10-Q 1 copt930201210q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)

T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended | September 30, 2012

or

o | 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
(Exact name of registrant as specified in its charter)

Maryland |  | 23-2947217
(State or other jurisdiction of |  | (IRS Employer
incorporation or organization) |  | Identification No.)

6711 Columbia Gateway Drive, Suite 300, Columbia, MD | 21046
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (443) 285-5400
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.
ý Yes o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes o No
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.

Large accelerated filer x |  | Accelerated filer o |  | Non-accelerated filer o |  | Smaller reporting company o
|  |  |  | (Do not check if a smaller reporting company) |  |

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes ý No
As of October 18, 2012, 80,793,776 of the Company’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

TABLE OF CONTENTS
FORM 10-Q

| PAGE
PART I: FINANCIAL INFORMATION |
Item 1: | Financial Statements: |
| Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited) | 3
| Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited) | 4
| Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited) | 5
| Consolidated Statements of Equity for the Nine Months Ended September 30, 2012 and 2011 (unaudited) | 6
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited) | 7
| Notes to Consolidated Financial Statements (unaudited) | 9
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 42
Item 4: | Controls and Procedures | 43
PART II: OTHER INFORMATION |
Item 1: | Legal Proceedings | 43
Item 1A: | Risk Factors | 43
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 44
Item 3: | Defaults Upon Senior Securities | 44
Item 4: | Mine Safety Disclosures | 44
Item 5: | Other Information | 44
Item 6: | Exhibits | 44
SIGNATURES | 45

2

PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)

| September 30, 2012 |  | December 31, 2011
Assets |  |  |  |  |
Properties, net: |  |  |  |  |
Operating properties, net | $ | 2,487,919 |  |  | $ | 2,714,056 |
Projects in development or held for future development | 614,595 |  |  | 638,919 |
Total properties, net | 3,102,514 |  |  | 3,352,975 |
Assets held for sale, net | 137,815 |  |  | 116,616 |
Cash and cash equivalents | 5,009 |  |  | 5,559 |
Restricted cash and marketable securities | 20,926 |  |  | 36,232 |
Accounts receivable (net of allowance for doubtful accounts of $4,754 and $3,546, respectively) | 15,877 |  |  | 26,032 |
Deferred rent receivable | 83,156 |  |  | 86,856 |
Intangible assets on real estate acquisitions, net | 81,059 |  |  | 89,120 |
Deferred leasing and financing costs, net | 58,753 |  |  | 66,515 |
Prepaid expenses and other assets | 92,547 |  |  | 87,619 |
Total assets | $ | 3,597,656 |  |  | $ | 3,867,524 |
Liabilities and equity |  |  |  |  |
Liabilities: |  |  |  |  |
Debt, net | $ | 2,169,315 |  |  | $ | 2,426,303 |
Accounts payable and accrued expenses | 87,390 |  |  | 96,425 |
Rents received in advance and security deposits | 26,773 |  |  | 29,548 |
Dividends and distributions payable | 26,954 |  |  | 35,038 |
Deferred revenue associated with operating leases | 13,102 |  |  | 15,554 |
Distributions received in excess of investment in unconsolidated real estate joint venture | 6,420 |  |  | 6,071 |
Interest rate derivatives | 6,543 |  |  | 30,863 |
Other liabilities | 10,938 |  |  | 9,657 |
Total liabilities | 2,347,435 |  |  | 2,649,459 |
Commitments and contingencies (Note 16) |  |  |  |  |
Equity: |  |  |  |  |
Corporate Office Properties Trust’s shareholders’ equity: |  |  |  |  |
Preferred Shares of beneficial interest at liquidation preference ($0.01 par value; shares authorized of 25,000,000 at September 30, 2012 and 15,000,000 at December 31, 2011; shares issued and outstanding of 12,821,667 at September 30, 2012 and 8,121,667 at December 31, 2011) | 333,833 |  |  | 216,333 |
Common Shares of beneficial interest ($0.01 par value; 125,000,000 shares authorized, shares issued and outstanding of 72,157,635 at September 30, 2012 and 72,011,324 at December 31, 2011) | 722 |  |  | 720 |
Additional paid-in capital | 1,455,558 |  |  | 1,452,393 |
Cumulative distributions in excess of net income | (610,659 | ) |  | (532,288 | )
Accumulated other comprehensive loss | (5,688 | ) |  | (1,733 | )
Total Corporate Office Properties Trust’s shareholders’ equity | 1,173,766 |  |  | 1,135,425 |
Noncontrolling interests in subsidiaries: |  |  |  |  |
Common units in the Operating Partnership | 48,973 |  |  | 55,281 |
Preferred units in the Operating Partnership | 8,800 |  |  | 8,800 |
Other consolidated entities | 18,682 |  |  | 18,559 |
Noncontrolling interests in subsidiaries | 76,455 |  |  | 82,640 |
Total equity | 1,250,221 |  |  | 1,218,065 |
Total liabilities and equity | $ | 3,597,656 |  |  | $ | 3,867,524 |

