default due to the
expected debt extinguishment via conveyance of such properties (totaling 665,000 square feet that were 36.1% occupied as of
December 31, 2014); effective April 1, 2014, all cash flows from such properties belong to the lender.
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; (4) renewal probabilities; and (5) 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.
33
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
from the tenant as rental revenue over the term of the lease. If the improvements are tenant assets, we defer the cost of
34
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.
35
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
Booz Allen Hamilton, Inc.
Northrop Grumman Corporation (1)
General Dynamics Corporation (1)
The Boeing Company (1)
Computer Sciences Corporation (1)
CareFirst, Inc.
The MITRE Corporation
Wells Fargo & Company (1)
Vadata Inc.
AT&T Corporation (1)
L-3 Communications Holdings, Inc. (1)
Science Applications International Corporation (1)
Kratos Defense & Security Solution, Inc. (1)
TASC Inc.
Raytheon Company (1)
ITT Exelis (1)
KEYW Corporation
The Johns Hopkins Institutions (1)
Unisys Corporation
The Aerospace Corporation (1)
Ciena Corporation
Lockheed Martin Corporation
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,
2013
2014
2012
27.6%
5.4%
5.0%
4.2%
3.8%
2.4%
2.2%
2.1%
1.7%
1.3%
1.3%
1.2%
1.0%
1.0%
0.9%
0.9%
0.9%
0.8%
0.8%
0.8%
N/A
N/A
N/A
65.3%
34.7%
100.0%
24.8%
5.8%
6.1%
4.0%
2.6%
4.4%
2.0%
2.0%
1.6%
N/A
1.3%
1.3%
1.0%
0.9%
0.9%
0.9%
1.2%
0.8%
0.9%
0.8%
1.8%
N/A
N/A
65.1%
34.9%
100.0%
24.2%
5.5%
6.3%
3.6%
1.4%
4.8%
1.9%
1.9%
1.7%
N/A
1.2%
1.4%
1.0%
1.5%
N/A
1.1%
1.7%
N/A
0.8%
0.8%
1.7%
1.0%
0.8%
64.5%
35.5%
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 76.6% of our annualized rental revenue from office properties as of
December 31, 2014. We expect to maintain a high concentration of revenue from customers in these properties, as discussed
further in the section in Item 1 to this Annual Report on Form 10-K entitled “Business and Growth Strategies.”
36
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,
2013
2012
2014
52.3%
17.5%
8.0%
2.2%
2.8%
3.5%
9.0%
2.6%
—%
2.1%
100.0%
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%
2014
2012
Number of
Office Properties
as of December 31,
2013
92
20
8
4
2
19
32
4
—
2
183
91
20
8
5
2
18
24
3
—
2
173
101
19
8
1
2
19
32
3
20
3
208
The most significant changes in our regional allocations set forth above were due to: significant dispositions of properties
(particularly in 2013), including our exit from the Colorado Springs region and dispositions 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,
2013
2012
2014
90.9%
93.4%
86.8%
96.6%
80.8%
74.4%
90.8%
86.8%
96.2%
N/A
100.0%
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%
Average contractual annual rental rate per square foot at year end (1) $ 29.27
$ 28.99
$ 27.92
(1) Includes estimated expense reimbursements.
37
December 31, 2013
Square feet vacated upon lease expiration (1)
Occupancy of previously vacant space in connection with new leases (2)
Square feet constructed or redeveloped
Dispositions
Square feet removed from operations for redevelopment
Square feet of properties to be conveyed
Other changes
December 31, 2014
Rentable
Square Feet
Occupied
Square Feet
(in thousands)
17,370
—
—
763
(303)
(371)
(665)
(4)
16,790
15,484
(893)
638
796
(148)
—
(623)
1
15,255
(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 2014 and our expectations
regarding the future outlook. As the table above reflects, much of the increase in our total occupancy from December 31, 2013
to December 31, 2014 was attributable to our sale, or removal from operations for redevelopment, of low occupancy operating
properties and our achievement of occupancy on newly constructed or redeveloped space. Occupancy of our Same Office
Properties was 91.3% at December 31, 2014, up slightly from 91.0% at December 31, 2013. With regard to our regional
occupancy trends, including changes from December 31, 2013 to December 31, 2014:
• Baltimore/Washington Corridor: the increase in occupancy was due in large part to occupancy of newly constructed
properties placed into service, our removal of 124,000 square feet from operations for redevelopment and our ability to
renew 83.5% of the square footage of our scheduled lease expirations for the year;
• Northern Virginia: the decrease in occupancy was due in large part to our renewal of only 25.3% of the square footage of
our scheduled lease expirations. Certain of our submarkets in this region are experiencing weakening market conditions,
including surplus supply for space and decreasing rental rates. While our occupancy in this region was 86.8% as of
December 31, 2014, the region also has scheduled lease expirations in 2015 for 471,000 square feet;
• Huntsville: our occupancy reflects an unoccupied 62,000 square foot property that was 100% leased as of December 31,
2014. This region, which is located proximate to Redstone Arsenal, was 94.9% leased as of December 31, 2014;
• Washington, DC - Capitol Riverfront: our occupancy reflects a tenant vacating 52,000 square feet in late 2013 that we have
yet to lease, and there are scheduled lease expirations in 2015 for 56,000 square feet. Our two properties in this region are
located proximate to the Washington Naval Yard;
• Greater Baltimore: the increase in our occupancy was due primarily to our disposition in 2014 of eight properties that were
48.9% occupied upon disposition. Our occupancy has been adversely affected by 208,000 square feet in two properties we
constructed in our North Gate Business Park that were collectively 25.9% occupied as of December 31, 2014; this park is
located proximate to Aberdeen Proving Ground; and
• Greater Philadelphia: the increase in our occupancy was due primarily to occupancy of newly redeveloped space occurring
in 2014.
In 2014, we completed 3.0 million square feet of leasing, including 893,000 of construction and redevelopment space. Our
construction and redevelopment leasing was highlighted by the following: 401,000 square feet leased in two properties to the
United States Government in Northern Virginia and San Antonio; 132,000 square feet in two properties in Huntsville to a
United States Government contractor; 120,000 square feet in a Northern Virginia single user data center; and 88,000 to another
United States Government contractor in the Baltimore/Washington Corridor. As of December 31, 2014, we had 1.2 million
square feet under construction that were 69% leased and 344,000 under redevelopment that were 41% leased.
In 2014, we renewed leases on 1.5 million square feet, representing 69.6% of the square footage of our lease expirations
(including the effect of early renewals). The annualized rents of these renewals (totaling $30.92 per square foot) decreased on
average by approximately 2.2% and the revenue under GAAP (totaling $32.00 per square foot) increased on average by
approximately 7.3% relative to the leases previously in place for the space. The renewed leases had a weighted average lease
term of approximately 5.0 years and the average estimated tenant improvements and lease costs associated with completing the
leasing was approximately $15.36 per square foot.
In 2014, we also completed 614,000 square feet in other leasing, consisting primarily of space previously leased by us to
tenants that was subsequently vacated (also referred to as re-tenanted space). The annualized rents of this other leasing totaled
38
$23.42 per square foot and the revenue under GAAP totaled $23.89 per square foot; these leases had a weighted average lease
term of approximately 6.7 years and the average estimated tenant improvements and lease costs associated with completing this
leasing was approximately $39.96 per square foot. The annualized rents of re-tenanted space decreased on average by
approximately 2.4% and the revenue under GAAP decreased on average by approximately 10.8% relative to the leases
previously in place for the space.
Our weighted average lease term for office properties at December 31, 2014 was approximately 4.7 years. The table below
sets forth as of December 31, 2014 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
2017
2016
2018
2019
2015
5.1% 5.3% 9.3% 8.2% 9.3%
3.7% 2.2% 2.2% 2.8% 2.5%
0.0% 0.0% 0.0% 0.1% 0.0%
0.0% 0.0% 0.0% 1.2% 0.4%
0.6% 0.4% 0.0% 0.7% 0.1%
1.7% 0.5% 0.1% 0.1% 0.2%
0.6% 1.2% 1.0% 1.0% 0.7%
0.0% 0.0% 0.0% 0.0% 0.1%
0.0% 0.0% 0.0% 0.0% 0.0%
11.8% 9.6% 12.6% 14.2% 13.2%
Thereafter
Total
15.1% 52.3%
4.1% 17.5%
8.0%
7.9%
2.2%
0.6%
2.8%
1.0%
3.5%
0.9%
9.0%
4.5%
2.6%
2.5%
2.1%
2.1%
38.6% 100.0%
With regard to leases expiring in 2015, we believe that the weighted average annualized rental revenue per occupied square
foot for such leases at December 31, 2014 was, on average, approximately 2% to 4% 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 19.25 megawatts, had 9.0
megawatts in operation at December 31, 2014, of which 6.56 were leased to tenants with further expansion rights of up to a
combined 7.63 megawatts. In February 2015, we leased an additional 11.25 megawatts expected to be in operations in stages
during 2015.
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 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; and
property dispositions.
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
39
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
2014
For the Years Ended December 31,
2012
2013
(in thousands)
$ 317,929
3,488
(24,131)
$ 312,365
3,260
(37,272)
$ 299,912
6,690
(121)
(136,086)
(1,416)
(31,794)
(5,573)
$ 131,612
(113,214)
(5,857)
(30,869)
(5,436)
$ 141,910
(107,998)
(43,678)
(31,900)
(5,711)
89,066
$
Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013
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 of unconsolidated entities
Income tax expense
Income from continuing operations
Discontinued operations
Gain on sales of real estate, net of income taxes
Net income
$
40
2014
For the Years Ended December 31,
2013
(in thousands)
Variance
$
479,725
106,748
586,473
$
460,997
62,363
523,360
$
18,728
44,385
63,113
179,934
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
229
(310)
34,509
26
10,671
45,206
$
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
$
12,735
22,872
41,183
(4,441)
925
137
73,411
(10,298)
(10,383)
1,089
17,478
(1,881)
1,668
(2,327)
(55,666)
1,655
(56,338)
NOI from Real Estate Operations
For the Years Ended December 31,
2013
(Dollars in thousands, except per square foot data)
Variance
2014
Revenues
Same Office Properties revenues
Rental revenue, excluding lease termination revenue
Lease termination revenue
Tenant recoveries and other real estate operations revenue
$
Same Office Properties total revenues
Constructed office properties placed in service
Properties to be conveyed
Dispositions
Other
Property operating expenses
Same Office Properties
Constructed office properties placed in service
Properties to be conveyed
Dispositions
Other
NOI from real estate operations
Same Office Properties
Constructed office properties placed in service
Properties to be conveyed
Dispositions
Other
Same Office Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
$
$
338,472
1,365
86,416
426,253
28,677
11,362
1,709
11,710
479,711
156,660
7,725
5,697
843
8,874
179,799
269,593
20,952
5,665
866
2,836
299,912
91.6%
24.61
$
$
$
336,091
1,925
77,511
415,527
9,890
20,485
40,362
12,369
498,633
147,785
2,543
7,139
15,330
7,907
180,704
267,742
7,347
13,346
25,032
4,462
317,929
$
2,381
(560)
8,905
10,726
18,787
(9,123)
(38,653)
(659)
(18,922)
8,875
5,182
(1,442)
(14,487)
967
(905)
1,851
13,605
(7,681)
(24,166)
(1,626)
$ (18,017)
90.5%
24.68
1.1%
$
(0.07)
(1) Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the years set forth above.
The increases in tenant recoveries and other real estate operations revenue and property operating expenses from our Same
Office Properties were primarily due to increases in expenses resulting mostly from higher than normal snowfall and lower than
normal temperatures in the Mid-Atlantic region in 2014 and an increase in certain other directly reimbursable expenses.
Our Same Office Properties pool consisted of 160 office properties, comprising 89.4% of our operating office square
footage as of December 31, 2014. This pool of properties included the following changes from the pool used for purposes of
comparing 2013 and 2012 in our 2013 Annual Report on Form 10-K: the additions of three properties placed in service and
100% operational by January 1, 2013, one property acquired and fully operational by January 1, 2013 and two properties in the
Greater Philadelphia region (this region was previously excluded from the pool as it was not considered held for long-term
investment); and the removals of eight properties sold in 2014 and three properties newly classified as redevelopment.
Our NOI from constructed office properties placed in service included 13 properties placed in service in 2013 and 2014.
Depreciation and Amortization Expense
The increase in depreciation and amortization expense was attributable primarily to our revision of the useful life of a
property that was removed from service for redevelopment.
41
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,
2013
2014
(in thousands)
$ 62,363
58,875
3,488
$ 44,385
41,183
3,202
$ 106,748
100,058
6,690
$
$
$
Construction contract and other service revenue and expenses increased due primarily to a higher volume of construction
activity in connection with several of our tenants. Construction contract activity is inherently subject to significant variability
depending on the volume and nature of projects undertaken by us (primarily on behalf of tenants). Service operations are an
ancillary component of our overall operations that should contribute little operating income relative to our real estate
operations.
Impairment Losses
We recognized the impairment losses described below in 2014 and 2013:
•
•
•
•
$1.4 million in 2014 primarily on three properties that were sold in the Greater Baltimore region;
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). 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; and
$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.
General, Administrative and Leasing Expenses
We capitalize compensation and indirect costs associated with properties, or portions thereof, undergoing construction,
development and redevelopment activities, and also capitalize such costs associated with internal-use software development.
We also capitalize compensation costs associated with obtaining new tenant leases or extending existing tenants. Capitalized
compensation and indirect costs were as follows:
For the Years Ended December 31,
2014
2013
$
(in thousands)
7,893
1,461
9,354
$
8,189
1,408
9,597
Construction, development, redevelopment, capital and tenant improvements
Leasing
Total
$
$
42
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, excluding default rate on debt to be extinguished
Interest under default rate on debt to be extinguished via
conveyance
Interest on Unsecured Senior Notes
Interest on unsecured term loans
Amortization of deferred financing costs
Interest expense recognized on interest rate swaps
Interest on Revolving Credit Facility
Interest on Exchangeable Senior Notes
Other interest
Capitalized interest
Total interest expense, net of capitalized interest
Interest expense reclassified to discontinued operations
Interest expense included in continuing operations
For the Years Ended December 31,
2013
2014
(in thousands)
Variance
$
37,857
$
55,105
$ (17,248)
5,806
33,302
10,282
4,666
2,990
232
34
3,289
(6,065)
92,393
—
92,393
$
—
12,294
13,633
5,451
2,741
968
5,824
3,000
(8,785)
90,231
(8,221)
82,010
$
5,806
21,008
(3,351)
(785)
249
(736)
(5,790)
289
2,720
2,162
8,221
10,383
$
Aside from the incremental additional interest expense associated with the default rate on debt to be extinguished via property
conveyance, most of the changes in interest expense reflected above are the result of our emphasis on improving our capital
position primarily through the repayment of existing borrowings using proceeds from the property sales, public offerings of
equity and new unsecured borrowings. Interest expense for Unsecured Senior Notes increased due to our initial note issuances
in May and September 2013 and an additional issuance in May 2014. Interest expense for Exchangeable Senior Notes
decreased due to our repayment of almost all of these notes during 2013. Capitalized interest decreased due primarily to our
completion of significant construction and development projects that were not immediately offset by new projects.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt in 2014 was attributable primarily to a $9.1 million loss recognized in connection
with the defeasance of, and full satisfaction of our obligations with respect to, two secured nonrecourse mortgage loans with a
$211.5 million aggregate principal amount. 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 decrease 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.
