UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

FORM 8-K

 


 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of report (Date of earliest event reported):  April 3, 2006 (December 22, 2005)

 

CORPORATE OFFICE PROPERTIES TRUST

(Exact name of registrant as specified in its charter)

 

Maryland

 

1-14023

 

23-2947217

(State or other jurisdiction of

 

(Commission

 

(IRS Employer

incorporation)

 

File Number)

 

Identification Number)

 

8815 Centre Park Drive, Suite 400

Columbia, Maryland 21045

(Address of principal executive offices)

 

(410) 730-9092

(Registrant’s telephone number, including area code)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

 

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 



 

Item 8.01 Other Events

 

On December 22, 2005, Corporate Office Properties Trust (the “Company”), through an affiliate of Corporate Office Properties, L.P. (the “Operating Partnership”), closed on a transaction to acquire, either directly or through an exchange accomodation title holder, a portfolio of office properties totaling 704,692 square feet located in Hunt Valley, Maryland and a portfolio of office properties totaling 402,174 square feet located in Woodlawn, Maryland (collectively referred to as the “Hunt Valley/Rutherford Portfolios”).

 

The Hunt Valley/Rutherford Portfolios were acquired from an unrelated third party for a contract price of $124.5 million and an aggregate cost to the Company of $124.0 million, including transaction costs and credits from the seller for future capital expenditures. The Company paid for this acquisition by using borrowings of $82.0 million under the Company’s Revolving Credit Facility, $41.6 million under a new loan from KeyBank, National Association and cash reserves for the balance.

 

The following schedule sets forth certain information relating to the Hunt Valley/Rutherford Portfolios as of December 31, 2005. In this schedule and the schedule that follows, the term annualized rental revenue is used; annualized rental revenue is computed by multiplying by 12 the sum of monthly contractual base rents and estimated monthly expense reimbursements under active leases in the acquired properties as of December 31, 2005.

 

 

 

 

 

 

 

 

 

 

 

Annualized

 

 

 

Year

 

Rentable

 

 

 

Annualized

 

Rental Revenue

 

 

 

Built/

 

Square

 

 

 

Rental

 

per Occupied

 

Property

 

Renovated

 

Feet

 

Occupancy

 

Revenue

 

Square Foot

 

Hunt Valley, Maryland

 

 

 

 

 

 

 

 

 

 

 

11311 McCormick Road

 

1984/1994

 

211,931

 

87.2

%

$

4,468,332

 

$

24.19

 

200 International Circle

 

1987

 

128,658

 

72.1

%

2,231,381

 

24.07

 

230 Schilling Circle

 

1981

 

107,348

 

68.6

%

1,172,587

 

15.92

 

226 Schilling Circle

 

1980

 

98,640

 

79.5

%

1,689,899

 

21.54

 

201 International Circle

 

1982

 

78,634

 

75.2

%

1,382,870

 

23.40

 

11011 McCormick Road

 

1974

 

55,249

 

100.0

%

953,215

 

17.25

 

11101 McCormick Road

 

1976

 

24,232

 

88.4

%

361,738

 

16.89

 

Woodlawn, Maryland

 

 

 

 

 

 

 

 

 

 

 

7210 Ambassador Road

 

1972

 

83,435

 

100.0

%

857,444

 

10.28

 

7152 Windsor Boulevard

 

1986

 

57,855

 

100.0

%

739,973

 

12.79

 

21 Governor’s Court

 

1981/1995

 

56,063

 

85.9

%

772,231

 

16.03

 

7125 Ambassador Road

 

1985

 

50,906

 

90.1

%

814,045

 

17.75

 

7253 Ambassador Road

 

1988

 

38,930

 

100.0

%

454,722

 

11.68

 

7104 Ambassador Road

 

1988

 

29,457

 

100.0

%

515,028

 

17.48

 

17 Governor’s Court

 

1981

 

14,701

 

78.6

%

209,637

 

18.13

 

15 Governor’s Court

 

1981

 

14,568

 

100.0

%

208,125

 

14.29

 

7127 Ambassador Road

 

1985

 

11,144

 

77.7

%

162,772

 

18.80

 

7129 Ambassador Road

 

1985

 

10,945

 

0.0

%

0

 

0.00

 

7108 Ambassador Road

 

1988

 

9,018

 

47.1

%

79,395

 

18.71

 

7102 Ambassador Road

 