See accompanying notes to consolidated financial statements.
3

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Revenues |  |  |  |  |  |  |  |  |
Rental revenue | $ | 92,783 |  |  | $ | 87,692 |  |  | $ | 273,089 |  |  | $ | 258,896 |
Tenant recoveries and other real estate operations revenue | 22,078 |  |  | 20,286 |  |  | 63,598 |  |  | 58,117 |
Construction contract and other service revenues | 15,283 |  |  | 18,729 |  |  | 53,812 |  |  | 67,854 |
Total revenues | 130,144 |  |  | 126,707 |  |  | 390,499 |  |  | 384,867 |
Expenses |  |  |  |  |  |  |  |  |  |  |
Property operating expenses | 42,799 |  |  | 41,669 |  |  | 126,339 |  |  | 123,135 |
Depreciation and amortization associated with real estate operations | 28,698 |  |  | 31,269 |  |  | 84,920 |  |  | 84,205 |
Construction contract and other service expenses | 14,410 |  |  | 18,171 |  |  | 51,302 |  |  | 65,698 |
Impairment losses | 46,096 |  |  | — |  |  | 41,260 |  |  | 42,983 |
General and administrative expenses | 5,061 |  |  | 6,154 |  |  | 19,820 |  |  | 19,251 |
Business development expenses and land carry costs | 1,632 |  |  | 1,751 |  |  | 4,506 |  |  | 4,322 |
Total operating expenses | 138,696 |  |  | 99,014 |  |  | 328,147 |  |  | 339,594 |
Operating (loss) income | (8,552 | ) |  | 27,693 |  |  | 62,352 |  |  | 45,273 |
Interest expense | (23,239 | ) |  | (24,176 | ) |  | (71,909 | ) |  | (74,861 | )
Interest and other income (loss) | 1,095 |  |  | (242 | ) |  | 3,152 |  |  | 3,682 |
Loss on early extinguishment of debt | (768 | ) |  | (1,611 | ) |  | (937 | ) |  | (1,636 | )
(Loss) income from continuing operations before equity in loss of unconsolidated entities and income taxes | (31,464 | ) |  | 1,664 |  |  | (7,342 | ) |  | (27,542 | )
Equity in loss of unconsolidated entities | (246 | ) |  | (159 | ) |  | (522 | ) |  | (223 | )
Income tax (expense) benefit | (106 | ) |  | 457 |  |  | (4,296 | ) |  | 6,043 |
(Loss) income from continuing operations | (31,816 | ) |  | 1,962 |  |  | (12,160 | ) |  | (21,722 | )
Discontinued operations | 11,051 |  |  | 5,508 |  |  | 10,212 |  |  | (18,109 | )
(Loss) income before gain on sales of real estate | (20,765 | ) |  | 7,470 |  |  | (1,948 | ) |  | (39,831 | )
Gain on sales of real estate, net of income taxes | — |  |  | — |  |  | 21 |  |  | 2,728 |
Net (loss) income | (20,765 | ) |  | 7,470 |  |  | (1,927 | ) |  | (37,103 | )
Net loss (income) attributable to noncontrolling interests: |  |  |  |  |  |  |  |  |  |  |
Common units in the Operating Partnership | 1,569 |  |  | (178 | ) |  | 1,020 |  |  | 3,188 |
Preferred units in the Operating Partnership | (165 | ) |  | (165 | ) |  | (495 | ) |  | (495 | )
Other consolidated entities | (411 | ) |  | (561 | ) |  | (939 | ) |  | (1,038 | )
Net (loss) income attributable to Corporate Office Properties Trust | (19,772 | ) |  | 6,566 |  |  | (2,341 | ) |  | (35,448 | )
Preferred share dividends | (6,546 | ) |  | (4,025 | ) |  | (14,738 | ) |  | (12,076 | )
Issuance costs associated with redeemed preferred shares | (1,827 | ) |  | — |  |  | (1,827 | ) |  | — |
Net (loss) income attributable to Corporate Office Properties Trust common shareholders | $ | (28,145 | ) |  | $ | 2,541 |  |  | $ | (18,906 | ) |  | $ | (47,524 | )
Net (loss) income attributable to Corporate Office Properties Trust: |  |  |  |  |  |  |  |  |  |  |
(Loss) income from continuing operations | $ | (30,200 | ) |  | $ | 1,381 |  |  | $ | (12,015 | ) |  | $ | (18,454 | )
Discontinued operations, net | 10,428 |  |  | 5,185 |  |  | 9,674 |  |  | (16,994 | )
Net (loss) income attributable to Corporate Office Properties Trust | $ | (19,772 | ) |  | $ | 6,566 |  |  | $ | (2,341 | ) |  | $ | (35,448 | )
Basic earnings per common share (1) |  |  |  |  |  |  |  |  |  |  |
Loss from continuing operations | $ | (0.54 | ) |  | $ | (0.04 | ) |  | $ | (0.40 | ) |  | $ | (0.46 | )
Discontinued operations | 0.15 |  |  | 0.07 |  |  | 0.13 |  |  | (0.24 | )
Net (loss) income attributable to COPT common shareholders | $ | (0.39 | ) |  | $ | 0.03 |  |  | $ | (0.27 | ) |  | $ | (0.70 | )
Diluted earnings per common share (1) |  |  |  |  |  |  |  |  |
Loss from continuing operations | $ | (0.54 | ) |  | $ | (0.04 | ) |  | $ | (0.40 | ) |  | $ | (0.46 | )
Discontinued operations | 0.15 |  |  | 0.07 |  |  | 0.13 |  |  | (0.24 | )
Net (loss) income attributable to COPT common shareholders | $ | (0.39 | ) |  | $ | 0.03 |  |  | $ | (0.27 | ) |  | $ | (0.70 | )
Dividends declared per common share | $ | 0.2750 |  |  | $ | 0.4125 |  |  | $ | 0.8250 |  |  | $ | 1.2375 |