Gain on Sales of Real Estate, Net
In 2014, we recognized gain on sales of real estate of $5.6 million in connection with the disposition of a non-operating
property and $5.1 million in connection with dispositions of operating properties in the Greater Baltimore region. 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 and a $2.7 million gain from our
disposition of land parcels in the Greater Baltimore region.
43
Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
2013
For the Years Ended December 31,
2012
(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 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
$
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
$
44
NOI from Real Estate Operations
For the Years Ended December 31,
2012
(Dollars in thousands, except per square foot data)
Variance
2013
Revenues
Same Office Properties revenues
Rental revenue, excluding lease termination revenue
Lease termination revenue
Tenant recoveries and other real estate operations revenue
$
Same Office Properties total revenues
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Dispositions
Other
Property operating expenses
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Dispositions
Other
NOI from real estate operations
Same Office Properties
Constructed office properties placed in service
Acquired office properties
Properties to be conveyed
Dispositions
Other
Same Office Properties rent statistics
Average occupancy rate
Average straight-line rent per occupied square foot (1)
$
$
321,742
1,925
77,160
400,827
18,409
6,180
20,485
40,362
12,370
498,633
143,141
5,369
1,812
7,139
15,330
7,913
180,704
257,686
13,040
4,368
13,346
25,032
4,457
317,929
91.6%
24.42
$
$
$
315,244
1,573
76,025
392,842
5,146
2,708
17,635
62,360
12,409
493,100
139,692
1,248
764
7,587
24,868
6,576
180,735
253,150
3,898
1,944
10,048
37,492
5,833
312,365
89.8%
24.34
$
$
$
6,498
352
1,135
7,985
13,263
3,472
2,850
(21,998)
(39)
5,533
3,449
4,121
1,048
(448)
(9,538)
1,337
(31)
4,536
9,142
2,424
3,298
(12,460)
(1,376)
5,564
1.8%
0.08
(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 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 for purposes of comparing 2013 and 2012 consisted of 155 office properties, comprising
82.7% of our operating office square footage as of December 31, 2013. This pool of properties changed from the pool used for
purposes of comparing 2013 and 2012 in our 2013 Annual Report on Form 10-K due to the removal of eight properties
disposed in 2014 and three properties newly classified as redevelopment in 2014; and the addition of one property in the
Greater Philadelphia region (this region was previously excluded from the pool as it was not considered held for long-term
investment).
Our NOI from constructed office properties placed in service included 13 properties placed in service in 2012 and 2013.
45
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.
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:
•
•
•
•
•
as described above, we recognized aggregate impairment losses in connection primarily with the Strategic Reallocation
Plan 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;
as described above, $5.9 million in 2013 on two properties in the Greater Baltimore region that Management concluded no
longer met our strategic investment criteria;
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.
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
$
$
46
$
(in thousands)
8,189
1,408
9,597
$
7,976
1,151
9,127
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 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
Capitalized interest
Total interest expense, net of capitalized interest
Interest expense reclassified to discontinued operations
Interest expense included in continuing operations
For the Years Ended December 31,
2013
2012
Variance
$ 55,105
13,633
12,294
5,824
5,451
3,000
2,741
968
(8,785)
90,231
(8,221)
$ 82,010
(in thousands)
$ 63,124
14,728
—
13,851
6,243
2,784
3,697
6,274
(13,903)
96,798
(10,397)
$ 86,401
$ (8,019)
(1,095)
12,294
(8,027)
(792)
216
(956)
(5,306)
5,118
(6,567)
2,176
$ (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 and a $2.7 million gain from our
disposition of land parcels in Greater Baltimore.
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 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, income taxes and executive transition costs, and excluding the effect of properties serving as collateral for debt
which is in default that we expect to extinguish via conveyance of such properties. The adjustment for the effect of properties
47
serving as collateral for debt which is in default that we expect to extinguish via conveyance of such properties pertains to the
periods subsequent to our default on the loan’s payment terms, which was the result of our decision to not support payments on
the loan since the estimated fair value of the properties was less than the loan balance. While we continued as the legal owner
of the properties during this period, all cash flows produced by them went directly to the lender and we did not fund any debt
service shortfalls. We believe that Adjusted EBITDA is a useful supplemental measure for assessing our un-levered
performance. We believe that net income, as reported on our consolidated statements of operations, is the most directly
comparable GAAP measure to Adjusted EBITDA. Adjusted EBITDA excludes items that are included in net income, including
some that require cash outlays; we compensate for this limitation by using the measure simply as a supplemental measure that
is considered alongside other GAAP and non-GAAP measures. It should not be used as an alternative to net income when
evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our
liquidity or ability to make cash distributions or pay debt service. In 2014, we changed our methodology for reporting Adjusted
EBITDA to include an adjustment to exclude the effect of executive transition costs; Adjusted EBITDA for prior periods has
been revised to conform with the change in methodology.
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, and interest expense on debt in default to be extinguished via conveyance of
properties). 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, and interest expense on debt in default to be
extinguished via conveyance of properties); (2) scheduled principal amortization on mortgage loans; (3) capitalized interest; (4)
dividends on preferred shares; and (5) distributions on preferred units in the Operating Partnership not owned by COPT. In
2014, we changed our methodology for reporting Adjusted EBITDA fixed charge coverage ratio to include scheduled principal
amortization on mortgage loans and capitalized interest in the denominator for the ratio; the Adjusted EBITDA fixed charge
coverage ratio for prior periods has been revised to conform with the change in methodology.
48
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
Interest expense (1)
Income tax expense (2)
Depreciation and amortization (1)
Impairment losses (1)
Loss (gain) 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
EBITDA from properties to be conveyed to extinguish debt in default
Executive transition costs
Adjusted EBITDA
Interest expense (1)
Less: Amortization of deferred financing costs
Less: Amortization of net debt discounts and premiums, net of amounts capitalized
Less: Interest exp. on debt in default to be exting. via conveyance of properties
Denominator for Adjusted EBITDA interest coverage ratio
Scheduled principal amortization
Capitalized interest
Preferred share dividends
Preferred unit distributions
Denominator for Adjusted EBITDA fixed charge coverage ratio
$
For the Years Ended December 31,
2012
2013
2014
(Dollars in thousands)
$
$ 101,544
90,231
1,978
119,773
32,047
(40,780)
(9,004)
(2,683)
45,206
92,393
310
138,490
1,419
9,668
(5,117)
(5,578)
20,341
96,798
381
124,418
66,910
(793)
(20,928)
(33)
291
—
(2,091)
1,056
$ 276,047
206
—
—
—
$ 293,312
(3,589)
229
—
2,157
$ 285,891
$
$
92,393
(4,666)
(920)
(12,684)
74,123
6,517
6,065
15,939
660
$ 103,304
$
$
90,231
(5,451)
(1,015)
—
83,765
9,481
8,785
19,971
660
$ 122,662
$
$
96,798
(6,243)
(2,721)
—
87,834
11,684
13,903
20,844
660
$ 134,925
Adjusted EBITDA interest coverage ratio
Adjusted EBITDA fixed charge coverage ratio
3.7x
2.7x
3.5x
2.4x
3.3x
2.1x
(1) Includes amounts included in continuing operations and discontinued operations.
(2) Includes income taxes on continuing operations and gains on sales of real estate.
49
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; FFO associated with properties securing non-recourse debt
on which we have defaulted and which we have extinguished, or expect to extinguish, via conveyance of those properties,
including property NOI and interest expense (discussed further below); loss on interest rate derivatives; executive transition
costs; 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. The adjustment for FFO associated with properties securing non-recourse debt on which
we have defaulted pertains to the periods subsequent to our default on the loan’s payment terms, which was the result of our
decision to not support payments on the loan since the estimated fair value of the properties was less than the loan balance.
While we continued as the legal owner of the properties during this period, all cash flows produced by them went directly to the
lender and we did not fund any debt service shortfalls, which included incremental additional interest under the default rate of
$5.8 million in 2014. 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
50
reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described
above for Diluted FFO. In 2014, we changed our methodology for reporting Diluted FFO, as adjusted for comparability to
include an adjustment to exclude the effect of executive transition costs; Diluted FFO, as adjusted for comparability for prior
periods has been revised to conform with the change in methodology.
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
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.
In 2014, we changed our methodology for reporting Diluted FFO per share, as adjusted for comparability to include an
adjustment to exclude the effect of executive transition costs; Diluted FFO per share, as adjusted for comparability for prior
periods has been revised to conform with the change in methodology.
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.
51
The tables appearing below and on the following page sets forth the computation of the above stated measures for the years
ended December 31, 2010 through 2014 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
Loss (gain) on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Executive transition costs
Add: Negative FFO of properties to be conveyed to extinguish debt
in default
Diluted FFO comparability adjustments allocable to restricted shares
Diluted FFO, as adjusted for comparability
For the Year Ended December 31,
2011
2012
2013
(Dollars and shares in thousands, except per share data)
$ 20,341
121,937
$(127,576)
134,131
$ 101,544
117,719
$ 45,504
123,243
2010
2014
$ 45,206
136,086
—
—
346
492
1,370
32,047
70,263
70,512
631
—
(5,117)
177,545
(9,004)
242,306
(20,928)
191,959
(4,811)
72,748
(1,077)
168,301
(660)
(3,216)
(15,939)
(1,769)
(665)
$ 155,296
—
(5,578)
49
—
—
—
9,668
1,769
1,056
(660)
(3,710)
(19,971)
(2,904)
(912)
$ 214,149
—
(2,683)
—
—
1,855
—
(40,780)
2,904
—
(660)
(1,989)
(20,844)
(1,827)
(919)
$ 165,720
229
(33)
(3,353)
673
(660)
(1,887)
(16,102)
—
(1,037)
$ 53,062
156
(2,717)
80,509
(4,775)
(660)
(1,370)
(16,102)
—
(1,524)
$ 148,645
3,424
(2,829)
—
—
—
—
(793)
1,827
2,157
—
29,805
2,023
—
—
—
—
—
—
—
10,928
(78)
$ 173,110
—
168
$ 175,613
—
—
$ 166,427
—
—
$ 158,063
—
—
$ 149,240
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
88,092
3,897
91,989
171
92,160
85,167
3,869
89,036
57
89,093
73,454
4,235
77,689
53
77,742
69,382
4,355
73,737
111
73,848
59,611
4,608
64,219
333
64,552
Diluted FFO per share
Diluted FFO per share, as adjusted for comparability
$
$
1.69
1.88
$
$
2.40
1.97
$
$
2.13
2.14
$
$
0.72
2.14
$
$
2.30
2.31
52
2014
For the Year Ended December 31,
2011
2012
2013
(Dollars and shares in thousands, except per share data)
2010
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
Loss (gain) on early extinguishment of debt
Issuance costs associated with redeemed preferred shares
Executive transition costs
Add: Negative FFO of properties to be conveyed to extinguish debt
in default
Diluted FFO comparability adjustments allocable to restricted shares
Diluted FFO, as adjusted for comparability
$ 22,115
$ 70,418
$
(2,163)
$(136,567)
$ 25,587
1,006
136,086
—
3,283
117,719
—
(87)
(8,439)
121,937
346
134,131
492
2,116
123,243
631
1,370
432
(725)
794
(665)
32,047
414
(927)
1,111
(912)
70,263
469
(633)
(2,565)
(919)
70,512
1,037
(849)
(1,407)
(1,037)
—
1,071
(1,402)
—
(1,524)
(5,117)
$ 155,296
—
(5,578)
49
—
(9,004)
$ 214,149
—
(2,683)
—
—
(20,928)
$ 165,720
229
(33)
(3,353)
673
(4,811)
$ 53,062
156
(2,717)
80,509
(4,775)
(1,077)
$ 148,645
3,424
(2,829)
—
—
—
—
9,668
1,769
1,056
1,855
—
(40,780)
2,904
—
—
—
(793)
1,827
2,157
—
29,805
2,023
—
—
—
—
—
—
—
10,928
(78)
$ 173,110
—
168
$ 175,613
—
—
$ 166,427
—
—
$ 158,063
—
—
$ 149,240
Denominator for diluted EPS
Weighted average common units
Anti-dilutive EPS effect of share-based compensation awards
Denominator for diluted FFO per share measures
88,263
3,897
—
92,160
85,224
3,869
—
89,093
73,454
4,235
53
77,742
69,382
4,355
111
73,848
59,944
4,608
—
64,552
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
$ 97,944
4,270
$ 102,214
$ 95,246
4,280
$ 99,526
$ 81,720
4,617
$ 86,337
$ 116,717
7,173
$ 123,890
$ 98,510
7,266
$ 105,776
57.6%
65.8%
59.0%
41.1%
46.5%
56.7%
45.0%
52.1%
51.9%
170.3%
233.5%
78.4%
62.8%
71.2%
70.9%
53
Property Additions
The table below sets forth the major components of our additions to properties for 2014 and 2013:
Construction, development and redevelopment
Tenant improvements on operating properties (1)
Capital improvements on operating properties
Variance
For the Years Ended December 31,
2013
2014
(in thousands)
$ 207,753
19,031
22,855
$ 249,639
$ 206,583
25,674
22,611
$ 254,868
$
$
(1,170)
6,643
(244)
5,229
(1) Tenant improvement costs incurred on newly-constructed properties are classified in this table as construction, development and redevelopment.
Cash Flows
Net cash flow provided by operating activities increased $34.9 million from 2013 to 2014 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.
Net cash flow provided by investing activities decreased $89.9 million from 2013 to 2014 due primarily to higher proceeds
from sales of properties in 2013.
Net cash flow used in financing activities in 2014 was $32.5 million and included the following:
net proceeds from the issuance of common shares (or units) of $150.2 million; offset in part by
net repayments of borrowings of $9.3 million;
redemption of preferred shares (or units) of $50.0 million; and
dividends and/or distributions to shareholders and/or unitholders of $118.1 million.
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.
•
•
•
•
•
•
•
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, 2014, COPT owned 96.0% of the outstanding common units and 95.5% 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.
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.
54
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
meet 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, 2014, we had $6.1 million in cash and cash equivalents.
Our senior unsecured debt is currently rated investment grade by the three major rating agencies. 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, 2014, the maximum
borrowing capacity under this facility totaled $800.0 million, of which $702.2 million was available.
We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without
necessitating property sales. We expect to complete dispositions opportunistically, depending on the circumstances pertaining
to properties, or groups of properties, or when capital markets otherwise warrant.
55
The following table summarizes our contractual obligations as of December 31, 2014 (in thousands):
2015
2016
2017
2018
2019
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
Total contractual cash obligations
$ 336,751
6,794
66,706
$ 166,062
5,337
56,805
$ 337,110
2,137
43,342
$
— $ 120,000
2,094
40,635
2,036
41,874
$ 943,562
7,927
120,284
$ 1,903,485
26,325
369,646
62,984
417
57,904
35,308
—
—
—
—
—
—
—
—
63,401
93,212
28,020
905
1,757
$ 561,821
12,000
839
1,230
$ 277,998
—
768
487
$ 383,844
$
—
735
201
44,846
—
728
192
$ 163,649
—
76,678
65
$ 1,148,516
40,020
80,653
3,932
$ 2,580,674
(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 $9.8 million. As of
December 31, 2014, maturities in 2015 include $150.0 million pertaining to a nonrecourse mortgage loan secured by two operating
properties the title for which we expect to transfer to extinguish our debt obligation. Maturities also include $150.0 million in 2015 that
may be extended for two one-year periods and $333.0 million in 2017 that may be extended for one year, subject to certain conditions.
(3) Represents interest costs for our outstanding debt as of December 31, 2014 for the terms of such debt. For variable rate debt, the
amounts reflected above used December 31, 2014 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.