1988

 

8,879

 

100.0

%

146,415

 

16.49

 

7106 Ambassador Road

 

1988

 

8,820

 

52.9

%

72,214

 

15.49

 

7131 Ambassador Road

 

1985

 

7,453

 

50.9

%

62,298

 

16.41

 

 

 

 

 

 

 

 

 

 

 

 

 

Total/Weighted Average

 

 

 

1,106,866

 

83.6

%

$

17,354,321

 

$

18.75

 

 

The following schedule sets forth annual lease expirations for the Hunt Valley/Rutherford Portfolios as of December 31, 2005 assuming that none of the tenants exercise renewal options:

 

2



 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

Annualized

 

 

 

 

 

 

 

 

 

Annualized

 

Total Portfolio’s

 

Rental

 

 

 

 

 

Square

 

 

 

Rental

 

Annualized

 

Revenue of

 

Year of

 

Number

 

Footage

 

Percentage of

 

Revenue of

 

Rental

 

Expiring Leases

 

Lease

 

of Leases

 

of Leases

 

Total Occupied

 

Expiring

 

Revenue

 

per Occupied

 

Expiration

 

Expiring

 

Expiring

 

Square Feet

 

Leases

 

Expiring

 

Square Foot

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

17

 

182,723

 

19.8

%

$

4,105

 

23.7

%

$

22.46

 

2007

 

8

 

118,547

 

12.8

%

2,566

 

14.8

%

21.65

 

2008

 

17

 

164,564

 

17.8

%

3,010

 

17.3

%

18.29

 

2009

 

8

 

73,302

 

7.9

%

1,498

 

8.6

%

20.44

 

2010

 

6

 

49,080

 

5.3

%

901

 

5.2

%

18.36

 

2011

 

7

 

86,129

 

9.3

%

1,409

 

8.1

%

16.36

 

2012

 

3

 

131,523

 

14.2

%

2,450

 

14.1

%

18.62

 

2013

 

3

 

100,013

 

10.8

%

1,097

 

6.3

%

10.97

 

2014

 

 

 

0.0

%

 

0.0

%

 

2015

 

1

 

19,553

 

2.1

%

318

 

1.9

%

16.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total/ Weighted Average

 

70

 

925,434

 

100.0

%

$

17,354

 

100.0

%

$

18.75

 

 

Item 9.01.              Financial Statements and Exhibits

 

(a)           Financial Statements of Real Estate Operations Acquired

 

The financial statements of the Hunt Valley/Rutherford Portfolios are included herein. See pages F-8 through F-12.

 

(b)           Pro Forma Financial Information

 

The pro forma condensed consolidated financial statements of the Company are included herein. See pages F-1 through F-7.

 

(c)           Exhibits

 

Exhibit Number

 

Description

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm.

 

3



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Dated: April 3, 2006

 

 

 

 

 

 

CORPORATE OFFICE PROPERTIES TRUST

 

 

 

 

 

By:

/s/ Randall M. Griffin

 

 

Name:

Randall M. Griffin

 

Title:

President and Chief Executive Officer

 

 

 

 

By:

/s/ Roger A. Waesche, Jr.

 

 

Name:

Roger A. Waesche, Jr.

 

Title:

Executive Vice President and

 

 

Chief Financial Officer

 

4



 

CORPORATE OFFICE PROPERTIES TRUST

INDEX TO FINANCIAL STATEMENTS

 

I.

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY

 

 

 

 

 

Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 2005 (unaudited)

 

 

 

 

 

Notes and Management’s Assumptions to Pro Forma Condensed Consolidated Financial Information

 

 

 

 

II.

Hunt Valley/Rutherford Portfolios

 

 

 

 

 

Report of Independent Auditors

 

 

 

 

 

Historical Summaries of Revenue and Certain Expenses for the Periods from January 1, 2004 to November 12, 2004 and November 13, 2004 to December 31, 2004

 

 

 

 

 

Historical Summaries of Revenue and Certain Expenses for the Nine Months Ended September 30, 2005 and 2004

 

 

 

 

 

Notes to Historical Summaries

 

 

F-1



 

CORPORATE OFFICE PROPERTIES TRUST

PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

Set forth below is the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2005 of Corporate Office Properties Trust and its consolidated affiliates, including Corporate Office Properties, L.P. (the “Operating Partnership”). Corporate Office Properties Trust and its consolidated affiliates, including the Operating Partnership, are collectively referred to herein as the “Company.”

