CDP

Business Context and Reporting Period

Company: Corporate Office Properties Trust (COPT), a fully-integrated, self-managed Real Estate Investment Trust (REIT).

Focus: Ownership, management, leasing, acquisition, and development of suburban office properties in the Mid-Atlantic region (Baltimore/Washington Corridor, Greater Philadelphia, Northern/Central New Jersey, Greater Harrisburg, Northern Virginia).

Reporting Period: Quarterly period ended March 31, 2002 (Form 10-Q).

Portfolio Status: As of March 31, 2002, the portfolio included 99 office properties. The company completed construction on two new buildings totaling 127,167 square feet during the quarter.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Real estate operating revenue increased 16% ($4.8 million) primarily due to 14 properties acquired and 5 newly constructed properties placed in service during 2001 and 2002.
• Expense Increases: Total expenses from real estate operations rose 19% ($4.1 million). Property operating expenses increased 21% due to new acquisitions and construction. Depreciation and amortization increased 36% ($1.9 million) driven by new assets.
• Discontinued Operations: Significant increase in income from discontinued operations ($720k vs $50k) due to gains on the sale of two properties (MOR Montpelier LLC and a land parcel) totaling $946k in gains.
• Net Income to Common: Decreased 3% ($83k) despite higher net income, primarily due to a $1.7 million increase in Preferred Share dividends resulting from new series issued in 2001.
• Shareholder Structure: Constellation Real Estate, Inc., previously the largest shareholder, sold its holdings and is no longer a shareholder following a public offering on March 5, 2002.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Liquidity: The company relies on cash from operations for short-term needs and a combination of debt and equity for long-term capital needs. As of May 2, 2002, $34.5 million remained unused on a $150 million Revolving Credit Facility.
• Construction Pipeline: Four buildings totaling 405,000 square feet were under construction as of March 31, 2002, with estimated completion costs of $70.2 million. These projects were 75% pre-leased.
• Subsequent Acquisitions: In April 2002, the company acquired five office buildings for $16.25 million, financed primarily through the Revolving Credit Facility.

Risks and Contingencies

• Joint Venture Commitments: The company may be required to make additional investments of up to $4.6 million in one joint venture if construction costs exceed funding. Additionally, the company serves as guarantor for $21.0 million in joint venture loans.
• Market Risk: Exposure to interest rate changes. 59.3% of debt is fixed-rate; the remainder is variable. The company utilizes interest rate swaps and caps to mitigate risk.
• Legal and Environmental: No material adverse effects anticipated from ongoing legal actions or environmental assessments.

Unusual Items

• Accounting Changes: Adoption of SFAS 144 reclassified revenues and expenses from sold properties to "Discontinued Operations."
• Extraordinary Item: A loss of $28k on early retirement of debt was recorded.

Investor Verification Checklist

• Debt Maturities: Verify the status of $78.5 million in mortgage loans maturing in 2002, noting that some have extension options exercised or available.
• Joint Venture Obligations: Confirm the occupancy status of joint venture buildings to assess the likelihood of triggering mandatory acquisition clauses (currently none exceed 85% occupancy).
• Preferred Dividends: Review the impact of the $2.5 million quarterly preferred dividend obligation on cash available for common shareholders.
• Construction Progress: Monitor the 75% pre-leasing status of the $70.2 million construction pipeline to ensure projected cash flows are met.
• Shareholder Base: Note the exit of Constellation Real Estate, Inc. and the dilution from the March 2002 public offering of 10.9 million shares.