(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.
We expect to spend more than $250.0 million on construction and development costs and approximately $70.0 million on
improvements to operating properties (including the commitments set forth in the table above) in 2015. We expect to fund the
construction and development costs using cash on hand and borrowings under our Revolving Credit Facility. 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,
2014, we were in compliance with these financial covenants.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements during 2014.
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.
56
Recent Accounting Pronouncements
We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) related to the reporting of
discontinued operations and disclosures of disposals of components of an entity effective for the quarterly period ended June
30, 2014. This guidance defines a discontinued operation as a component or group of components disposed or classified as
held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results;
the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of
business, a major equity method investment or other major parts of an entity. The guidance also provides for additional
disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued
operations. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale
after the effective date. Our adoption of the guidance will result in fewer disposed or held for sale properties being reported as
discontinued operations in our results of operations (including operating properties sold during the current period) but will not
otherwise materially affect our consolidated financial statements.
In May 2014, the FASB issued guidance regarding the recognition of revenue from contracts with customers. Under this
guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance
requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. We are required to adopt this guidance for our annual and interim periods beginning January 1, 2017,
utilizing one of two methods: retrospective restatement for each reporting period presented at time of adoption, or
retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We
are currently assessing the financial impact of this guidance on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, one of 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.
The following table sets forth as of December 31, 2014 our debt obligations and weighted average interest rates for fixed
rate debt by expected maturity date (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
For the Years Ending December 31,
Debt:
Fixed rate debt (1)
$ 156,668
$ 171,399
$
6,247
Weighted average interest rate (2)
10.46%
7.19%
5.18%
Variable rate debt (3)
$ 186,877
$
Weighted average interest rate (4)
1.81%
— $ 333,000
—%
1.61%
$
$
2,036
$
2,094
$ 951,489
$1,289,933
4.61%
4.60%
4.10%
5.29%
— $ 120,000
—%
2.26%
$
— $ 639,877
—%
1.79%
(1) Represents principal maturities only and therefore excludes net discounts of $9.8 million. As of December 31, 2014, maturities in 2015
include $150.0 million pertaining to a nonrecourse mortgage loan secured by two operating properties the title for which we expect to
transfer to extinguish our debt obligation in connection with loan default proceedings.
(2) Excluding the incremental additional interest rate associated with the default rate on the mortgage loan discussed above, the rate would
be 5.67% for the fixed rate debt maturing in 2015 and 4.71% for the total fixed rate debt.
(3) As of December 31, 2014, maturities include $150.0 million in 2015 that may be extended for two one-year periods and $333.0 million
in 2017 that may be extended for one year, subject to certain conditions.
(4) The amounts reflected above used December 31, 2014 interest rates on variable rate debt.
The fair value of our debt was $1.9 billion as of December 31, 2014 and December 31, 2013. If interest rates had been 1%
lower, the fair value of our fixed-rate debt would have increased by approximately $86 million as of December 31, 2014 and
$81 million as of December 31, 2013.
57
The following table sets forth information pertaining to interest rate swap contracts in place as of December 31, 2014 and
2013 and their respective fair values (dollars in thousands):
$
Notional
Amount
100,000
100,000
36,877 (1)
100,000
100,000
100,000
100,000
100,000
100,000
Floating Rate
Index
Fixed
Rate
0.8320% One-Month LIBOR
0.8320% One-Month LIBOR
3.8300% One-Month LIBOR + 2.25%
0.8055% One-Month LIBOR
0.8100% One-Month LIBOR
1.6730% One-Month LIBOR
1.7300% One-Month LIBOR
0.6123% One-Month LIBOR
0.6100% One-Month LIBOR
Effective
Date
1/3/2012
1/3/2012
11/2/2010
9/2/2014
9/2/2014
9/1/2015
9/1/2015
1/3/2012
1/3/2012
Expiration
Date
9/1/2015
9/1/2015
11/2/2015
9/1/2016
9/1/2016
8/1/2019
8/1/2019
9/1/2014
9/1/2014
Fair Value at December 31,
2014
2013
$
$
(407) $
(407)
(400)
(317)
(324)
239
35
—
—
(1,581) $
(861)
(861)
(832)
(94)
(105)
3,377
3,217
(279)
(277)
3,285
(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 $1.9 million in 2014 and $3.6 million in 2013 if short-term interest rates were 1% higher. Interest expense in
2013 was more sensitive to a change in interest rates than 2014 due primarily to our having a higher average variable-rate debt
balance in 2013.
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, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of December 31, 2014 were functioning effectively to provide reasonable assurance that
the information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as
amended is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
I.
Internal Control Over Financial Reporting
COPT
(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-4.
(c) Change in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
58
COPLP
(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-3.
(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-5.
(c) Change in Internal Control over Financial Reporting
No change in the Operating Partnership’s internal control over financial reporting occurred during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, its 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 2015 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).
59
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
3.2.1
3.2.2
3.3
4.1
4.2
4.3
5.1
10.1.1
10.1.2
10.1.3
10.1.4
10.1.5
DESCRIPTION
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).
Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland on
September 22, 2014 (filed with the Company’s Current Report on Form 8-K dated September 24, 2014 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).
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).
60
EXHIBIT
NO.
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
10.1.20
10.1.21
10.1.22
10.1.23
10.1.24
DESCRIPTION
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).
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).
61
EXHIBIT
NO.
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*
10.4.3*
10.4.4*
10.5.1*
10.5.2*
10.5.3*
DESCRIPTION
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).
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).
62
EXHIBIT
NO.
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*
10.7.3*
10.7.4*
10.8.1*
10.8.1*
10.9
DESCRIPTION
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).
Second Amendment to Employment Agreement, dated June 20, 2014, between Corporate Office Properties,
L.P., Corporate Office Properties Trust, and Wayne H. Lingafelter (filed on July 30, 2014 with the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference).
Letter Agreement, dated August 28, 2014, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Wayne H. Lingafelter (filed with the Company’s Current Report on Form 8-K dated
September 3, 2014 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).
Letter Agreement, dated September 26, 2014, between Corporate Office Properties Trust, Corporate Office
Properties, L.P., and Stephen E. Budorick (filed with the Company’s Current Report on Form 8-K dated
October 1, 2014 and incorporated herein by reference).
Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain
shareholders of the Company (filed on August 12, 1998 with the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by reference).
10.10.1*
10.10.2*
Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation Plan (filed with the
Company’s Current Report on Form 8-K dated December 10, 2008 and incorporated herein by reference).
First Amendment to the Corporate Office Properties Trust Supplemental Nonqualified Deferred Compensation
Plan dated December 4, 2008 (filed with the Company’s Current Report on Form 8-K dated December 10, 2008
and incorporated herein by reference).
63
EXHIBIT
NO.
10.11.1*
10.11.2*
10.12*
10.13
10.14
10.15.1
10.15.2
10.16
10.17.1
10.17.2
10.17.3
10.18
10.19
10.20
DESCRIPTION
Corporate Office Properties Trust 2008 Omnibus Equity and Incentive Plan (included in Appendix A to the
Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission
on April 9, 2008 and incorporated herein by reference).
Corporate Office Properties Trust Amended and Restated 2008 Omnibus Equity and Incentive Plan (included in
Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange
Commission on March 30, 2010 and incorporated herein by reference).
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).
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).
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).
64
EXHIBIT
NO.
10.21
10.22
12.1
12.2
21.1
21.2
23.1
23.2
31.1
31.2
31.3
31.4
32.1
32.2
32.3
32.4
DESCRIPTION
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).
Second Supplemental Indenture, dated as of May 14, 2014, 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 14, 2014 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).
COPT’s Consent of Independent Registered Public Accounting Firm (filed herewith).
COPLP’s 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).
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).
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Instance Document (filed herewith).
XBRL Taxonomy Extension Schema Document (filed herewith).
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
XBRL Extension Labels Linkbase (filed herewith).
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
* - Indicates a compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
(c)
Not applicable.
65
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: February 18, 2015
Date: February 18, 2015
By:
By:
CORPORATE OFFICE PROPERTIES TRUST
/s/ Roger A. Waesche, Jr.
Roger A. Waesche, Jr.
President and Chief Executive Officer
/s/ Anthony Mifsud
Anthony Mifsud
Executive Vice President and Chief Financial Officer
66
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/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/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/ Richard Szafranski
(Richard Szafranski)
Chairman of the Board and Trustee
February 18, 2015
President and Chief Executive Officer and Trustee February 18, 2015
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 18, 2015
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
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.
Date: February 18, 2015
Date: February 18, 2015
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/ Anthony Mifsud
Anthony Mifsud
Executive Vice President and Chief Financial Officer
By:
By:
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/ Anthony Mifsud
(Anthony Mifsud)
/s/ Gregory J. Thor
(Gregory J. Thor)
/s/ Robert L. Denton
( Robert L. Denton)
/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/ Richard Szafranski
(Richard Szafranski)
Chairman of the Board and Trustee
February 18, 2015
President and Chief Executive Officer and Trustee February 18, 2015
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 18, 2015
Senior Vice President, Controller and Chief
Accounting Officer (Principal Accounting Officer)
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
February 18, 2015
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
69
(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, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013
and 2012
Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Financial Statements of Corporate Office Properties, L.P.
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013
and 2012
Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
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, 2014
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-60
F-61
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, 2014. 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, 2014 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, 2014 based on the criteria in Internal Control-Integrated
Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2014 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, 2014. 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, 2014 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, 2014 based on the criteria in Internal Control-Integrated
Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2014 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, 2014 and December 31, 2013, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 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, 2014, based on
criteria established in Internal Control - Integrated Framework (2013) 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.
As discussed in Note 2 to the consolidated financial statements, the Company adopted accounting standards update (“ASU”)
No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", which changed
the criteria for reporting discontinued operations in 2014.
/s/ PricewaterhouseCoopers LLP
Baltimore, MD
February 18, 2015
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. and its subsidiaries at December 31, 2014 and December 31, 2013, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 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, 2014, based on
criteria established in Internal Control - Integrated Framework (2013) 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.
As discussed in Note 2 to the consolidated financial statements, the Company adopted accounting standards update (“ASU”)
No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", which changed
the criteria for reporting discontinued operations in 2014.
/s/ PricewaterhouseCoopers LLP
Baltimore, MD
February 18, 2015
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 $717 and $2,976, respectively)
Deferred rent receivable (net of allowance of $1,418 and $2,126, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing and financing costs, net
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
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 93,255,284 at December 31, 2014 and 87,394,512 at December 31,
2013)
Additional paid-in capital
Cumulative distributions in excess of net income
Accumulated other comprehensive (loss) income
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,
2014
2013
$ 2,751,488
545,426
3,296,914
14,339
6,077
9,069
26,901
95,910
43,854
64,797
52,147
60,249
$ 3,670,257
$ 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
$ 1,920,057
123,035
31,011
29,862
13,031
1,855
12,105
2,130,956
$ 1,927,703
98,785
31,492
29,080
10,369
3,309
14,207
2,114,945
18,417
17,758
199,083
249,083
933
1,969,968
(717,264)
(1,297)
1,451,423
874
1,814,015
(641,868)
3,480
1,425,584
51,534
8,800
9,127
69,461
1,520,884
$ 3,670,257
53,468
8,800
9,397
71,665
1,497,249
$ 3,629,952
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
Income from continuing operations before equity in income (loss) of
unconsolidated entities and income taxes
Equity in income (loss) of unconsolidated entities
Income tax expense
Income from continuing operations
Discontinued operations
Income before gain on sales of real estate
Gain on sales of real estate, net of income taxes
Net income
Net (income) loss attributable to noncontrolling interests:
Common units in COPLP
Preferred units in COPLP
Other consolidated entities
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Net income (loss) attributable to COPT common shareholders
Net income attributable to COPT:
Income from continuing operations
Discontinued operations, net
Net income 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,
2014
2013
2012
$ 386,396
93,329
106,748
586,473
$ 377,611
83,386
62,363
523,360
$ 353,080
81,219
73,836
508,135
179,934
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(1,006)
(660)
(3,285)
40,255
(15,939)
(1,769)
22,547
40,225
30
40,255
0.25
—
0.25
0.25
—
0.25
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
87
(660)
1,209
20,977
(20,844)
(1,827)
(1,694)
9,297
11,680
20,977
(0.19)
0.16
(0.03)
(0.19)
0.16
(0.03)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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
Other comprehensive (loss) income
Unrealized (losses) gains on interest rate derivatives
Losses on interest rate derivatives included in interest expense
Losses on interest rate derivatives included in loss on early extinguishment
of debt
Unrealized equity in other comprehensive income of equity method investee
Realized equity in other comprehensive income of equity method investee
Other comprehensive (loss) income
Comprehensive income
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income attributable to COPT
For the Years Ended December 31,
2014
45,206
2013
$ 101,544
2012
20,341
$
$
(7,799)
2,990
38
—
—
(4,771)
40,435
(4,957)
35,478
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
$
See accompanying notes to consolidated financial statements.
F-8
Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
Cumulative
Distributions in
Excess of Net
Income
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
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 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, 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
—
172,500
—
(55,000)
—
—
—
—
—
—
—
—
—
—
333,833
(84,750)
—
—
—
—
720
2
—
86
—
—
1
—
—
—
—
—
—
—
—
809
—
3
45
15
—
Additional
Paid-in
Capital
$ 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
$
(534,041) $
—
—
—
(1,827)
—
—
—
—
20,977
(102,564)
—
—
—
—
(617,455)
(2,904)
—
—
—
(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)
Redemption of preferred shares (2,000,000 shares)
Conversion of common units to common shares (140,149 shares)
Common shares issued to the public (5,520,000 shares)
Exercise of share options (62,888 shares)
Share-based compensation
Restricted common share redemptions (57,537 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, 2014 (93,255,284 common shares outstanding)
—
—
—
—
—
—
—
—
—
—
—
249,083
(50,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 199,083
See accompanying notes to consolidated financial statements.