 

The pro forma condensed consolidated financial information is presented as if the acquisition of a portfolio of office buildings totaling 704,692 square feet located in Hunt Valley, Maryland and a portfolio of office buildings totaling 402,174 square feet located in Woodlawn, Maryland (collectively referred to as the “Hunt Valley/Rutherford Portfolios”) had been consummated on January 1, 2005.

 

This pro forma condensed consolidated financial information should be read in conjunction with the following financial statements and notes thereto:

 

                  the historical financial statements of Corporate Office Properties Trust and its consolidated subsidiaries, included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2005; and

 

                  the historical summaries of revenue and certain expenses of the Hunt Valley/Rutherford Portfolios, which are included in this Current Report on Form 8-K.

 

In management’s opinion, all adjustments necessary to reflect the effects of this transaction have been made. This pro forma condensed consolidated financial information is unaudited and is not necessarily indicative of what the Company’s results of operations would have been for the year ended December 31, 2005. The pro forma condensed consolidated financial information also does not purport to represent the future results of operations of the Company.

 

F-2



 

Corporate Office Properties Trust

Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2005

(Unaudited)

(Amounts in thousands, except per share data)

 

 

 

 

 

Hunt Valley/

 

Other

 

 

 

 

 

Historical

 

Rutherford

 

Pro Forma

 

Pro Forma

 

 

 

Consolidated

 

Portfolios

 

Adjustments

 

Consolidated

 

 

 

(A)

 

(B)

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

219,062

 

$

17,301

 

$

 

$

236,363

 

Tenant recoveries and other revenue

 

30,849

 

970

 

 

31,819

 

Service operations revenues

 

79,234

 

 

 

79,234

 

Total revenues

 

329,145

 

18,271

 

 

347,416

 

Expenses

 

 

 

 

 

 

 

 

 

Property operating expenses

 

75,258

 

6,624

 

 

81,882

 

Depreciation and other amortization associated with real estate operations

 

63,063

 

 

9,009

(C)

72,072

 

Service operations expenses

 

77,287

 

 

 

77,287

 

General and administrative expenses

 

13,534

 

 

 

13,534

 

Total operating expenses

 

229,142

 

6,624

 

9,009

 

244,775

 

Operating income (loss)

 

100,003

 

11,647

 

(9,009

)

102,641

 

Interest expense and amortization of deferred financing costs

 

(58,895

)

 

(5,643

)(D)

(64,538

)

Equity in loss of unconsolidated real estate joint ventures

 

(88

)

 

 

(88

)

Income tax expense

 

(668

)

 

 

(668

)

Income (loss) from continuing operations before minority interests

 

40,352

 

11,647

 

(14,652

)

37,347

 

Minority interests

 

 

 

 

 

 

 

 

 

Common units

 

(4,869

)

 

587

(E)

(4,282

)

Preferred units

 

(660

)

 

 

(660

)

Other consolidated entities

 

85

 

 

 

85

 

Income (loss) from continuing operations

 

34,908

 

11,647

 

(14,065

)

32,490

 

Preferred share dividends

 

(14,615

)

 

 

(14,615

)

Income (loss) from continuing operations available to common shareholders

 

$

20,293

 

$

11,647

 

$

(14,065

)

$

17,875

 

Earnings per share: Basic (F)

 

$

0.55

 

 

 

 

 

$

0.49

 

Earnings per share: Diluted (F)

 

$

0.53

 

 

 

 

 

$

0.47

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

Basic (F)

 

37,371

 

 

 

 

 

37,371

 

Diluted (F)

 

38,997

 

 

 

 

 

38,997

 

 

See accompanying notes and management’s assumptions to pro forma financial statements.

 

F-3



 

CORPORATE OFFICE PROPERTIES TRUST

NOTES AND MANAGEMENT’S ASSUMPTIONS TO

PRO FORMA CONDENSED CONSOLIDATING

FINANCIAL INFORMATION

(Dollars in thousands, except share and per share amounts)

 

1.                                      Basis of Presentation:

 

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses on the acquisition, development, ownership, management and leasing of primarily Class A suburban office properties in the Greater Washington, D.C. region and other select submarkets. As of December 31, 2005, our investments in real estate included the following:

 

                  165 wholly owned operating properties in our portfolio with an average size of 83,000 square feet per property;

                  14 wholly owned office properties under construction or development that we estimate will total approximately 1.8 million square feet upon completion and one wholly owned office property totaling approximately 52,000 square feet that was under redevelopment;

                  wholly owned land parcels totaling 311 acres that we believe are potentially developable into approximately 4.7 million square feet; and

                  partial ownership interests in a number of other real estate projects in operations or under development or redevelopment.

