News Column

CORPORATE OFFICE PROPERTIES, L.P. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 1, 2014

Overview

COPT is a REIT that focuses primarily on serving the specialized requirements of United States Government agencies and defense contractors, most of whom are engaged in defense information technology and national security related activities. COPLP and its subsidiaries are the entities through which COPT, the sole general partner of COPLP, conduct almost all of its operations and owns almost all of its assets. We generally acquire, develop, manage and lease office and data center properties concentrated in large office parks located near knowledge-based government demand drivers and/or in targeted markets or submarkets in the Greater Washington, DC/Baltimore region. COPLP owns real estate both directly and through subsidiary partnerships and LLCs. 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.



During the three months ended March 31, 2014, we:

placed into service an aggregate of 355,000 square feet in two newly

constructed properties that were 100% leased as of March 31, 2014; and

finished the period with occupancy of our portfolio of operating office

properties at 89.8%. In April 2014, a wholly owned subsidiary of ours defaulted 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 has an interest rate of 5.65% and is scheduled to mature in 2017. While we intend to negotiate with the lender to restructure the loan, we expect that we will convey the properties to the lender to extinguish the loan.



We discuss significant factors contributing to changes in our net income 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; and

our commitments and contingencies.

You should refer to our consolidated financial statements 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; 32

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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.

Occupancy and Leasing Office Properties The tables below set forth occupancy information pertaining to our portfolio of operating office properties: March 31, 2014 December 31, 2013 Occupancy rates at period end Total 89.8 % 89.1 % Baltimore/Washington Corridor 92.0 % 91.7 % Northern Virginia 89.9 % 88.6 % San Antonio 96.6 % 96.6 % Huntsville 85.6 % 80.7 % Washington, DC - Capitol Riverfront 76.4 % 76.4 % St. Mary's and King George Counties 93.4 % 89.8 % Greater Baltimore 78.4 % 77.2 % Greater Philadelphia 90.6 % 93.7 % Other 100.0 % 100.0 % Average contractual annual rental rate per square foot at period end (1) $ 28.90 $ 28.99 (1) Includes estimated expense reimbursements. Rentable Occupied Square Feet Square Feet (in thousands) December 31, 2013 17,370 15,484 Square feet vacated upon lease expiration (1) -



(364 ) Occupancy of previously vacated space in connection with new lease (2)

-



217

Square feet constructed or redeveloped 355



358

Square feet removed from operations for redevelopment (247 ) - Other changes (5 ) - March 31, 2014 17,473 15,695



(1) Includes lease terminations and space reductions occurring in connection

with lease renewals.

(2) Excludes occupancy of vacant square feet acquired or developed.

Occupancy of our Same Office Properties was 89.9% as of March 31, 2014, up from 89.4% as of December 31, 2013.

During the three months ended March 31, 2014, we completed 446,000 square feet of leasing, including 176,000 of construction and redevelopment space, and renewed 56.1% of the square footage of our lease expirations for the period (including the effect of early renewals, and excluding the effect of a 219,000 square foot property vacated in Greater Philadelphia that was removed from service for redevelopment). 33 --------------------------------------------------------------------------------



Wholesale Data Center Property

Our wholesale data center property, which upon completion is expected to have a critical load of 18 megawatts, had 9.0 megawatts in operations as of March 31, 2014, of which 6.3 were leased to tenants with further expansion rights of up to a combined 7.2 megawatts. 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 current and prior

year reporting periods, excluding properties held for future disposition. We

define these as changes from "Same Office Properties";

office properties acquired during the current and prior year reporting

periods;

constructed or redeveloped office properties placed into service that were

not 100% operational throughout the current and prior year reporting periods;

two properties that we expect to convey to a mortgage holder; and

property dispositions.



You may refer to Note 15 of the consolidated financial statements for a summary of operating properties that were disposed and therefore are included in discontinued operations.