779
7,603
(2,002)
(744)
—
—
—
—
—
(7,121)
(122)
1,814,015
1,769
1,841
148,611
1,489
7,048
(1,554)
(3,382)
—
—
—
—
—
134
(3)
$ 1,969,968
—
2
—
—
—
—
—
—
—
—
—
874
—
2
55
—
2
—
—
—
—
—
—
—
—
—
933
$
—
—
—
—
93,707
(115,216)
—
—
—
—
—
(641,868)
(1,769)
—
—
—
—
—
—
40,255
(113,882)
—
—
—
—
—
(717,264) $
$
F-9
(1,733) $
—
—
—
—
—
—
—
—
(3,702)
—
—
—
—
—
(5,435)
—
—
—
—
—
—
—
—
—
8,915
—
—
—
—
—
—
3,480
—
—
—
—
—
—
—
(4,777)
—
—
—
—
—
—
(1,297) $
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
—
(1,843)
—
—
—
—
3,382
2,796
—
(4,929)
3
(1,613)
—
—
69,461
Total
$ 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
(50,000)
—
148,666
1,489
7,050
(1,554)
—
38,274
(113,882)
(4,929)
3
(1,613)
134
(3)
$ 1,520,884
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 refunded (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
Investing receivables funded
Investing 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 (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
For the Years Ended December 31,
2014
2013
2012
$ 479,605
89,180
(178,803)
(79,271)
(29,521)
(79,095)
—
—
—
—
(9,017)
607
200
193,885
$ 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
(200,385)
(27,037)
(28,720)
—
57,782
(3,731)
10,279
(16,234)
1,137
(2,780)
(209,689)
232,000
297,342
11,569
(149,000)
(6,517)
(394,653)
(708)
—
150,174
(50,000)
(96,330)
(16,731)
(5,008)
(1,554)
(3,076)
(32,492)
(48,296)
(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
329,000
—
403,117
(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
54,373
6,077
$
10,594
54,373
$
5,559
10,594
$
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 to net cash provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization
Impairment losses
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
Share-based compensation
Loss (gain) on early extinguishment of debt
Other
Changes in operating assets and liabilities:
For the Years Ended December 31,
2014
2013
2012
$
45,206
$ 101,544
$
20,341
138,490
1,419
—
4,666
(3,520)
921
(10,695)
6,164
651
(3,242)
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)
Decrease (increase) in accounts receivable
Decrease in restricted cash and marketable securities
(Increase) decrease in prepaid expenses and other assets
Increase in accounts payable, accrued expenses and other liabilities
(Decrease) increase in rents received in advance and security deposits
Decrease in interest rate derivatives in connection with cash settlement
Net cash provided by operating activities
94
1,352
(12,231)
25,091
(481)
—
$ 193,885
(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
Supplemental schedule of non-cash investing and financing activities:
(Decrease) increase in accrued capital improvements, leasing and other investing
activity costs
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
(Decrease) 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
(Decrease) increase in redeemable noncontrolling interest and (increase) decrease
in equity to carry redeemable noncontrolling interest at fair value
$
$
$
$
$
$
$
$
$
(3,779) $
2,947
— $
73,780
— $ 146,500
(4,866) $
$
29,862
9,470
29,080
— $
5,194
1,843
3,382
$
$
3,997
744
(134) $
7,121
$
$
$
$
$
$
$
$
$
(1,227)
12,042
16,304
4,040
28,698
—
2,814
4,627
3,955
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 $717 and $2,976, respectively)
Deferred rent receivable (net of allowance of $1,418 and $2,126, respectively)
Intangible assets on real estate acquisitions, net
Deferred leasing and financing costs, net
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
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, preferred units outstanding of 7,431,667 at December 31, 2014 and 9,431,667 at
December 31, 2013
Limited partner, 352,000 preferred units outstanding at December 31, 2014 and 2013
Common units, 93,255,284 and 87,394,512 held by the general partner and 3,837,551 and
3,977,700 held by limited partners at December 31, 2014 and 2013, respectively
Accumulated other comprehensive (loss) income
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,
2014
2013
$ 2,751,488
545,426
3,296,914
14,339
6,077
3,187
26,901
95,910
43,854
64,797
52,147
60,249
$ 3,664,375
$ 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
$ 1,920,057
123,035
31,011
29,862
13,031
1,855
6,223
2,125,074
$ 1,927,703
98,785
31,492
29,080
10,369
3,309
6,740
2,107,478
18,417
17,758
199,083
8,800
249,083
8,800
1,305,219
(1,381)
1,511,721
9,163
1,520,884
$ 3,664,375
1,226,318
3,605
1,487,806
9,443
1,497,249
$ 3,622,485
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
Income from continuing operations before equity in income (loss) of
unconsolidated entities and income taxes
Equity in income (loss) of unconsolidated entities
Income tax expense
Income from continuing operations
Discontinued operations
Income before gain on sales of real estate
Gain on sales of real estate, net of income taxes
Net income
Net (income) loss attributable to noncontrolling interests in consolidated entities
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income (loss) attributable to COPLP common unitholders
Net income attributable to COPLP:
Income from continuing operations
Discontinued operations, net
Net income 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,
2014
2013
2012
$ 386,396
93,329
106,748
586,473
$ 377,611
83,386
62,363
523,360
$ 353,080
81,219
73,836
508,135
179,934
136,086
100,058
1,416
31,794
5,573
454,861
131,612
(92,393)
4,923
(9,552)
34,590
229
(310)
34,509
26
34,535
10,671
45,206
(3,276)
41,930
(16,599)
(1,769)
23,562
41,899
31
41,930
0.25
—
0.25
0.25
—
0.25
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)
8,894
(546)
(381)
7,967
12,353
20,320
21
20,341
507
20,848
(21,504)
(1,827)
(2,483)
9,194
11,654
20,848
(0.19)
0.15
(0.04)
(0.19)
0.15
(0.04)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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
Other comprehensive (loss) income
Unrealized (losses) gains on interest rate derivatives
Losses on interest rate derivatives included in interest expense
Losses on interest rate derivatives included in loss on early extinguishment
of debt
Unrealized equity in other comprehensive income of equity method investee
Realized equity in other comprehensive income of equity method investee
Other comprehensive (loss) income
Comprehensive income
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income attributable to COPLP
For the Years Ended December 31,
2014
45,206
2013
$ 101,544
2012
20,341
$
$
(7,799)
2,990
38
—
—
(4,771)
40,435
(3,492)
36,943
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
$
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, 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 loss
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
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
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, 2014
Units
352,000
—
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
Amount
$ 8,800
Amount
$216,333
172,500
(55,000)
Units
Units
76,313,112
8,121,667
—
— 6,900,000
—
— (2,200,000)
— 8,625,000
—
—
61,624
—
—
—
160,643
—
—
—
(139,851)
—
—
—
—
—
660
20,844
—
— (20,844)
(660)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
85,020,528
333,833
12,821,667
8,800
— (3,390,000)
—
(84,750)
— 4,485,000
—
—
Amount
$ 972,107
(6,848)
—
204,696
928
11,184
(3,379)
(656)
(86,337)
—
1,608
(3,955)
43
1,089,391
—
117,961
Accumulated
Other
Comprehensive
Income (Loss)
$
Noncontrolling
Interests in
Subsidiaries
Total
Equity
$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
10,496
—
—
—
—
—
—
1,950
—
(655)
(1,608)
—
—
10,183
—
—
(1,837) $
—
—
—
—
—
—
(3,871)
—
—
—
—
—
(5,708)
—
—
—
—
—
— 1,500,000
38,447
—
—
38,447
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
—
—
—
—
—
—
—
352,000
—
—
—
—
660
(660)
—
—
—
—
8,800
3,899
221,501
—
—
779
39,331
—
—
7,605
184,292
—
—
(2,002)
(78,440)
—
—
77,006
—
—
19,971
(99,525)
—
— (19,971)
—
—
—
—
—
—
—
—
(7,121)
—
—
—
(122)
—
—
—
1,226,318
91,372,212
249,083
9,431,667
—
—
— (2,000,000)
(50,000)
148,666
— 5,520,000
—
—
1,489
62,888
—
—
—
7,050
195,272
—
—
—
(1,554)
(57,537)
—
—
—
—
—
660
25,331
15,939
— (102,212)
— (15,939)
(660)
—
—
—
—
—
—
—
—
—
—
134
—
—
—
—
—
(3)
—
—
—
$1,305,219
97,092,835
$199,083
7,431,667
$ 8,800
$
—
—
—
—
9,313
—
—
—
—
—
3,605
—
—
—
—
—
(4,986)
—
—
—
—
—
(1,381) $
(2,530)
—
—
—
2,749
—
86
(1,045)
—
—
9,443
—
—
—
—
—
1,330
—
3
(1,613)
—
—
9,163
1,369
779
7,605
(2,002)
109,699
(120,156)
86
(1,045)
(7,121)
(122)
1,497,249
(50,000)
148,666
1,489
7,050
(1,554)
38,274
(118,811)
3
(1,613)
134
(3)
$1,520,884
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 refunded (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
Investing receivables funded
Investing 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 (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
For the Years Ended December 31,
2014
2013
2012
$ 479,605
89,180
(178,803)
(79,271)
(29,521)
(79,095)
—
—
—
—
(9,017)
607
200
193,885
$ 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
(200,385)
(27,037)
(28,720)
—
57,782
(3,731)
10,279
(16,234)
1,137
(2,780)
(209,689)
232,000
297,342
11,569
(149,000)
(6,517)
(394,653)
(708)
—
150,174
(50,000)
(100,678)
(17,391)
(1,554)
(3,076)
(32,492)
(48,296)
(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
329,000
—
403,117
(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
54,373
6,077
$
10,594
54,373
$
5,559
10,594
$
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 to net cash provided by operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization
Impairment losses
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
Share-based compensation
Loss (gain) on early extinguishment of debt
Other
Changes in operating assets and liabilities:
For the Years Ended December 31,
2014
2013
2012
$
45,206
$ 101,544
$
20,341
138,490
1,419
—
4,666
(3,520)
921
(10,695)
6,164
651
(3,242)
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)
Decrease (increase) in accounts receivable
(Increase) decrease in restricted cash and marketable securities
(Increase) decrease in prepaid expenses and other assets
Increase in accounts payable, accrued expenses and other liabilities
(Decrease) increase in rents received in advance and security deposits
Decrease in interest rate derivatives in connection with cash settlement
Net cash provided by operating activities
94
(234)
(12,231)
26,677
(481)
—
$ 193,885
(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
Supplemental schedule of non-cash investing and financing activities:
(Decrease) increase in accrued capital improvements, leasing and other investing
activity costs
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
(Decrease) 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
(Decrease) increase in redeemable noncontrolling interest and (increase) decrease
in equity to carry redeemable noncontrolling interest at fair value
$
$
$
$
$
$
$
(3,779) $
2,947
— $
73,780
— $ 146,500
(4,866) $
$
29,862
9,470
29,080
— $
5,194
(134) $
7,121
$
$
$
$
$
$
$
(1,227)
12,042
16,304
4,040
28,698
—
3,955
See accompanying notes to consolidated financial statements.
F-17
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. 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 their contractors, most of whom are engaged in national
security and information technology 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, 2014, our properties included the
following (all references to number of properties, square footage, acres and megawatts are unaudited):
•
•
•
•
173 operating office properties totaling 16.8 million square feet (excluding two properties serving as collateral for a
nonrecourse mortgage loan in default, as discussed further in Note 11);
13 office properties under, or contractually committed for, construction or redevelopment that we estimate will total
approximately 1.6 million square feet upon completion;
1,464 acres of land we control that we believe are potentially developable into approximately 18.3 million square feet; and
a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of
19.25 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”).
Equity interests in COPLP are in the form of common and preferred units. As of December 31, 2014, COPT owned 96.0%
of the outstanding COPLP common units (“common units”) and 95.5% of the outstanding COPLP preferred units (“preferred
units”); the remaining common and preferred units in COPLP were owned by third parties. 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 we are deemed to be the primary beneficiary of such entities. We eliminate all significant
intercompany balances and transactions in consolidation.
We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but
cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net
F-18
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
Prior 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 consolidated 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 consolidated statement of equity for 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;
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 lease 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
F-19
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
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. In capitalizing interest expense, if there is a specific borrowing for the property undergoing construction, development
and redevelopment activities, we apply the interest rate of that borrowing to the average accumulated expenditures that do not
exceed such borrowing; for the portion of expenditures exceeding any such specific borrowing, we apply our weighted average
interest rate on other borrowings to the expenditures. We continue to capitalize costs while construction, development or
redevelopment activities are underway until a property becomes “operational,” which occurs when lease terms commence
(generally when the tenant has control of the leased space and we have delivered the premises to the tenant as required under the
terms of such lease), but no later than 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
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
F-20
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 factors 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 factors 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 property’s 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. For periods in which a property is classified as held for sale, we classify the assets of the property as held
for sale on our consolidated balance sheet for such periods.
For dispositions of operating properties occurring prior to the quarterly period ended June 30, 2014 in which we have no
significant continuing involvement in such properties, or for operating properties held for sale prior to the quarterly period ended
June 30, 2014, we classify the results of operations for such properties as discontinued operations; interest expense that is
specifically identifiable to properties included in discontinued operations is used in the computation of interest expense
attributable to discontinued operations. As discussed further below, we adopted guidance issued by the Financial Accounting
Standards Board (“FASB”) related to the reporting of discontinued operations and disclosures of disposals of components of an
entity effective for the quarterly period ended June 30, 2014. This guidance defines a discontinued operation as a component or
group of components disposed or classified as held for sale that represents a strategic shift that has (or will have) a major effect
on an entity’s operations and financial results; the guidance states that a strategic shift could include a disposal of a major
geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity. We
have had no properties newly classified as discontinued operations subsequent to our adoption of this guidance.
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 consolidated 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 consolidated 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 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 previously recognized.
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:
Asset Type
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% of interests in such entities. 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
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. A lease term
generally commences when: (1) the tenant has control of the leased space (legal right to use the property); and (2) we have
delivered the premises to the tenant as required under the terms of such lease. 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; or (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 on our consolidated 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
F-23
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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
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 issue 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 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. This 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 that 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.
Recent Accounting Pronouncements
We adopted guidance issued by the FASB related to the reporting of discontinued operations and disclosures of disposals of
components of an entity effective for the quarterly period ended June 30, 2014. This guidance defines a discontinued operation
as a component or group of components disposed or classified as held for sale that represents a strategic shift that has (or will
F-24
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
have) a major effect on an entity’s operations and financial results; the guidance states that a strategic shift could include a
disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major
parts of an entity. The guidance also provides for additional disclosure requirements in connection with both discontinued
operations and other dispositions not qualifying as discontinued operations. The guidance applies prospectively to new disposals
and new classifications of disposal groups as held for sale after the effective date. Our adoption of the guidance will result in
fewer disposed or held for sale properties being reported as discontinued operations in our results of operations (including
operating properties sold during the current period) but will not otherwise materially affect our consolidated financial statements.
In May 2014, the FASB issued guidance regarding the recognition of revenue from contracts with customers. Under this
guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance
requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from
contracts with customers. We are required to adopt this guidance for our annual and interim periods beginning January 1, 2017,
using one of two methods: retrospective restatement for each reporting period presented at the time of adoption, or
retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We are
currently assessing the financial impact of this guidance on our consolidated financial statements.
3.
Fair Value Measurements
Accounting standards define fair value as the exit price, or the amount that would be received upon sale of an asset or paid
to transfer a liability in an orderly transaction between market participants as of the measurement date. The standards also
establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability developed based on market data obtained from sources
independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use
in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy of
these inputs is broken down into three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets
or liabilities; Level 2 inputs include (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for
identical or similar assets or liabilities in inactive markets 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 a
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 utilize
Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of December 31,
2014, 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.
F-25
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2014 and 2013, 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. The expected volatility is based on an average of the historical
volatility of companies in KEYW’s industry that we deem to be comparable. The 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.
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 as of December 31,
2014 and 2013, we used a discount rate of 15.5%, which factored in risk appropriate to the level of future property development
expected to be undertaken by the joint venture. A significant increase (decrease) in the discount rate used in determining the
fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the
valuations are classified in Level 3 of the fair value hierarchy.
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 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 investing receivables, 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, 2014 and 2013 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2014:
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
Other
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, 2013:
Assets:
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
$
$
$
$
$
$
$
$
$
$
5,756
126
—
—
5,882
$
$
— $
—
— $
— $
7,090
176
201
298
—
—
7,765
$
$
— $
—
— $
— $
— $
—
274
164
438
$
$
5,882
1,855
7,737
$
— $
— $
—
—
—
6,594
301
6,895
$
$
7,467
3,309
10,776
$
— $
— $
—
—
—
— $
— $
—
— $
$
18,417
— $
—
—
—
—
— $
— $
—
— $
$
17,758
5,756
126
274
164
6,320
5,882
1,855
7,737
18,417
7,090
176
201
298
6,594
301
14,660
7,467
3,309
10,776
17,758
(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, 2014 and 2013 and the hierarchy level of inputs used in measuring their respective fair
values under applicable accounting standards (in thousands):
Description
December 31, 2014:
Assets:
Interest rate derivatives (1)
Warrants to purchase common stock in KEYW (1)
Total Assets
Liabilities:
Interest rate derivatives
Redeemable noncontrolling interest
December 31, 2013:
Assets:
Common stock (2)
Interest rate derivatives (1)
Warrants to purchase common stock in KEYW (1)
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
$
$
— $
— $
274
164
438
$
$
1,855
$
— $
— $
6,594
301
6,895
$
3,309
$
— $
— $
—
— $
274
164
438
— $
$
18,417
1,855
18,417
— $
—
—
— $
298
6,594
301
7,193
— $
$
17,758
3,309
17,758
(1) Included in the line entitled “prepaid expenses and other assets” on COPLP’s consolidated balance sheet.