 

These pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto of the Company and of the historical summaries of revenue and certain expenses and notes thereto of the Hunt Valley/Rutherford Portfolios. In management’s opinion, all adjustments necessary to reflect the effects of the acquisition of the Hunt Valley/Rutherford Portfolios have been made. This pro forma condensed consolidated financial information is unaudited and is not necessarily indicative of what the Company’s results of operations would have been for the year ended December 31, 2005, nor does it purport to represent the future results of operations of the Company.

 

The Company allocates the cost of property acquisitions to the components of those acquisitions based on their respective fair values. The Company’s allocation of the acquisition of the Hunt Valley/Rutherford Portfolios included in these consolidated financial statements, excluding deferred finance costs, is set forth below:

 

F-4



 

Land, operating properties

 

$

18,715

 

Building and improvements

 

87,933

 

Intangible assets on real estate acquisitions

 

 

 

Lease-up value

 

16,549

 

Lease cost portion of deemed cost avoidance

 

1,303

 

Lease to market value

 

109

 

Tenant relationship value

 

2,566

 

Deferred revenue associated with acquired operating leases

 

(3,187

)

Total

 

$

123,988

 

 

The approximate weighted average amortization periods for the intangible assets set forth above is as follows: lease-up value – 3 years; lease cost portion of deemed cost avoidance – 4 years; lease to market value – 2 years; and tenant relationship value – 5 years.

 

2.                                      Adjustments to Pro Forma Condensed Consolidating Statements of Operations:

 

(A)                              Reflects the historical consolidated operations of the Company for the period presented.

 

(B)                                Reflects the effects of the (i) historical operations of the Hunt Valley/Rutherford Portfolios for the period presented and (ii) increase in rental revenue of $675 for the twelve months ended December 31, 2005 reflecting the amortization for that period of value associated with in-place operating leases to the extent that future cash flows under the contractual leases are above or below market at the time of the acquisition (the “lease to market value”).

 

(C)                                Pro forma depreciation expense adjustments are reflected on the acquisition based on (i) the portion of the acquisition costs attributable to the building depreciated over a useful life of 40 years and (ii) the value of tenant improvements associated with in-place operating leases depreciated over the remaining lives of the leases. Pro forma amortization expense adjustments are reflected on acquisitions based on (i) the value associated with acquiring a built-in revenue stream on leased buildings amortized over the life of the tenants’ leases (the “lease-up value”), (ii) the value associated with acquiring properties with particular tenants amortized over the estimated amount of time that the associated tenants are expected to remain in the properties (the “tenant relationship value”) and (iii) the value of leasing costs associated with in-place operating leases amortized over the remaining lives of the leases (the “lease cost portion of deemed cost avoidance”).

 

 

 

For the Year Ended
December 31, 2005

 

 

 

 

 

Adjustment to depreciation and other amortization expense related to:

 

 

 

Depreciation expense

 

$

2,933

 

Amortization of lease-up value

 

5,539

 

Amortization of tenant relationship value

 

286

 

Amortization of lease cost portion of deemed cost avoidance

 

251

 

 

 

$

9,009

 

 

F-5



 

(D)                               Pro forma adjustments for additional interest expense resulting from the property acquisition are set forth below. The pro forma adjustments below were computed using the weighted average of the rates in effect for the applicable pro forma period. Pro forma deferred financing cost amortization adjustments are reflected assuming such costs are amortized over the lives of the related loans.

 

 

 

For the Year Ended

 

 

 

December 31, 2005

 

Adjustment to interest expense related to:

 

 

 

 

 

 

 

Borrowings in connection with the acquisition consisting of the following: (1) $82,000 in borrowings under the Revolving Credit Facility and (2) $41,600 in borrowings under a new loan, both bearing a variable interest rate of LIBOR plus 125 basis points.