In addition to owning properties, we provide construction management and other services. The primary manner in which we evaluate the operating performance of our construction management and other service activities is through a measure we define as NOI from service operations, which is based on the net of the revenues and expenses from these activities. The revenues and expenses from these activities consist primarily of subcontracted costs that are reimbursed to us by customers along with a management fee. The operating margins from these activities are small relative to the revenue. We believe NOI from service operations is a useful measure in assessing both our level of activity and our profitability in conducting such operations. We believe that operating income, as reported on our consolidated statements of operations, is the most directly comparable generally accepted accounting principles ("GAAP") measure for both NOI from real estate operations and NOI from service operations. Since both of these measures exclude certain items includable in operating income, reliance on these measures has limitations; management compensates for these limitations by using the measures simply as supplemental measures that are considered alongside other GAAP and non-GAAP measures. 34 -------------------------------------------------------------------------------- The table below reconciles NOI from real estate operations and NOI from service operations to operating income reported on the consolidated statements of operations: For the Three Months Ended March 31, 2014 2013 (in thousands) NOI from real estate operations $ 75,144$ 78,011 NOI from service operations 3,166 785 NOI from discontinued operations (39 ) (6,442 )



Depreciation and amortization associated with real estate operations

(43,596 ) (27,010 ) General, administrative and leasing expenses (8,143 ) (7,820 ) Business development expenses and land carry costs (1,326 ) (1,359 ) Operating income $ 25,206$ 36,165 Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013 For the Three Months Ended March 31, 2014 2013 Variance (in thousands) Revenues Revenues from real estate operations $ 124,877$ 111,957$ 12,920 Construction contract and other service revenues 21,790 14,262 7,528 Total revenues 146,667 126,219 20,448 Expenses Property operating expenses 49,772 40,388 9,384 Depreciation and amortization associated with real estate operations 43,596 27,010 16,586 Construction contract and other service expenses 18,624 13,477 5,147 General, administrative and leasing expenses 8,143 7,820 323 Business development expenses and land carry costs 1,326 1,359 (33 ) Total operating expenses 121,461 90,054 31,407 Operating income 25,206 36,165 (10,959 ) Interest expense (20,827 ) (20,290 ) (537 ) Interest and other income 1,285 946 339 Loss on early extinguishment of debt - (5,184 ) 5,184 Equity in income of unconsolidated entities 60 41 19 Income tax expense (64 ) (16 ) (48 ) Income from continuing operations 5,660 11,662 (6,002 ) Discontinued operations 11 1,261 (1,250 ) Gain on sales of real estate - 2,354 (2,354 ) Net income $ 5,671$ 15,277$ (9,606 ) 35

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NOI from Real Estate Operations

For the Three Months Ended March 31, 2014 2013 Variance (Dollars in thousands, except per square foot data) Revenues Same Office Properties $ 110,190 $ 103,075 $ 7,115 Constructed office properties placed in service 5,986 1,389 4,597 Properties to be conveyed 5,394 5,151 243 Dispositions 19 10,121 (10,102 ) Other 3,307 2,341 966 124,896 122,077 2,819 Property operating expenses Same Office Properties 44,401 36,447 7,954 Constructed office properties placed in service 1,550 416 1,134 Properties to be conveyed 1,820 1,802 18 Dispositions (20 ) 3,834 (3,854 ) Other 2,001 1,567 434 49,752 44,066 5,686 NOI from real estate operations Same Office Properties 65,789 66,628 (839 ) Constructed office properties placed in service 4,436 973 3,463 Properties to be conveyed 3,574 3,349 225 Dispositions 39 6,287 (6,248 ) Other 1,306 774 532 $ 75,144 $ 78,011 $ (2,867 )Same Office Properties rent statistics Average occupancy rate 89.7 % 88.9 % 0.8 % Average straight-line rent per occupied square foot (1) $ 6.11 $ 6.08 $ 0.03



(1) Includes minimum base rents, net of abatements, and lease incentives on a

straight-line basis for the three-month periods set forth above.

The increase in revenues from our Same Office Properties included a $1.3 million, or 1.6%, increase in rental revenue (including $323,000 in connection with lease terminations) and a $5.8 million, or 30.3%, increase in tenant recoveries and other real estate operations revenue. The increases in tenant recoveries and other real estate operations revenue and property operating expenses for these properties were primarily due to higher than normal snowfall and lower than normal temperatures in the Mid-Atlantic region. Our Same Office Properties pool consisted of 170 office properties, comprising 88.4% of our operating office square footage as of March 31, 2014. Operating office properties disposed or otherwise no longer held for long-term investment (currently two properties expected to be conveyed to lenders) by, or as of, March 31, 2014 were excluded from the Same Office Properties pool. 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 removal of one property newly classified as redevelopment. 36 --------------------------------------------------------------------------------

NOI from Service Operations For the Three Months Ended March 31, 2014 2013 Variance (in thousands)



Construction contract and other service revenues $ 21,790$ 14,262$ 7,528 Construction contract and other service expenses

18,624 13,477 5,147 NOI from service operations $ 3,166$ 785$ 2,381



The increase in NOI from service operations was due primarily to $2.4 million in income recognized on one large construction contract in the current period.