(2) Included in the line entitled “restricted cash and marketable securities” on COPLP’s consolidated balance sheet.
Nonrecurring Fair Value Measurements
In 2014, we recognized impairment losses totaling $1.4 million primarily in connection with certain of our operating
properties in the Greater Baltimore, Maryland (“Greater Baltimore”) region that were disposed in the current period. After
shortening our expected holding period for these properties during the year, 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 2013, we recognized the following impairment losses:
•
•
•
for certain of our operating properties that served as collateral for a nonrecourse 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 technique we used to determine 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 (2):
Properties, net
$
— $
— $
4,459
$
4,459
$
31,068
(1) Represents aggregate impairment losses on non recurring fair value measurements resulting in such losses, excluding exit costs
incurred of $979,000.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.
The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value
measurements reported above as of December 31, 2013 (dollars in thousands):
Valuation Technique
Fair Value on
Measurement Date
Unobservable Input
Discounted cash flow $
4,459 Discount rate
Terminal capitalization rate
Market rent growth rate
Expense growth rate
Range (Weighted Average)
10.0% (1)
9.5% (1)
3.0% (1)
3.0% (1)
(1) Only one value applied for this unobservable input.
2012 Impairment Losses
We recognized impairment losses in 2012 in connection with the following:
•
•
•
4.
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.
Concentration of Rental Revenue
We derived large concentrations of our revenue from real estate operations from certain tenants during the periods set forth
in our consolidated statements of operations. The following table summarizes the percentage of our rental revenue (which
excludes tenant recoveries and other real estate operations revenue) earned from (1) individual tenants that accounted for at
least 5% of our rental revenue from continuing and discontinued operations and (2) the aggregate of the five tenants from which
F-29
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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,
2014
2013
2012
18%
6%
6%
N/A
39%
18%
8%
6%
5%
41%
18%
7%
6%
5%
39%
(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,
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.
5.
Properties, net
Operating properties, net consisted of the following (in thousands):
Land
Buildings and improvements
Less: accumulated depreciation
Operating properties, net
December 31,
$
2014
439,355
3,015,216
(703,083)
$ 2,751,488
$
2013
430,472
2,869,870
(597,649)
$ 2,702,693
In 2014, we recognized $12.9 million in additional depreciation expense resulting from our revision of the useful life of a
property in Greater Philadelphia that was removed from service for redevelopment.
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
December 31,
2014
214,977
330,449
545,426
$
$
2013
245,676
265,932
511,608
$
$
F-30
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2014 Dispositions
In 2014, we completed dispositions of the following operating properties (dollars in thousands):
Project Name
4969 and 4979 Mercantile Road White Marsh, MD
9930 and 9940 Franklin Square White Marsh, MD
White Marsh, MD
5020, 5022, 5024 and 5026
Campbell Boulevard
Location
Date of Sale
7/14/2014
7/30/2014
8/4/2014
Number
of
Buildings
2
2
4
Total
Rentable
Square Feet
96,721
71,992
134,245
Transaction
Value
$
5,960
10,475
12,400
Gain on
Disposition
2,124
$
2,303
666
8
302,958
$
28,835
$
5,093
We also sold land in 2014 for $28.3 million and recognized gains of $5.6 million on the sales.
2014 Construction Activities
In 2014, we placed into service an aggregate of 692,000 square feet in five newly constructed office properties located in
the Baltimore/Washington Corridor, Northern Virginia and Huntsville. As of December 31, 2014, we had eight office properties
under construction, or for which we were contractually committed to construct, that we estimate will total 1.2 million square
feet upon completion, including four in Northern Virginia, two in the Baltimore/Washington Corridor, one in San Antonio and
one in Huntsville. We also had five office properties under redevelopment that we estimate will total 344,000 square feet upon
completion, including three in the Baltimore/Washington Corridor, one in Greater Philadelphia and one in St. Mary’s County,
Maryland.
2013 Dispositions
In April 2011, we completed a review of our portfolio and identified a number of properties that were 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 recognized impairment losses on certain of these assets 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 excess of the mortgage loan and interest payable extinguished over
F-31
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
the carrying values of the properties transferred as of the transfer date (which included the effect of previous impairment losses)
and related closing costs.
2013 Construction Activities
In 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.
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, 2014 (dollars in thousands):
Date
Acquired
LW Redstone Company, LLC 3/23/2010
Nominal
Ownership
% as of
12/31/2014
85%
Nature of Activity
Operates four buildings and developing others (2)
M Square Associates, LLC
6/26/2007
50%
Operates two buildings and developing others (3)
59,414
$202,948
(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).
With regard to our consolidated joint ventures:
Total
Assets
$143,534
December 31, 2014 (1)
Encumbered
Assets
Total
Liabilities
41,659
$
39,077
66,620
48,856
115,476
$
80,736
$
$
•
•
For LW Redstone, LLC, we anticipate funding certain infrastructure costs (up to a maximum of $76.0 million excluding
accrued interest thereon) due to be reimbursed by the City of Huntsville as discussed further in Note 9; as of December 31,
2014, we had advanced $49.1 million to the City to fund such costs (included in 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. We disclose the activity for this redeemable noncontrolling interest in Note 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; the project had achieved 561,000 square
feet of construction commencement through December 31, 2014; and
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.
The ventures discussed above include only ones in which parties other than COPLP and COPT own interests.
F-32
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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;
• 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; and
• COPT-FD Indian Head, LLC, a joint venture owning property in Charles County, Maryland (in our “Other” region). On
August 7, 2014, the joint venture’s property was repurchased by Charles County under the terms of a development
agreement for $6.4 million, after which the proceeds were distributed to the partners and there was no remaining business
operations or assets.
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 the gain on our initial contribution of property to the joint venture in a prior period 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 encumbering all of
the joint venture’s properties 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 the gain on our contribution of the 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 the mortgage debt 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, 2014; 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.
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.
F-33
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the 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
$
$
6,519
(2,818)
(10,463)
(2,067)
23,013
14,184
$
$
7,316
(2,829)
(7,672)
(2,283)
—
(5,468)
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, 2014
December 31, 2013
Gross
Carrying
Amount
123,759
42,301
12,415
8,659
1,333
188,467
$
$
Accumulated
Amortization
101,040
$
28,492
5,984
8,159
938
144,613
$
Net
Carrying
Amount
Gross
Carrying
Amount
$
$
22,719
13,809
6,431
500
395
43,854
$
$
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
$
$
31,619
18,452
7,280
955
952
59,258
Amortization of the intangible asset categories set forth above totaled $15.2 million in 2014, $16.2 million in 2013 and $21.4
million in 2012. 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: 31 years; above-market leases:
two years; and market concentration premium: 28 years. The approximate weighted average amortization period for all of the
categories combined is ten years. The estimated amortization expense associated with the intangible asset categories set forth
above for the next five years is: $9.3 million for 2015; $8.4 million for 2016; $6.2 million for 2017; $3.8 million for 2018; and
$3.4 million for 2019.
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
December 31,
2014
$ 123,925
31,229
(90,357)
64,797
$
2013
$ 110,711
36,390
(80,834)
66,267
$
F-34
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9.
Investing Receivables
Investing receivables, including accrued interest thereon, consisted of the following (in thousands):
Notes receivable from City of Huntsville
Other investing loans receivable
December 31,
2014
49,147
3,000
52,147
$
$
2013
44,055
9,608
53,663
$
$
Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company,
LLC joint venture (see Note 6) and carry an interest rate of 9.95%. These notes and the accrued and unpaid interest thereon,
which is compounded annually on March 1st, will be repaid using the real estate taxes generated by the properties constructed
by the joint venture. When these tax revenues are sufficient to cover the debt service on a certain increment of municipal
bonds, the City of Huntsville will be required to issue bonds to repay the notes receivable and the accrued and unpaid interest
thereon. Each note has a maturity date of the earlier of 30 years from the date issued or the expiration of the tax increment
district comprising the constructed properties in 2045.
We did not have an allowance for credit losses in connection with our investing receivables as of December 31, 2014 or
December 31, 2013. The fair value of these receivables approximated their carrying amounts as of December 31, 2014 and
December 31, 2013.
10.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
Prepaid expenses
Lease incentives
Construction contract costs incurred in excess of billings
Furniture, fixtures and equipment, net
Deferred tax asset, net (1)
Operating notes receivable
Other equity method investments
Interest rate derivatives
Other assets
Prepaid expenses and other assets
(1) See Note 19 for further disclosure.
December 31,
2014
20,570
13,344
6,656
6,637
4,002
3,797
2,368
274
2,601
60,249
$
$
2013
19,308
8,435
2,462
6,556
4,305
1,692
2,258
6,594
2,576
54,186
$
$
Operating notes receivable reported above includes amounts due from tenants with remaining terms exceeding one year totaling
$3.6 million as of December 31, 2014 and $1.7 million as of December 31, 2013; we carried allowances for estimated losses for
$252,000 of the December 31, 2014 balance and $87,000 of the December 31, 2013 balance.
F-35
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 as of
December 31,
2014
Carrying Value as of
December 31,
2014
December 31,
2013
Stated Interest Rates as of
December 31, 2014
Scheduled Maturity
as of
December 31, 2014
Mortgage and Other Secured Loans:
Fixed rate mortgage loans (1)
Variable rate secured loan
Total mortgage and other secured loans
Revolving Credit Facility (4)
$
800,000
(5)
Term Loan Facilities
Unsecured Senior Notes (4)
3.600% Senior Notes
5.250% Senior Notes
3.700% Senior Notes
Unsecured notes payable
4.25% Exchangeable Senior Notes (4)
Total debt
$
387,139
$
675,060
3.96% - 10.65% (2)
2015-2024
36,877
424,016
83,000
520,000
347,496
245,797
297,569
1,607
572
37,691
712,751
LIBOR + 2.25% (3)
November 2015
— LIBOR + 0.975% to 1.75%
620,000
LIBOR + 1.10% to 2.60% (6)
July 2017
2015-2019
347,244
245,445
—
1,700
563
3.60%
5.25%
3.70%
0% (7)
4.25%
May 2023
February 2024
June 2021
2026
April 2030
$
1,920,057
$ 1,927,703
(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 $42,000 as of December 31, 2014 and $69,000 as of December 31, 2013.
(2) The maximum stated interest rate would be 7.87%, excluding the incremental additional interest rate associated with the default rate on a
nonrecourse mortgage loan discussed further below. The weighted average interest rate on our fixed rate mortgage loans was 8.10% as
of December 31, 2014 (or 6.16% excluding the incremental additional interest rate associated with the default rate on the loan discussed
above).
(3) The interest rate on the loan outstanding was 2.41% as of December 31, 2014.
(4) Refer to the paragraphs below for further disclosure.
(5) As discussed below, we have the ability to borrow an additional $180.0 million in the aggregate under these term loan facilities, provided
that there is no default under the facilities and subject to the approval of the lenders.
(6) The weighted average interest rate on these loans was 1.80% as of December 31, 2014.
(7) 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 $654,000 as of
December 31, 2014 and $761,000 as of December 31, 2013.
All debt is owed by the Operating Partnership. While COPT is not directly obligated by any debt, it has guaranteed the
Operating Partnership’s 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, 2014, we were
within the compliance requirements of these financial covenants.
F-36
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):
2015
2016
2017
2018
2019
Thereafter
Total
$
343,545 (1)
171,399
339,247 (2)
2,036
122,094
951,489
$
1,929,810 (3)
(1)
Includes $150.0 million pertaining to a nonrecourse mortgage loan on which we defaulted on the payment terms as discussed further below. Also includes
$150.0 million that may be extended for two one-year periods at our option, subject to certain conditions.
Includes $333.0 million that may be extended for one year at our option, subject to certain conditions.
(2)
(3) Represents scheduled principal amortization and maturities only and therefore excludes net discounts of $9.8 million.
We capitalized interest costs of $6.1 million in 2014, $8.8 million in 2013 and $13.9 million in 2012.
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
Mortgage and Other Secured Loans
December 31, 2014
December 31, 2013
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
890,862
572
388,746
639,877
1,920,057
$
$
901,599
575
355,802
642,091
1,900,067
$
$
592,689
563
676,760
657,691
1,927,703
$
$
575,374
575
650,997
657,527
1,884,473
In April 2014, a wholly owned subsidiary defaulted on the payment terms of a $150.0 million nonrecourse mortgage loan
secured by 15000 and 15010 Conference Center Drive, two operating properties in Northern Virginia with an aggregate
estimated fair value that was less than the loan balance. This loan had an interest rate of 10.65% (including the effect of default
interest) and was originally scheduled to mature in 2017. The lender subsequently accelerated the loan’s maturity date to July
2014. Additional disclosure regarding this loan is provided in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations section of this Annual Report on Form 10-K.
In December 2014, we completed the defeasance of, and full satisfaction of our obligations with respect to, (1) $103.0
million principal amount of secured nonrecourse mortgage loan due to mature on November 6, 2015 and bearing an interest rate
of 5.53% and (2) $108.5 million principal amount of secured nonrecourse mortgage loan due to mature on January 1, 2016 and
bearing an interest rate of 5.56%, as well as costs related to the defeasance and satisfaction. As a result, we recognized a loss
on early extinguishment of debt of $9.1 million.
Revolving Credit Facility
We have 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 joint lead arrangers and joint
book runners, KeyBank National Association acted as administrative agent and JPMorgan Chase Bank, N.A. and Bank of
America, N.A. acted as co-syndication agents. The lenders’ aggregate commitment under the facility 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
F-37
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 2014, the maximum borrowing capacity under this
facility totaled $800.0 million, of which $702.2 million was available.
Weighted average borrowings under our Revolving Credit Facility totaled $15.9 million in 2014 and $55.5 million in 2013.
The weighted average interest rate on our Revolving Credit Facility was 1.47% in 2014 and 1.74% in 2013.
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 repaid $150.0 million of the loan balance. In 2014, we repaid an additional $100.0 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 total availability of the agreement. The variable interest rate on the term
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 February 14, 2012, we entered into an unsecured term loan agreement with a group of lenders for which J.P.
Morgan Securities LLC and KeyBank Capital Markets acted as joint lead arrangers and joint book runners, KeyBank National
Association acted as administrative agent and JPMorgan Chase Bank, N.A. acted as syndication agent. We borrowed $250.0
million under the term loan. The term loan matures on February 14, 2017, 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 and 2014, 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 $2.5 million as of December 31, 2014 and $2.8 million as of December 31, 2013. The
effective interest rate under the notes, including amortization of the issuance costs, was 3.70%;
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 $4.2 million as of December 31, 2014 and $4.6 million as of December 31, 2013. The
effective interest rate under the notes, including amortization of the issuance costs, was 5.49%; and
a $300.0 million aggregate principal amount of 3.700% Senior Notes at an initial offering price of 99.739% of their face
value on May 14, 2014, resulting in proceeds, after deducting underwriting discounts, but before other offering expenses,
of $297.3 million. The notes mature on June 15, 2021. The carrying value of these notes reflects an unamortized discount
totaling $2.4 million as of December 31, 2014. The effective interest rate under the notes, including amortization of the
issuance costs, was 3.85%.