 

$

5,539

 

 

 

 

 

Amortization of deferred financing costs related to:

 

 

 

Borrowings under the new $41,600 loan

 

104

 

 

 

$

5,643

 

 

The aggregate pro forma increase to interest expense would increase by an additional $151 for the year ended December 31, 2005 if interest rates on this variable-rate debt were 1/8th of a percentage point higher.

 

(E)                                 Adjustment for minority interests’ share of pro forma adjustments made to the Operating Partnership.

 

F-6



 

(F)                                 Our computation of historical and pro forma earnings per share (“EPS”) is set forth below:

 

 

 

For the Year Ended
December 31, 2005

 

 

 

Historical

 

Pro Forma

 

Numerator:

 

 

 

 

 

Income from continuing operations

 

$

34,908

 

$

32,490

 

Add: Gain on sales of real estate, net of minority interests

 

268

 

268

 

Less: Preferred share dividends

 

(14,615

)

(14,615

)

Numerator for basic and diluted EPS from continuing operations available to common shareholders

 

$

20,561

 

$

18,143

 

Denominator (all weighted averages):

 

 

 

 

 

Denominator for basic EPS (common shares)

 

37,371

 

37,371

 

Assumed conversion of share options

 

1,626

 

1,626

 

Denominator for diluted EPS

 

38,997

 

38,997

 

 

 

 

 

 

 

EPS on income from continuing operations available to common shareholders:

 

 

 

 

 

Basic

 

$

0.55

 

$

0.49

 

Diluted

 

$

0.53

 

$

0.47

 

 

F-7



 

Report of Independent Auditors

 

To the Board of Directors and Shareholders of Corporate Office Properties Trust:

 

We have audited the accompanying Historical Summaries of Revenue and Certain Expenses of Hunt Valley/Rutherford Portfolios (the “Properties”) for the predecessor period from January 1, 2004 to November 12, 2004 and the successor period from November 13, 2004 to December 31, 2004. These Historical Summaries of Revenue and Certain Expenses are the responsibility of the Properties’ management. Our responsibility is to express an opinion on these Historical Summaries of Revenue and Certain Expenses based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summaries of Revenue and Certain Expenses are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Historical Summaries of Revenue and Certain Expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Historical Summaries of Revenue and Certain Expenses. We believe that our audit provides a reasonable basis for our opinion.

 

The accompanying Historical Summaries of Revenue and Certain Expenses were prepared for the purpose of complying with rules and regulations of the Securities and Exchange Commission (for inclusion on Form 8-K of Corporate Office Properties Trust) as described in Note 2, and are not intended to be a complete presentation of the Properties’ revenue and expenses.

 

In our opinion, the Historical Summaries of Revenue and Certain Expenses referred to above present fairly, in all material respects, the revenue and certain expenses of the Properties for the predecessor period from January 1, 2004 to November 12, 2004 and the successor period from November 13, 2004 to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ PricewaterhouseCoopers LLP

 

April 3, 2006

 

F-8



 

Hunt Valley/Rutherford Portfolios

Historical Summaries of Revenue and Certain Expenses

January 1, 2004 to November 12, 2004 and November 13, 2004 to

December 31, 2004

 

 

 

Predecessor

 

Successor

 

Total

 

 

 

(Note 1)

 

(Note 1)

 

 

 

Revenue

 

 

 

 

 

 

 

Rental

 

$

14,076,046

 

$

1,828,520

 

$

15,904,566

 

Tenant reimbursements

 

620,631

 

34,106

 

654,737

 

Other income

 

14,175

 

4,716

 

18,891

 

Total revenue

 

14,710,852

 

1,867,342

 

16,578,194

 

 

 

 

 

 

 

 

 

Certain Expenses

 

 

 

 

 

 

 

Property operating expenses

 

 

 

 

 

 

 

Property taxes and insurance

 

1,061,823

 

153,230

 

1,215,053

 

Utilities

 

1,352,752

 

168,860

 

1,521,612

 

Other operating expenses

 

689,108

 

75,192

 

764,300

 

Repairs and maintenance

 

2,145,106

 

267,350

 

2,412,456

 

Total Certain Expense

 

5,248,789

 

664,632

 

5,913,421

 

Revenue in excess of Certain Expenses

 

$

9,462,063

 

$

1,202,710

 

$

10,664,773

 

 

F-9



 

Hunt Valley/Rutherford Portfolios

Historical Summary of Revenue and Certain Expenses

Nine Months Ended September 30, 2005 and 2004 (Unaudited)