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.



Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt in the prior period was attributable primarily to a $5.3 million loss recognized on our repayment of a $53.7 million principal amount of our 4.25% Exchangeable Senior Notes.



Gain on Sales of Real Estate

The gain on sales of real estate in the prior period was attributable to the condemnation of a land parcel in the Greater Baltimore region in connection with an interstate widening project.



Funds from Operations

Funds from operations ("FFO") is defined as net income computed using GAAP, excluding gains on sales of, and impairment losses on, previously depreciated operating properties, plus real estate-related depreciation and amortization. When multiple properties consisting of both operating and non-operating properties exist on a single tax parcel, we classify all of the gains on sales of, and impairment losses on, the tax parcel as all being for previously depreciated operating properties when most of the value of the parcel is associated with operating properties on the parcel. We believe that we use the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, although others may interpret the definition differently and, accordingly, our presentation of FFO may differ from those of other REITs. We believe that FFO is useful to management and investors as a supplemental measure of operating performance because, by excluding gains related to sales of, and impairment losses on, previously depreciated operating properties, net of related tax benefit, and excluding real estate-related depreciation and amortization, FFO can help one compare our operating performance between periods. In addition, since most equity REITs provide FFO information to the investment community, we believe that FFO is useful to investors as a supplemental measure for comparing our results to those of other equity REITs. We believe that net income is the most directly comparable GAAP measure to FFO. Since FFO excludes certain items includable in net income, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service. Basic FFO available to common share and common unit holders ("Basic FFO") is FFO adjusted to subtract (1) preferred share dividends, (2) issuance costs associated with redeemed preferred shares, (3) income attributable to noncontrolling interests through ownership of preferred units in the Operating Partnership or interests in other consolidated entities not owned by us, (4) depreciation and amortization allocable to noncontrolling interests in other consolidated entities and (5) Basic FFO allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP 37 -------------------------------------------------------------------------------- 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, interest expense and gains on debt extinguishment); loss on interest rate derivatives; and accounting charges for original issuance costs associated with redeemed preferred shares. We believe that the excluded items are not reflective of normal operations and, as a result, we believe that a measure that excludes these items is a useful supplemental measure in evaluating our operating performance. We believe that the numerator to diluted EPS is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO. Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use earnings per share ("EPS") in evaluating net income available to common shareholders. In addition, since most equity REITs provide Diluted FFO per share information to the investment community, we believe that Diluted FFO per share is a useful supplemental measure for comparing us to other equity REITs. We believe that diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. Diluted FFO per share has most of the same limitations as Diluted FFO (described above); management compensates for these limitations in essentially the same manner as described above for Diluted FFO. Diluted FFO per share, as adjusted for comparability is (1) Diluted FFO, as adjusted for comparability divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that this measure is useful to investors because it provides investors with a further context for evaluating our FFO results. We believe that diluted EPS is the most directly comparable GAAP measure to this per share measure. This measure has most of the same limitations as Diluted FFO (described above) as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO. The computations for all of the above measures on a diluted basis assume the conversion of common units in COPLP but do not assume the conversion of other securities that are convertible into common shares if the conversion of those securities would increase per share measures in a given period. We use measures called payout ratios as supplemental measures of our ability to make distributions to investors based on each of the following: FFO; Diluted FFO; and Diluted FFO, adjusted for comparability. These measures are defined as (1) the sum of (a) dividends on common shares and (b) distributions to holders of interests in COPLP and dividends on convertible preferred shares when such distributions and dividends are included in Diluted FFO divided by either (2) FFO, Diluted FFO or Diluted FFO, adjusted for comparability. 38 -------------------------------------------------------------------------------- The table appearing below sets forth the computation of the above stated measures for the three months ended March 31, 2014 and 2013 of COPT and subsidiaries, and provides reconciliations to the GAAP measures associated with such measures: For the Three Months Ended March 31, 2014 2013 (Dollars and shares in thousands, except per share data) Net income $ 5,671 $ 15,277 Real estate-related depreciation and amortization 43,596 28,252