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 or (2) the sum of the present values of the remaining
F-38
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 40 basis points for the 5.250% Senior Notes and 25 basis points for the 3.700% 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 $3,000
as of December 31, 2014 and $12,000 as of December 31, 2013. 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, 2014 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, 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,
2014 and 2013 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
12.
Interest Rate Derivatives
For the Years Ended December 31,
2014
2013
4,208
2012
$ 10,200
24
$
10
34
$
1,615
5,823
3,651
$ 13,851
$
$
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
36,877 (1)
100,000
100,000
100,000
100,000
100,000
100,000
Fixed Rate
Floating Rate Index
0.8320% One-Month LIBOR
0.8320% One-Month LIBOR
3.8300% One-Month LIBOR + 2.25%
0.8055% One-Month LIBOR
0.8100% One-Month LIBOR
1.6730% One-Month LIBOR
1.7300% One-Month LIBOR
0.6123% One-Month LIBOR
0.6100% One-Month LIBOR
Effective
Date
1/3/2012
1/3/2012
11/2/2010
9/2/2014
9/2/2014
9/1/2015
9/1/2015
1/3/2012
1/3/2012
Expiration
Date
9/1/2015
9/1/2015
11/2/2015
9/1/2016
9/1/2016
8/1/2019
8/1/2019
9/1/2014
9/1/2014
$
$
Fair Value at
December 31,
2014
2013
(407) $
(407)
(400)
(317)
(324)
239
35
—
—
(1,581) $
(861)
(861)
(832)
(94)
(105)
3,377
3,217
(279)
(277)
3,285
(1) The notional amount of this instrument is scheduled to amortize to $36.2 million.
F-39
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
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, 2014
December 31, 2013
Balance Sheet Location
Prepaid expenses and
other assets
Interest rate derivatives
Fair Value
274
$
(1,855)
Balance Sheet Location
Prepaid expenses and
other assets
Interest rate derivatives
Fair Value
$ 6,594
(3,309)
The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and
comprehensive income (in thousands):
Amount of (losses) gains recognized in accumulated other
comprehensive income (loss) (“AOCI”) (effective portion)
Amount of losses reclassified from AOCI into interest expense
(effective portion)
Amount of loss reclassified from AOCI into loss on early
extinguishment of debt
For the Years Ended December 31,
2013
2012
2014
$
(7,799) $
6,791
$
(7,676)
2,990
2,740
3,697
38
—
—
Over the next 12 months, we estimate that approximately $2.9 million of losses 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 defined levels 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, 2014, the fair value of
interest rate derivatives in a liability position related to these agreements was $1.9 million, excluding the effects of accrued
interest. As of December 31, 2014, 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 $2.1 million.
13.
Redeemable Noncontrolling Interest
The table below sets forth the 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,
2013
2012
2014
Beginning balance
Distribution to noncontrolling interest
Net income (loss) attributable to noncontrolling interest
Adjustment to arrive at fair value of interest
Ending balance
$
$
17,758
(1,369)
2,162
(134)
18,417
$
$
10,298
(1,037)
1,376
7,121
17,758
$
$
8,908
—
(2,565)
3,955
10,298
F-40
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, 2014, COPT had 25.0 million preferred shares authorized at $0.01 par value per share. The table
below sets forth additional information pertaining to COPT’s outstanding preferred shares (dollars in thousands, except per
share data):
Series
Series K
Series L
# of Shares
Issued
531,667
6,900,000
7,431,667
Aggregate
Liquidation
Preference
26,583
$
172,500
$ 199,083
Month of Issuance
January 2007
June 2012
Annual
Annual
Dividend
Dividend
Yield
Per Share
5.600% $2.80000
7.375% $1.84375
Earliest
Redemption
Date
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.
During 2013 and 2014, COPT redeemed all of the outstanding shares of its following series of preferred shares:
•
•
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; and
the 7.500% Series H Preferred Shares on June 16, 2014 at a price of $25.00 per share, or $50.0 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 incurred at the time of the
redemption.
Common Shares
During 2013 and 2014, COPT completed the following public offerings of common shares:
•
•
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; and
5.52 million common shares in November 2014 at a public offering price of $27.30 per share for net proceeds of $148.9
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. Through December 31, 2014, COPT’s only issuance under the program was 1.5 million common shares issued on July
15, 2013 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.
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 140,149 in 2014 and 311,343 in 2013.
COPT declared dividends per common share of $1.10 in 2014, 2013 and 2012.
F-41
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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, 2014
(dollars in thousands, except per unit data):
Series
Series K
Series L
# of Units
Issued
531,667
6,900,000
7,431,667
Aggregate
Liquidation
Preference
26,583
$
172,500
$ 199,083
Month of Issuance
January 2007
June 2012
Annual
Distribution
Per Unit
Annual
Distribution
Yield
5.600% $ 2.80000
7.375% $ 1.84375
Earliest
Redemption
Date
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).
In 2013 and 2014, COPLP redeemed all of the outstanding units of its following series of preferred units held by COPT:
•
•
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; and
the 7.500% Series H Preferred Units on June 16, 2014 at a price of $25.00 per unit, or $50.0 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.
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.
Common Units
COPT owned 96.0% of COPLP’s common units as of December 31, 2014 and 95.6% as of December 31, 2013.
During 2013 and 2014, COPT acquired additional common units through the following public offerings of common shares:
•
•
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; and
5.52 million common shares in November 2014 at a public offering price of $27.30 per share for net proceeds of $148.9
million (after underwriter discounts but before offering expenses) that were contributed to COPLP in exchange for an equal
number of common units in COPLP.
On July 15, 2013, COPT issued 1.5 million common shares at a weighted average price of $26.05 per share, representing
its only issuance under the ATM program through December 31, 2014. Net proceeds from the shares issued totaled $38.5
F-42
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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 140,149 in 2014 and 311,343 in 2013.
We declared distributions per common unit of $1.10 in 2014, 2013 and 2012.
16.
Share-Based Compensation and Other Compensation Matters
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 5.9 million 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-43
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 2012, 2013 and
2014:
Unvested at December 31, 2011
Granted
Forfeited
Vested
Unvested at December 31, 2012
Granted
Forfeited
Vested
Unvested at December 31, 2013
Granted
Forfeited
Vested
Unvested at December 31, 2014
Unvested shares as of December 31,
2014 that are expected to vest
Weighted
Average
Grant Date
Fair Value
33.13
23.64
31.43
32.72
29.67
25.91
27.59
30.97
26.96
26.73
25.10
28.56
26.19
26.18
Shares
648,378
177,662
(17,019)
(374,378)
434,643
193,833
(9,541)
(241,487)
377,448
216,607
(21,335)
(182,213)
390,507
375,686
$
$
$
The aggregate intrinsic value of restricted shares that vested was $4.9 million in 2014, $6.3 million in 2013 and $9.0
million in 2012.
Our Board of Trustees made the following grants of PSUs to executives from 2011 through 2014 (dollars in thousands):
Number
of PSUs
Granted
56,883
54,070
69,579
49,103
Performance
Period
Commencement
Date
3/3/2011
1/1/2012
1/1/2013
1/1/2014
Grant Date
3/3/2011
3/1/2012
3/1/2013
3/6/2014
Performance
Period End Date
3/2/2014
12/31/2014
12/31/2015
12/31/2016
Grant Date
Fair Value
2,796
$
1,772
1,867
1,723
Number of PSUs
Outstanding as of
December 31, 2014
—
54,070
69,579
49,103
The PSUs each have three year performance periods concluding on the earlier of the respective performance period end
dates set forth above 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 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
F-44
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the
percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance
between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of
fully-vested 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.
Based on COPT’s total shareholder return relative to its peer group of companies:
•
•
for the 2011 PSUs that vested in 2014, there was no payout value in connection with the vesting; and
for the 2012 PSUs that vested on December 31, 2014 to be paid out in 2015, approximately 40,000 shares will be issued in
March 2015 in connection with the vesting.
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 2012, 2013 and 2014 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,
2012
2013
2014
$ 32.77
$ 26.84
$ 35.09
$ 24.39
$ 25.85
$ 26.52
28.6%
0.66%
29.5%
0.33%
43.2%
0.41%
F-45
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 2012, 2013 and 2014
(dollars in thousands, except per share data):
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
Forfeited/Expired – 2014
Exercised – 2014
Outstanding at December 31, 2014
Exercisable at December 31, 2012
Exercisable at December 31, 2013
Exercisable at December 31, 2014
Shares
945,422
(85,588)
(61,624)
798,210
(117,952)
(39,331)
640,927
(18,303)
(62,888)
559,736
798,210
640,927
559,736
Range of Exercise
Price per Share
$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
$22.34 - $49.60
$19.63 - $28.15
$25.52 - $56.00
(1)
(2)
(3)
Weighted
Average
Exercise
Price per
Share
$
$
$
$
$
$
$
$
$
$
$
$
$
36.63
42.98
15.08
37.62
40.91
19.67
38.11
42.12
23.70
39.60
37.62
38.11
39.60
Weighted
Average
Remaining
Contractual
Term
(in Years)
4
3
2
2
Aggregate
Intrinsic
Value
$
510
$
325
$
68
$
167
(1) 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.
(2) 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.
(3) 105,672 of these options had an exercise price ranging from $25.52 to $30.04; 142,862 had an exercise price ranging from
$30.05 to $41.28; 158,902 had an exercise price ranging from $41.29 to $42.74; and 152,300 had an exercise price ranging
from $42.75 to $56.00.
The aggregate intrinsic value of options exercised was $225,000 in 2014, $258,000 in 2013 and $553,000 in 2012.
We own a taxable REIT subsidiary that is subject to Federal and state income taxes. We realized a windfall tax (loss)
benefit of $(3,000) in 2014, $(122,000) in 2013 and $43,000 in 2012 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,
2014
2013
2012
$
$
5,307
857
886
7,050
$
$
5,412
1,118
1,075
7,605
$
$
8,611
1,371
1,202
11,184
The amounts included in our consolidated statements of operations for share-based compensation reflected an estimate of
pre-vesting forfeitures of 0% for PSUs and 0% to 5% for restricted shares.
As of December 31, 2014, all of our options are vested and fully expensed. As of December 31, 2014, there was $6.3
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, 2014, there was $1.9 million of unrecognized
compensation cost related to PSUs that is expected to be recognized over a weighted average performance period of
approximately two years.
F-46
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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. Our matching contributions
under the plan totaled approximately $1.2 million in 2014, $1.1 million in 2013 and $1.1 million in 2012. The 401(k) plan is
fully funded as of December 31, 2014.
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 $5.9 million as of December 31, 2014 and $7.5 million as of
December 31, 2013, and is included in the accompanying COPT consolidated balance sheets.
Executive Transition Costs
In connection with the departure on February 3, 2015 of Stephen E. Riffee, our Executive Vice President and Chief
Financial Officer, and the retirement on March 31, 2012 of Randall M. Griffin, our former Chief Executive Officer, we
recognized executive transition costs of $1.1 million in 2014 and $2.2 million in 2012. These costs, which are included in
general administrative expense, represent incremental compensation costs associated with the executives’ employment
separation, including cash and share-based compensation and post-employment benefits.
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, 2014 were as follows (in thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
$
349,099
301,184
263,428
202,661
154,044
312,304
$ 1,582,720
F-47
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. 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, 2014
Property operating expenses
NOI from real estate operations
Revenues from real estate operations
$ 236,191
81,132
$ 155,059
24,174
$
Additions to long-lived assets
56,699
Transfers from non-operating properties $
$1,277,600
Segment assets at December 31, 2014
$ 89,263
31,532
$ 57,731
$ 17,447
$ 43,154
$ 642,429
$ 36,377
20,562
$ 15,815
$
$
$116,252
$ 10,446
3,066
$
7,380
4,077
(6) $
— $ 21,014
$ 97,209
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
3,563
335
$
— $ 48,799
$
$ 77,773
$118,299
$
$
$
$
$
$
$
$
$
$
$
$
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
16,736
5,268
11,468
8,825
$ 43,591
17,778
$ 25,813
7,925
$
3,550
— $
$ 274,091
100,777
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
14,599
7,308
7,291
1,185
95,195
$
$
— $
$
$
16,863
7,844
9,019
2,604
98,962
$
$
— $
$
$
16,697
7,555
$
9,142
$
317
— $
$
104,544
F-48
11,929
4,386
7,543
952
16,344
106,931
$
$
$
$
$
(1) $ 10,150
1,469
12
(13) $
8,681
— $
30
$
— $ 77,834
$
— $
— $
$
10,430
7,286
3,144
22
1,108
$ 163,177
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
$
— $
— $
$
$
$
— $ 80,002
$ 479,711
179,799
$ 299,912
64,601
$
$ 141,899
$2,951,495
$ 498,633
180,704
$ 317,929
56,877
$
$ 264,290
$2,905,630
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
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,
2014
$ 479,711
106,748
14
$ 586,473
2013
$ 498,633
62,363
(37,636)
$ 523,360
2012
$ 493,100
73,836
(58,801)
$ 508,135
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,
2012
2013
2014
$ 180,735
$ 180,704
$ 179,799
(21,529)
(13,505)
135
$ 159,206
$ 167,199
$ 179,934
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,
2012
2013
2014
$ 73,836
$ 62,363
$ 106,748
(70,576)
(58,875)
(100,058)
3,260
3,488
6,690
$
$
$
Construction contract and other service revenues
Construction contract and other service expenses
NOI from service operations
F-49
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 from continuing operations as reported on our consolidated statements of operations (in thousands):
NOI from real estate operations
NOI from service operations
Interest and other income
Equity in income (loss) of unconsolidated entities
Income tax expense
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 early extinguishment of debt
COPT consolidated income from continuing operations
For the Years Ended December 31,
2012
2013
2014
$ 312,365
$ 317,929
$ 299,912
3,260
3,488
6,690
7,172
3,834
4,923
(546)
2,110
229
(381)
(1,978)
(310)
—
(136,086)
(1,416)
(31,794)
(5,573)
(92,393)
(121)
(9,552)
$ 34,509
(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
$
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,
2014
$ 2,951,495
567,586
151,176
$ 3,670,257
2013
$ 2,905,630
517,564
206,758
$ 3,629,952
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, loss on early extinguishment of debt and
gain on sales of real estate to our real estate segments since they are not included in the measure of segment profit reviewed by
management. We also did not allocate general and administrative expenses, business development expenses and land carry
costs, interest and other income, equity in 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-50
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 2014 and actual 2013 and 2012) and
net income as reported on our consolidated statements of operations are set forth below (in thousands):
COPLP consolidated net income
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,
2012
2013
2014
(Estimated)
45,206
$
$ 101,544
$
20,341
(3,932)
1,912
(2,260)
(1,404)
1,367
—
405
(391)
310
41,500
920
(187)
(3,285)
2,346
82,507
(3,247)
—
79,260
1,303
8,987
(1,663)
(50,860)
32,047
—
—
1,650
1,978
20,834
2,057
3,148
(7,837)
1,529
$ 114,717
(4,061)
—
$ 110,656
(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
$
$
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,
2013
71.8%
22.4%
5.8%
2014
64.5%
6.5%
29.0%
2012
33.2%
0.0%
66.8%
Preferred Shares
For the Years Ended December 31,
2013
76.2% 100.0%
0.0%
23.8%
0.0%
0.0%
2014
90.9%
9.1%
0.0%
2012
We distributed all of COPT’s REIT taxable income in 2014, 2013 and 2012 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 $233 million lower than
the amount reported on our consolidated balance sheet at December 31, 2014, which is primarily related to differences in basis
for net properties, intangible assets on property acquisitions and deferred rent receivable.