 

 

 

2005

 

2004

 

 

 

(Note 4)

 

(Note 4)

 

Revenue

 

 

 

 

 

Rental

 

$

12,786,271

 

$

11,959,518

 

Tenant reimbursements

 

621,897

 

602,870

 

Other income

 

124,236

 

11,566

 

Total revenue

 

13,532,404

 

12,573,954

 

 

 

 

 

 

 

Certain Expenses

 

 

 

 

 

Property operating expenses

 

 

 

 

 

Property taxes and insurance

 

959,569

 

900,507

 

Utilities

 

1,453,646

 

1,161,462

 

Other operating expenses

 

584,753

 

611,114

 

Repairs and maintenance

 

2,096,069

 

1,857,031

 

Total Certain Expense

 

5,094,037

 

4,530,114

 

Revenue in excess of Certain Expenses

 

$

8,438,367

 

$

8,043,840

 

 

F-10



 

Hunt Valley/Rutherford Portfolios

Notes to Historical Summaries of Revenue and Certain Expenses

January 1, 2004 to November 12, 2004 and November 13, 2004 to

December 31, 2004

 

1.              Business

 

The accompanying Historical Summaries of Revenue and Certain Expenses relate to the operations of the Hunt Valley/Rutherford Portfolios (the “Properties”), consisting of revenue and certain expenses of a portfolio of office properties totaling 704,692 square feet located in Hunt Valley, Maryland and a portfolio of office properties totaling 402,174 square feet located in Woodlawn, Maryland. As the Properties were owned by two different independent third parties in 2004, due to a sale that closed on November 12, 2004, the Historical Summary of Revenue and Certain Expenses for the year ended December 31, 2004 are presented for each period the Properties were owned by the predecessor and successor owners.

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation

The accompanying Historical Summaries of Revenue and Certain Expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission in contemplation of Corporate Office Properties Trust acquiring the Properties.

 

The Historical Summaries of Revenue and Certain Expenses are not representative of the actual operations of the Properties for the period presented nor indicative of future operations as certain expenses, primarily depreciation, amortization, and interest expense, may not be comparable to the expenses expected to be incurred by Corporate Office Properties Trust in future operations of the Property, and have been excluded.

 

Revenue and Expense Recognition

Revenue is recognized on a straight-line basis over the terms of the related lease. Tenant reimbursement revenue includes payments from tenants as reimbursement for property operating expenses as stipulated in the leases. Expenses are recognized in the period in which they are incurred.

 

Use of Estimates

The preparation of these Historical Summaries of Revenue and Certain Expenses are in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

 

Major Tenants

During 2004, 31% of the Properties base rents were earned from four major tenants:  McCormick and Company; First Data Merchant Services; MCI Worldcom Communications; and AT&T Corporation. Base rent earned from these tenants for the year ended December 31, 2004 was approximately $4,915,133.

 

F-11



 

3.              Rentals

 

The Properties have entered into non-cancelable tenant leases. The leases provide that tenants will share operating expenses and real estate taxes on a pro rata basis, as defined in the leases. Future minimum rentals as of December 31, 2004 to be received under these tenant leases are as follows:

 

2005

 

$

15,913,019

 

2006

 

15,441,140

 

2007

 

11,981,384

 

2008

 

1,086,625

 

2009

 

200,465

 

Thereafter

 

 

 

4.              Unaudited Historical Interim Information

 

The Historical Summaries of Revenue and Certain Expenses for the nine months ended September 30, 2005 and 2004 are unaudited. As a result, the interim Historical Summaries of Revenue and Certain Expenses should be read in conjunction with Historical Summaries of Revenue and Certain Expenses and the accompanying notes for the predecessor period from January 1, 2004 to November 12, 2004 and the successor period from November 13, 2004 to December 31, 2004. The interim Historical Summaries of Revenue and Certain Expenses reflect all adjustments which management believes are necessary for the fair presentation of the Historical Summaries of Revenue and Certain Expenses for the interim period presented. These adjustments are of a normal recurring nature. The Historical Summaries of Revenue and Certain Expenses for such interim periods are not necessarily indicative of the results for a full year. The nine months ended September 30, 2005 relates to ownership by the successor owner while the nine months ended September 30, 2004 relates to the ownership by the predecessor owner as the property sale closed on November 12, 2004.

 

F-12