Impairment losses on previously depreciated operating properties

1 1,857 Loss on sales of previously depreciated operating properties 4 - FFO 49,272 45,386 Less: Noncontrolling interests-preferred units in COPLP (165 ) (165 ) Less: FFO allocable to other noncontrolling interests (761 ) (727 ) Less: Preferred share dividends (4,490 ) (6,106 ) Basic and Diluted FFO allocable to restricted shares (205 ) (183 ) Basic and Diluted FFO $ 43,651 $ 38,205 Gain on sales of non-operating properties - (2,354 ) Loss on early extinguishment of debt 23 5,184 Diluted FFO, as adjusted for comparability $



43,674 $ 41,035

Weighted average common shares 87,080 81,397 Conversion of weighted average common units 3,958 3,893 Weighted average common shares/units - Basic FFO 91,038 85,290 Dilutive effect of share-based compensation awards 112 52 Weighted average common shares/units - Diluted FFO 91,150 85,342 Diluted FFO per share $ 0.48 $ 0.45 Diluted FFO per share, as adjusted for comparability $



0.48 $ 0.48

Numerator for diluted EPS $



130 $ 8,796 Income allocable to noncontrolling interests-common units in COPLP

16 429 Real estate-related depreciation and amortization 43,596 28,252



Impairment losses on previously depreciated operating properties

1 1,857 Numerator for diluted EPS allocable to restricted shares 121 118



Depreciation and amortization allocable to noncontrolling interests in other consolidated entities

(180 ) (274 )



Increase (decrease) in noncontrolling interests unrelated to earnings

168 (790 ) Basic and diluted FFO allocable to restricted shares (205 ) (183 ) Loss on sales of previously depreciated operating properties 4 - Basic and Diluted FFO $ 43,651 $ 38,205 Gain on sales of non-operating properties - (2,354 ) Loss on early extinguishment of debt 23 5,184 Diluted FFO, as adjusted for comparability $ 43,674 $ 41,035 Denominator for diluted EPS 87,192 81,449 Weighted average common units 3,958 3,893 Denominator for diluted FFO per share measures 91,150 85,342 39

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Property Additions

The table below sets forth the major components of our additions to properties for the three months ended March 31, 2014 (in thousands): Construction, development and redevelopment $ 40,462 Tenant improvements on operating properties 4,973 (1) Capital improvements on operating properties 3,154

$ 48,589



(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 $4.2 million when comparing the three months ended March 31, 2014 and 2013 due primarily to:

$7.1 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; and

a $5.8 million increase in cash flow from construction contract and other

services attributable in large part to the timing of cash payments and

collections on construction projects; offset in part by

a $6.8 million decrease in net cash from revenues and operating expenses

associated with real estate operations due in large part to our dispositions

of properties in 2013.



Net cash flow used in investing activities increased $679,000 when comparing the three months ended March 31, 2014 and 2013.

Net cash flow used in financing activities in the three months ended March 31, 2014 was $26.7 million, and was comprised primarily of dividends and/or distributions to shareholders and/or unitholders.

Net cash flow provided by financing activities in the three months ended March 31, 2013 was $25.8 million, and included the following:

net proceeds from the issuance of preferred shares (or units) of $118.4

million; offset in part by

net repayments of debt of $60.3 million; and

dividends and/or distributions to shareholders and/or unitholders of $29.8

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 March 31, 2014, COPT owned 95.7% of the outstanding common units and 96.4% of the outstanding preferred units in COPLP; the remaining common and preferred units in COPLP were owned by third parties, which included certain members of COPT's Board of Trustees. As the sole general partner of COPLP, COPT has the full, exclusive and complete responsibility for COPLP's day-to-day management and control. 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 8 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. 40