F-51
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 before income taxes under GAAP of
$822,000 in 2014, $330,000 in 2013 and $11.3 million in 2012. Our TRS’ provision for income tax consisted of the following
expenses (in thousands):
Deferred
Federal
State
Total income tax expense
For the Years Ended December 31,
2012
2013
2014
$
$
258
52
310
$
$
1,742
236
1,978
$
$
312
69
381
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,
2013
2014
34.0 % 34.0 %
4.5 %
4.2 %
0.0 % 562.9 %
(0.4)% (1.1)%
37.8 % 600.3 %
2012
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, 2014, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $13
million expiring in 2033. We believe that our TRS is no longer subject to income tax examinations for years prior to 2011.
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,
2014
2013
$
$
5,012
976
195
(119)
(2,062)
4,002
$
$
5,382
869
221
(105)
(2,062)
4,305
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, 2014 net deferred
tax asset.
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.
F-52
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
20.
Discontinued Operations and Assets Held for Sale
Income from discontinued operations primarily includes revenues and expenses associated with the following:
•
•
•
•
•
•
•
•
•
•
•
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.
The table below sets forth the components of discontinued operations reported on our consolidated statements of operations
(in thousands):
Revenue from real estate operations
Property operating expenses
Depreciation and amortization
Impairment losses
General, administrative and leasing expenses
Business development and land carry costs
Interest expense
Gain on sales of real estate
Gain on early extinguishment of debt
Discontinued operations
$
$
$
For the Years Ended December 31,
2012
2013
2014
58,801
37,636
(21,529)
(13,505)
(13,939)
(4,505)
(23,232)
(26,190)
(3)
(4)
(24)
—
(10,397)
(8,221)
20,940
2,671
1,736
67,810
12,353
55,692
(14) $
135
—
(3)
—
—
—
24
(116)
26
$
$
As of December 31, 2014, we had two land parcels in the Greater Baltimore region classified as held for sale with a cost
basis of $14.3 million.
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-53
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 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,
2012
2013
2014
$
$
$
$
34,509
10,671
(15,939)
(1,769)
(4,955)
(432)
22,085
26
4
36,836
9,016
(19,971)
(2,904)
(4,486)
(414)
$
7,967
21
(20,844)
(1,827)
1,309
(469)
18,077
55,692
(3,351)
$ (13,843)
12,353
(673)
$
22,115
$
70,418
$
(2,163)
88,092
171
88,263
85,167
57
85,224
73,454
—
73,454
$
$
$
$
0.25
$
0.21
$
(0.19)
—
0.25
$
0.62
0.83
$
0.16
(0.03)
0.25
$
0.21
$
(0.19)
—
0.25
$
0.62
0.83
$
0.16
(0.03)
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,
2014
2013
2012
3,897
176
434
3,869
176
434
4,235
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 401,000 for 2014, 385,000 for 2013 and 461,000 for 2012; and
• weighted average options of 492,000 for 2014, 636,000 for 2013 and 772,000 for 2012, respectively.
As discussed in Note 11, we have outstanding senior notes that have an exchange settlement feature, but such notes 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-54
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 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,
2014
2013
2012
$
$
$
$
34,509
10,671
(16,599)
(1,769)
(3,281)
(432)
23,099
26
5
36,836
9,016
(20,631)
(2,904)
(2,977)
(414)
$
7,967
21
(21,504)
(1,827)
1,206
(469)
18,926
55,692
(930)
$ (14,606)
12,353
(699)
$
23,130
$
73,688
$
(2,952)
91,989
171
92,160
89,036
57
89,093
77,689
—
77,689
$
$
$
$
0.25
$
0.21
$
(0.19)
—
0.25
$
0.62
0.83
$
0.15
(0.04)
0.25
$
0.21
$
(0.19)
—
0.25
$
0.62
0.83
$
0.15
(0.04)
F-55
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,
2014
2013
2012
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 401,000 for 2014, 385,000 for 2013 and 461,000 for 2012; and
• weighted average options of 492,000 for 2014, 636,000 for 2013 and 772,000 for 2012.
As discussed in Note 11, we have outstanding senior notes that have an exchange settlement feature, but such notes 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, 2014 and 2013 (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 from continuing operations
Discontinued operations
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPT
Preferred share dividends
Issuance costs associated with redeemed preferred shares
Net income attributable to COPT common shareholders
Basic earnings per common share
Diluted earnings per common share
For the Year Ended December 31, 2014
First
Quarter
$ 146,667
25,206
$
5,660
$
11
$
5,671
$
(930)
4,741
(4,490)
—
251
0.00
0.00
$
$
$
Second
Quarter
$ 139,820
$ 31,836
9,248
$
(198)
$
9,050
$
(1,160)
7,890
(4,344)
(1,769)
1,777
0.02
0.02
$
$
$
Third
Quarter
$ 153,015
$ 37,422
$ 13,727
191
$
$ 24,548
(1,828)
22,720
(3,553)
—
$ 19,167
0.22
$
0.22
$
Fourth
Quarter
$ 146,971
37,148
$
5,874
$
22
$
5,937
$
(1,033)
4,904
(3,552)
—
1,352
0.01
0.01
$
$
$
F-56
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Revenues
Operating income
Income (loss) from continuing operations
Discontinued operations
Net income (loss)
Net 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, 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
$
$
$
The tables below set forth selected quarterly information for the years ended December 31, 2014 and 2013 (in thousands,
except per share data).
Revenues
Operating income
Income from continuing operations
Discontinued operations
Net income
Net income attributable to noncontrolling interests
Net income attributable to COPLP
Preferred unit distributions
Issuance costs associated with redeemed preferred units
Net income attributable to COPLP common unitholders
Basic earnings per common unit
Diluted earnings per common unit
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
For the Year Ended December 31, 2014
First
Quarter
$ 146,667
25,206
$
5,660
$
11
$
5,671
$
(737)
4,934
(4,655)
—
279
0.00
0.00
$
$
$
Second
Quarter
$ 139,820
$ 31,836
9,248
$
(198)
$
9,050
$
(837)
8,213
(4,509)
(1,769)
1,935
0.02
0.02
$
$
$
Third
Quarter
$ 153,015
$ 37,422
$ 13,727
$
191
$ 24,548
(897)
23,651
(3,718)
—
$ 19,933
0.22
$
0.22
$
Fourth
Quarter
$ 146,971
37,148
$
5,874
$
22
$
5,937
$
(805)
5,132
(3,717)
—
1,415
0.01
0.01
$
$
$
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
$
$
$
F-57
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 joint venture
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, 2014; 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, 2014 because the actions that would
trigger performance are all within our control.
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 $1.3 million liability
through December 31, 2014 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.
Operating Leases
We are obligated as lessee under operating leases (mostly ground leases) with various expiration dates extending to the
year 2100. Future minimum rental payments due under the terms of these operating leases as of December 31, 2014 follow (in
thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
$
905
839
768
735
728
76,678
$ 80,653
F-58
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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-59
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2014, 2013 and 2012
(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, 2014
Year ended December 31, 2013
Year ended December 31, 2012
Allowance for Deferred Rent Receivable
Year ended December 31, 2014
Year ended December 31, 2013
Year ended December 31, 2012
Allowance for Deferred Tax Asset
Year ended December 31, 2014
Year ended December 31, 2013
Year ended December 31, 2012
$
$
$
$
$
$
$
$
$
2,976
4,694
3,546
2,126
913
703
2,062
207
207
$
$
$
$
$
$
$
$
$
278
$
(65) $
$
1,532
— $
— $
$
232
(2,537) $
(1,653) $
(616) $
717
2,976
4,694
— $
— $
— $
(708) $
$
1,213
$
416
— $
— $
(206) $
1,418
2,126
913
1,855
— $
$
— $
— $
— $
— $
— $
— $
— $
2,062
2,062
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-60
Corporate Office Properties Trust and Subsidiaries and Corporate Office Properties, L.P. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2014
(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)
$
11,671 $
— $
20,527 $
— $
— $
20,527 $
20,527 $
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
131 National Business Parkway (O)
Annapolis Junction, MD
132 National Business Parkway (O)
Annapolis Junction, MD
12,057
—
—
13,950
—
—
—
—
—
—
—
—
—
—
364
1,305
—
—
1,288
—
630
2,078
1,999
2,796
1,906
2,917
13200 Woodland Park Road (O)
Herndon, VA
— 10,428
133 National Business Parkway (O)
Annapolis Junction, MD
1331 Ashton Road (O)
1334 Ashton Road (O)
Hanover, MD
Hanover, MD
134 National Business Parkway (O)
Annapolis Junction, MD
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
11,418
1362 Mellon Road (O)
Hanover, MD
13857 McLearen Road (O)
140 National Business Parkway (O)
Herndon, VA
Annapolis Junction, MD
—
—
—
141 National Business Parkway (O)
Annapolis Junction, MD
11,871
14280 Park Meadow Drive (O)
1460 Dorsey Road (L)
Chantilly, VA
Hanover, MD
14840 Conference Center Drive (O)
Chantilly, VA
14850 Conference Center Drive (O)
14900 Conference Center Drive (O)
Chantilly, VA
Chantilly, VA
—
—
—
—
—
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
—
46
112
—
2,455
460
2,014
—
5,008
2,594
5,745
3,288
2,977
13,985
4,920
1,474
2,634
1,282
1,466
601
405
3,335
5,447
4,742
119
1,557
643
2,995
1,754
—
1,488
2,896
4,569
—
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
19,501
3,155
52,210
22,409
52,240
5,912
44,478
—
13,321
15,528
16,931
10,911
15,236
55,696
14,988
3,821
4,122
8,799
5,086
1,824
1,179
8,911
17,433
14,492
8,789
31,734
24,810
12,585
17,707
—
9,663
11,254
18,971
19,501
3,519
53,515
22,409
52,240
7,200
44,478
630
15,399
17,527
19,727
12,817
18,153
66,124
17,505
4,408
4,858
12,483
5,991
2,130
1,372
10,297
20,332
16,976
10,495
35,241
28,217
14,983
21,438
1,800
11,235
12,869
22,407
19,501
3,109
52,098
22,409
49,785
5,452
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-61
(924)
(476)
(1,042)
(9,889)
(586)
(7,255)
(2,388)
(7,143)
—
(5,610)
(5,680)
(6,097)
(4,807)
(7,314)
(24,106)
(7,560)
(1,154)
(2,055)
(3,765)
(2,431)
(860)
(596)
(3,580)
(6,255)
(5,845)
(1,278)
(4,945)
(7,039)
(5,575)
(5,626)
—
(3,885)
(4,074)
(7,396)
2013
2014
2002
2007
2013
2001
1985 (7)
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
Initial Cost
Gross Amounts Carried
At Close of Period
Encumbrances
(2)
Land
Building
and Land
Improvements
Costs
Capitalized
Subsequent
to Acquisition
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)
1560 West Nursery Road (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
Linthicum, MD
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
54,000
5,193
— 27,964
96,000
—
—
—
3,500
4,415
5,753
2,465
— 14,071
—
—
—
—
—
—
—
—
—
—
5,595
1,441
1,097
2,299
613
1,856
522
688
773
436
— 10,486
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22,636
17,606
—
—
35,161
—
—
8,275
726
1,813
1,045
1,065
4,040
7,346
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
47,045
52,146
41,921
20,365
13,615
24,720
16,930
26,212
96
3,770
6,545
2,582
7,425
2,090
2,860
3,094
1,742
42,339
34,353
31,091
17,485
16,087
14,687
10,369
16,864
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
58,827
F-62
Land
5,193
27,964
3,500
4,415
5,753
2,465
18,692
7,553
498
726
1,780
—
— 14,071
116
—
352
11
593
167
465
1,469
1,367
172
22,325
10,528
60
—
32
75
—
—
1,511
1,119
539
7,491
223
1
5,115
2,554
1,451
113
1,226
7,093
6,419
166
5,595
1,441
1,097
2,299
613
1,856
522
688
773
436
10,486
8,275
726
1,813
1,045
1,065
4,040
7,346
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
Building
and Land
Improvements
Total
(3)(4)
Accumulated
Depreciation
(5)
Year Built or
Renovated
Date
Acquired (6)
65,737
59,699
42,419
21,091
15,395
24,720
16,930
26,328
96
4,122
6,556
3,175
7,592
2,555
4,329
4,461
1,914
64,664
44,881
31,151
17,485
16,119
14,762
10,369
16,864
7,230
6,910
5,577
17,910
3,274
12,146
22,449
17,820
23,062
29,385
15,823
38,705
22,798
58,993
70,930
87,663
45,919
25,506
21,148
27,185
31,001
31,923
1,537
5,219
8,855
3,788
9,448
3,077
5,017
5,234
2,350
75,150
53,156
31,877
19,298
17,164
15,827
14,409
24,210
8,652
8,272
6,671
20,153
3,966
14,937
24,547
19,557
25,313
33,248
20,434
47,442
26,005
60,510
(25,365)
(11,059)
(8,644)
(8,781)
(6,071)
(576)
(3,038)
(3,647)
(2)
(950)
(1,532)
(1,153)
(2,020)
(714)
(1,696)
(1,529)
(486)
(20,705)
(14,406)
(5,579)
(979)
(1,665)
(1,191)
(106)
(447)
(2,512)
(2,433)
(1,878)
(3,999)
(1,066)
(4,073)
(6,938)
(6,641)
(9,531)
(7,577)
(5,840)
(14,268)
(5,969)
(6,977)
1989
2006
2006
1997
2000
2014
2009
2002
2014
1985/2007
1985/2006
2002
2000
2002
1990
1996
2002
1989/1995
1976/2004
2007
2012
2010
2010
2014
2013
2000
1998
1997
1984/1997
1984
2000
2005
2001
2002
2004
2000
1990
1982/2008
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
10/28/2009
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
Property (Type) (1)
Location
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)
Initial Cost
Gross Amounts Carried
At Close of Period
310 The Bridge Street (O)
Huntsville, AL
312 Sentinel Way (O)
Annapolis Junction, MD
3120 Fairview Park Drive (O)
Falls Church, VA
302 Sentinel Drive (O)
304 Sentinel Drive (O)
306 Sentinel Drive (O)
308 Sentinel Drive (O)
310 Sentinel Way (O)
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
16,298
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
Annapolis Junction, MD
21,680
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)
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
5825 University Research Court (O)
College Park, MD
5850 University Research Court (O)
6700 Alexander Bell Drive (O)
College Park, MD
Columbia, MD
6708 Alexander Bell Drive (O)
6711 Columbia Gateway Drive (O)
6716 Alexander Bell Drive (O)
Columbia, MD
Columbia, MD
Columbia, MD
2,648
3,411
3,260
1,422
2,372
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
355
816
761
—
—
—
—
1,755
897
2,683
1,242
29,687
24,917
22,592
26,197
33,953
26,531
23,793
35,606
1,325
38,156
28,426
21,623
22,827
23,018
10,415
23,257
27,161
21,138
1,583
1,619
3,204
890
3,506
13,808
5,796
7,199
11,558
3,858
397
3,976
3,562
20,072
4,550
22,522
31,689
7,019
7,544
23,239
4,969
F-63
423
138
415
—
—
1,051
—
7,303
—
139
—
—
—
—
4,857
112
101
120
582
336
88
148
1,307
—
1,335
803
21
1,373
79
485
1,758
38
—
60
57
5,550
1,591
435
3,352
2,648
3,411
3,260
1,422
2,372
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
355
816
761
—
—
—
—
1,755
897
2,683
1,242
30,110
25,055
23,007
26,197
33,953
27,582
23,793
42,909
1,325
38,295
28,426
21,623
22,827
23,018
15,272
23,369
27,262
21,258
2,165
1,955
3,292
1,038
4,813
32,758
28,466
26,267
27,619
36,325
27,843
26,931
49,772
2,579
41,043
30,611
23,690
25,432
24,674
17,755
25,200
29,632
23,110
2,982
2,360
3,726
1,382
6,122
13,808
16,080
7,131
8,002
8,537
9,202
11,579
13,457
5,231
476
4,461
5,320
20,110
4,550
22,582
31,746
12,569
9,135
23,674
8,321
6,610
831
5,277
6,081
20,110
4,550
22,582
31,746
14,324
10,032
26,357
9,563
(5,210)
(5,655)
(4,687)
(2,395)
—
(4,310)
(240)
(5,456)
(216)
(2,602)
(6,270)
(3,770)
(4,572)
(2,503)
(6,904)
(1,127)
(541)
(1,494)
(405)
(641)
(1,037)
(199)
(1,492)
(1,057)
(2,780)
(1,618)
(2,959)
(1,278)
(153)
(1,076)
(1,874)
(2,687)
(842)
(3,246)
(3,763)
(5,435)
(3,319)
(4,765)
(3,992)
2007
2005
2006
2010
(7)
2009
2014
2008
2008
2011
2005
2007
2006
2010
1986
2012
2013
2011
1986
1986
1989 (7)
1989
1997
2011
2002
2005
2004
1990
1967
2002
2005
2009
2007
2008
2008
1988
1988 (7)
2006-2007
11/14/2003
11/14/2003
11/14/2003
11/14/2003
11/14/2003
8/9/2011
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
7/12/2007
1/9/2007
1/9/2007
4/4/2006
3/8/2006
1/29/2008
1/29/2008
5/14/2001
5/14/2001
9/28/2000
1990
12/31/1998
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,615
21,261
—
—
—
—
Property (Type) (1)
Location
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)
Initial Cost
Gross Amounts Carried
At Close of Period
6721 Columbia Gateway Drive (O)
Columbia, MD
17,102
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
7005 Columbia Gateway Drive (O)
Columbia, MD
—
—
—
—
—
—
—
—
—
—
7015 Albert Einstein Drive (O)
Columbia, MD
1,900
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
—
—
—
—
—
1,753
449
2,807
1,424
675
1,263
890
3,545
3,596
3,131
3,036
2,058
729
902
919
1,829
3,361
7125 Columbia Gateway Drive (O)
Columbia, MD
— 17,126
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)
7400 Redstone Gateway (O)
7467 Ridge Road (O)
7740 Milestone Parkway (O)
7770 Backlick Road (O)
7880 Milestone Parkway (O)
Columbia, MD
Columbia, MD
Columbia, MD
Columbia, MD
Huntsville, AL
Columbia, MD
Columbia, MD
Hanover, MD
Hanover, MD
Hanover, MD
Huntsville, AL
Hanover, MD
Hanover, MD
Springfield, VA
Hanover, MD
8003 Corporate Drive (O)
White Marsh, MD
—
—
—
—
—
—
—
—
—
—
—
—
4,919
—
—
—
—
19,357
—
—
—
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
3,825
6,387
4,857
611
34,090
5,039
19,098
5,696
1,711
12,461
3,561
9,916
14,269
12,103
14
6,093
3,094
3,684
3,763
11,823
555
46,994
4,359
1,971
3,518
3,978
3,429
4,388
7,006
3,096
7,270
4,926
16,356
24,114
6,300
3,888
3,570
4,163
6,517
34,365
74,325
12,221
1,611
F-64
65
368
2,046
3,346
114
3,419
2,763
4,717
2,164
989
—
855
1,407
1,074
2,902
2,773
279
8,848
1,802
310
1,975
2,494
579
1,332
1,605
658
—
—
3,538
—
3,884
926
4,018
—
2,402
366
140
—
655
1,753
449
2,807
1,424
675
1,263
890
3,545
3,596
3,131
3,036
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
3,825
6,387
4,857
611
34,155
5,407
21,144
9,042
1,825
15,880
6,324
14,633
16,433
13,092
14
6,948
4,501
4,758
6,665
14,596
834
55,842
6,161
2,281
5,493
6,472
4,008
5,720
8,611
3,754
7,270
4,926
19,894
24,114
10,184
4,814
7,588
4,163
8,919
34,731
74,465
12,221
2,266
35,908
5,856
23,951
10,466
2,500
17,143
7,214
18,178
20,029
16,223
3,050
9,006
5,230
5,660
7,584
16,425
4,195
72,968
7,511
2,985
6,597
7,814
5,040
7,541
11,343
5,037
9,058
4,926
23,983
25,481
11,663
5,786
8,493
4,163
10,548
38,556
80,852
17,078
2,877
(4,941)
(2,106)
(7,841)
(4,644)
(303)
(7,008)
(2,989)
(6,463)
(6,965)
(4,056)
—
(2,669)
(1,657)
(2,272)
(2,343)
(5,461)
2009
2001
2002
1992
2008
2001
1991
1999
1998
1999
(8)
1999
2000
2000
2000
2001
— 1973/1999 (8)
(14,434)
(2,321)
(638)
(2,817)
(2,091)
(1,056)
(1,742)
(3,040)
(1,218)
(207)
(133)
(7,933)
(774)
(2,461)
(1,879)
(2,310)
—
(4,138)
(4,003)
(3,414)
—
(396)
1973/1999
1989
1990
1990
1994
1991
2000
2000
2000
1996/2013
2013
1986
2013
1991/1996
1984
1983
(7)
1990
2009
2012
(7)
1999
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
6/26/2014
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
7/27/2005
3/23/2010
10/13/1998
7/27/2005
1/10/2007
4/16/1999
4/4/2002
3/23/2010
4/28/1999
7/2/2007
3/10/2010
9/17/2013
1/9/2007
Property (Type) (1)
Location
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)
Initial Cost
Gross Amounts Carried
At Close of Period
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)
8094 Sandpiper Circle (O)
8098 Sandpiper Circle (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)
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
White Marsh, MD
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
9920 Franklin Square Drive (O)
White Marsh, MD
Aerotech Commerce (L)
Colorado Springs, CO
Arborcrest (O)
Arundel Preserve (L)
Ashburn Crossing - DC 10 (O)
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)
Dahlgren Technology Center (L)
Columbia, MD
Dahlgren, VA
Expedition VII (L)
InterQuest (L)
Lexington Park, MD
Colorado Springs, CO
M Square Research Park (L)
College Park, MD
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,691
—
—
1,434
1,349
642
446
680
2,184
651
1,960
1,797
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
900
— 21,968
— 13,401
—
4,408
— 16,085
—
—
—
7,300
6,387
978
705
—
— 14,382
—
—
3,336
3,262
1,536
1,116
1,898
3,767
1,603
3,716
3,651
10,117
8,457
12,642
3,764
4,280
9,442
4,772
7,972
4,437
4,861
4,239
4,748
3,756
4,730
204,176
13,723
3,466
6,590
5,293
—
1,034
1,744
1,809
361
739
2,205
5
941
639
989
3,008
336
2,423
1,981
6,941
2,295
3,486
2,419
2,024
748
1,155
3,074
170
853
7,289
325
74
1,436
—
1,434
1,349
642
446
680
2,184
651
1,960
1,797
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
900
4,370
5,006
3,345
1,477
2,637
5,972
1,608
4,657
4,290
11,106
11,465
12,978
6,187
6,261
16,383
7,067
11,458
6,856
6,885
4,987
5,903
6,830
4,900
5,804
6,355
3,987
1,923
3,317
8,156
2,259
6,617
6,087
13,391
13,623
15,295
7,697
7,979
18,386
8,232
13,451
8,012
8,100
6,031
7,066
7,769
6,004
205,029
211,079
21,012
24,427
3,791
6,664
6,729
—
4,770
7,883
7,787
900
(938)
(1,282)
(770)
(428)
(751)
(1,499)
(357)
(1,125)
(827)
(2,870)
(3,767)
(3,015)
(1,848)
(2,754)
(7,965)
(3,229)
(5,655)
(2,672)
(3,239)
(2,244)
(1,928)
(2,927)
(4,884)
(10,881)
(9,585)
(989)
(1,952)
(2,077)
—
1995
1998
1990
1990
1990
1997
1990
1998
1998
2001
2003
2005-2006
2002
2002
1981
1984
1982
1984
1985
1983 (7)
1984
1983
(8)
2010
1988
1999
2005
2006
(8)
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
1/9/2007
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
5/19/2006
109,468
1,209
21,968
110,677
132,645
(22,043) 1991-1996 (7)
10/14/1997
7,238
8,399
905
15,556
2,940
178
727
9
3,129
F-65
— 13,401
—
4,408
— 16,085
878
—
—
7,300
6,387
978
705
—
— 14,382
—
—
7,238
8,399
905
16,434
2,940
178
727
9
3,129
20,639
12,807
16,990
23,734
9,327
1,156
1,432
14,391
3,129
—
—
—
(2,755)
—
—
—
—
—
(8)
(7)
(8)
2006
(8)
(8)
(8)
(8)
(8)
7/2/2007
12/27/2012
10/27/2009
10/27/2009
9/20/2004
3/16/2005
3/24/2004
9/28/2005
1/29/2008
Property (Type) (1)
Location
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)
Initial Cost
Gross Amounts Carried
At Close of Period
National Business Park North (L)
Annapolis Junction, MD
— 27,785
North Gate Business Park (L)
Northwest Crossroads (L)
NOVA Office A (O) (9)
NOVA Office B (O) (9)
NOVA Office D (O)
Old Annapolis Road (O)
Patriot Park (L)
Patriot Ridge (L)
Redstone Gateway (L)
Route 15/Biggs Ford Road (L)
Sentry Gateway (L)
Sentry Gateway - T (O)
Sentry Gateway - V (O)
Sentry Gateway - W (O)
Sentry Gateway - X (O)
Sentry Gateway - Y (O)
Sentry Gateway - Z (O)
Westfields - Park Center (L)
Westfields Corporate Center (L)
White Marsh (L)
Woodland Park (L)
Aberdeen, MD
San Antonio, TX
Chantilly, VA
Chantilly, VA
Chantilly, VA
Columbia, MD
Colorado Springs, CO
Springfield, VA
Huntsville, AL
Frederick, MD
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
San Antonio, TX
Chantilly, VA
Chantilly, VA
White Marsh, MD
Herndon, VA
Other Developments, including
intercompany eliminations (V)
Various
—
—
—
—
—
—
—
6,486
7,430
2,096
739
6,587
1,637
8,723
— 18,517
—
—
—
—
8,703
8,275
— 14,020
—
—
—
—
—
—
—
1,964
1,964
1,964
— 16,418
—
7,141
— 17,610
9,614
—
—
47,411
10,922
836
38,142
18,858
2
5,500
248
14,440
14,087
541
3,645
38,804
1,066
1,884
21,178
21,298
23,185
8,584
1,415
6,983
81
— 27,785
—
—
—
—
—
2,421
—
6,486
7,430
2,096
739
6,587
1,637
8,723
— 18,517
—
—
—
13
—
—
—
—
—
—
8,703
8,275
14,020
—
—
1,964
1,964
1,964
— 16,418
—
7,141
— 17,610
—
9,614
47,411
10,922
836
38,142
18,858
2
7,921
248
14,440
14,087
541
3,645
38,817
1,066
1,884
21,178
21,298
23,185
8,584
1,415
6,983
81
75,196
17,408
8,266
40,238
19,597
6,589
9,558
8,971
32,957
14,087
9,244
11,920
52,837
1,066
1,884
23,142
23,262
25,149
25,002
8,556
24,593
9,695
—
—
—
—
—
—
(2,756)
—
—
—
—
—
(7,646)
(161)
(249)
(2,204)
(2,213)
—
—
—
—
—
(8)
(8)
(8)
(7)
(7)
(7)
6/29/2006
9/14/2007
1/20/2006
7/31/2002
7/31/2002
7/31/2002
1974/1985
12/14/2000
(8)
(8)
(8)
(8)
(8)
1982/1985
2007
2009
2010
2010
(7)
(8)
(8)
(8)
(8)
7/8/2005
3/10/2010
3/23/2010
8/28/2008
3/30/2005
3/30/2005
3/30/2005
3/30/2005
1/20/2006
1/20/2006
6/14/2005
7/18/2002
7/31/2002
1/9/2007
4/29/2004
8
276
261
8
537
545
(26)
Various
Various
$
409,193 $668,660 $
3,008,508 $
337,168 $ 668,660 $
3,345,676 $4,014,336 $
(703,083)
(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 Revolving Credit Facility of $83.0 million, term loan facilities of $520.0 million, unsecured senior notes of $890.9 million, exchangeable senior notes of $572,000, unsecured notes payable of $1.6
million, a letter of credit on a mortgage loan of $14.8 million, and net premiums on the remaining loans of $42,000.
(3) The aggregate cost of these assets for Federal income tax purposes was approximately $3.4 billion at December 31, 2014.
(4) As discussed in Note 3 to our Consolidated Financial Statements, we recognized impairment losses of $1.4 million primarily in connection with certain of our operating properties in the Greater Baltimore region that
were disposed in the current period.
(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, 2014.
(8) Held or under pre-construction at December 31, 2014.
(9) The carrying amounts of these properties under construction exclude allocated costs of the garage being constructed to support the properties.
F-66
The following table summarizes our changes in cost of properties for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Beginning balance
Acquisitions of operating properties
Improvements and other additions
Sales
Impairments
Other dispositions
Other
Ending balance
2014
2013
2012
$ 3,811,950
$ 3,859,960
$ 4,038,932
—
254,868
(48,466)
(3,042)
(974)
—
—
249,639
(141,045)
(45,931)
(110,673)
—
33,684
214,418
(291,491)
(121,557)
(13,891)
(135)
$ 4,014,336
$ 3,811,950
$ 3,859,960
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
2014
2013
2012
$
597,649
$
568,176
$
577,601
111,326
(3,129)
(1,671)
(1,092)
—
92,677
(9,542)
(14,863)
(38,799)
—
93,158
(40,346)
(58,855)
(3,247)
(135)
$
703,083
$
597,649
$
568,176
F-67
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Corporate
Information
Annual Meeting
The 2015 annual meeting of shareholders will be held at 9:30 a.m. Eastern Time on May 7, 2015, at Corporate Office
Properties Trust’s headquarters, located at 6711 Columbia Gateway Drive, 1st Floor, Columbia, Maryland 21046.
Board of Trustees
Thomas F. Brady
Chairman
Executive Officers
Roger A. Waesche, Jr.
President & Chief Executive Officer
Robert L. Denton
Philip L. Hawkins
Elizabeth A. Hight
David M. Jacobstein
Steven D. Kesler
C. Taylor Pickett
Richard Szafranski
Roger A. Waesche, Jr.
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
Anthony Mifsud
Executive Vice President &
Chief Financial Officer
Karen M. Singer
Senior Vice President,
General Counsel and Secretary
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
Executive Offices
6711 Columbia Gateway Drive, Suite 300
Columbia, Maryland 21046
Telephone: 443.285.5400 | Facsimile: 443.285.7650
www.COPT.com | NYSE: OFC
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