-------------------------------------------------------------------------------- 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 March 31, 2014, we also had $18.4 million in cash and cash equivalents. We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. We expect to complete future dispositions opportunistically, depending on the circumstances pertaining to properties, or groups of properties, or when capital markets otherwise warrant. We aim to maintain an investment grade rating to enable us to use debt comprised of unsecured, primarily fixed-rate debt (including the effect of interest rate swaps) from public markets and banks. We also use secured nonrecourse debt from institutional lenders and banks, when appropriate. In addition, we periodically access the public equity markets to raise capital by issuing common and/or preferred shares. We use our Revolving Credit Facility to initially finance much of our investing activities. We subsequently pay down the facility using proceeds from long-term borrowings, equity issuances and property sales. The lenders' aggregate commitment under the facility is $800.0 million, with the ability for us to increase the lenders' aggregate commitment to $1.3 billion, provided that there is no default under the facility and subject to the approval of the lenders. Amounts available under the facility are computed based on 60% of our unencumbered asset value, as defined in the loan agreement. The Revolving Credit Facility matures in July 2017, and may be extended by one year at our option, provided that there is no default under the facility and we pay an extension fee of 0.15% of the total availability of the facility. As of March 31, 2014, the maximum borrowing capacity under this facility totaled $800.0 million, of which $785.2 million was available. We also have construction loan facilities that provide for aggregate borrowings of up to $26.2 million as of March 31, 2014, of which $6.4 million was available to fund future construction costs at specific projects. 41 -------------------------------------------------------------------------------- The following table summarizes our contractual obligations as of March 31, 2014 (in thousands): For the Periods Ending December 31, 2014 2015 2016 2017 2018 Thereafter Total Contractual obligations (1) Debt (2) Balloon payments due upon maturity $ 82,458$ 389,751$ 274,605$ 404,110 $ - $ 763,945$ 1,914,869 Scheduled principal payments 5,121 6,218 4,734 1,505 1,374 5,854 24,806 Interest on debt (3) 57,328 70,772 52,911 35,007 30,674 144,039 390,731 New construction and redevelopment obligations (4)(5) 71,423 30,752 - - - - 102,175 Third-party construction and development obligations (5)(6) 12,900 9,230 - - - - 22,130 Capital expenditures for operating properties (5)(7) 30,585 6,725 - - - - 37,310 Operating leases (8) 690 807 748 725 698 75,377 79,045 Other purchase obligations (9) 911 425 335 66 10 - 1,747 Total contractual cash obligations $ 261,416$ 514,680$ 333,333$ 441,413$ 32,756$ 989,215$ 2,572,813



(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 $7.8 million. We expect to refinance the

balloon payments that are due in 2014 using primarily a combination of

borrowings under our credit facilities and by accessing the unsecured debt

market and/or secured debt market. In April 2014, a wholly owned subsidiary

of ours defaulted on the payment terms of a $150.0 million nonrecourse

mortgage loan secured by two operating properties in Northern Virginia that

is scheduled to mature in 2017; while we intend to negotiate with the lender

to restructure the loan, we expect that we will convey the properties to the

lender to extinguish the loan.

(3) Represents interest costs for our outstanding debt as of March 31, 2014 for

the terms of such debt. For variable rate debt, the amounts reflected above

used March 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. Properties under, or contractually committed for,

construction or redevelopment as of March 31, 2014 included the following: Expected Year Number of Square Feet Estimated For Costs to be Activity Properties (in thousands) Remaining Costs(in millions) Incurred Through Construction of new office properties 8 1,165 $ 174.1 2016 Redevelopment of existing office properties 4 403 35.9 2016



(5) Due to the long-term nature of certain construction and development contracts

and leases included in these lines, the amounts reported in the table represent our estimate of the timing for the related obligations being payable.



(6) Represents contractual obligations pertaining to projects for which we are

acting as construction manager on behalf of unrelated parties who are our

clients. We expect to be reimbursed in full for these costs by our clients.

(7) Represents contractual obligations pertaining to recurring and nonrecurring

capital expenditures for our operating properties. We expect to finance

these costs primarily using cash flow from operations.

(8) We expect to pay these items using cash flow from operations.

(9) Primarily represents contractual obligations pertaining to managed-energy

service contracts in place for certain of our operating properties. We expect to pay these items using cash flow from operations. We expect to spend more than $210 million on construction and development costs and approximately $40 million on improvements to operating properties (including the commitments set forth in the table above) during the remainder of 2014.



We

expect to fund the construction and development costs using cash on hand, borrowings under our Revolving Credit Facility and existing construction loan facilities. We expect to fund improvements to existing operating properties using cash flow from operations. Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including maximum leverage ratio, unencumbered leverage ratio, minimum net worth, minimum fixed charge coverage, minimum unencumbered interest coverage ratio, minimum debt service and maximum secured indebtedness ratio. As of March 31, 2014, we were in compliance with these financial covenants. 42 --------------------------------------------------------------------------------



Off-Balance Sheet Arrangements

We had no significant changes in our off-balance sheet arrangements from those described in the section entitled "Off-Balance Sheet Arrangements" in our 2013 Annual Report on Form 10-K. 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.


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Source: Edgar Glimpses


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