(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.
4

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Net (loss) income | $ | (20,765 | ) |  | $ | 7,470 |  |  | $ | (1,927 | ) |  | $ | (37,103 | )
Other comprehensive loss |  |  |  |  |  |  |  |  |  |  |
Unrealized losses on interest rate derivatives | (2,760 | ) |  | (21,869 | ) |  | (7,386 | ) |  | (30,463 | )
Losses on interest rate derivatives included in net (loss) income | 632 |  |  | 1,179 |  |  | 3,034 |  |  | 3,446 |
Other comprehensive loss | (2,128 | ) |  | (20,690 | ) |  | (4,352 | ) |  | (27,017 | )
Comprehensive loss | (22,893 | ) |  | (13,220 | ) |  | (6,279 | ) |  | (64,120 | )
Comprehensive loss (income) attributable to noncontrolling interests | 1,111 |  |  | 302 |  |  | (171 | ) |  | 3,249 |
Comprehensive loss attributable to COPT | $ | (21,782 | ) |  | $ | (12,918 | ) |  | $ | (6,450 | ) |  | $ | (60,871 | )

See accompanying notes to consolidated financial statements.
5

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Equity
(Dollars in thousands)
(unaudited)

| Preferred Shares |  | Common Shares |  | Additional Paid-in Capital |  | Cumulative Distributions in Excess of Net Income |  | Accumulated Other Comprehensive Loss |  | Noncontrolling Interests |  | Total
Balance at December 31, 2010 (66,931,582 common shares outstanding) | $ | 216,333 |  |  | $ | 669 |  |  | $ | 1,295,592 |  |  | $ | (281,794 | ) |  | $ | (4,163 | ) |  | $ | 96,501 |  |  | $ | 1,323,138 |
Conversion of common units to common shares (83,506 shares) | — |  |  | 1 |  |  | 1,275 |  |  | — |  |  | — |  |  | (1,276 | ) |  | — |
Common shares issued to the public (4,600,000 shares) | — |  |  | 46 |  |  | 145,315 |  |  | — |  |  | — |  |  | — |  |  | 145,361 |
Exercise of share options (185,714 shares) | — |  |  | 2 |  |  | 2,393 |  |  | — |  |  | — |  |  | — |  |  | 2,395 |
Share-based compensation | — |  |  | 2 |  |  | 9,536 |  |  | — |  |  | — |  |  | — |  |  | 9,538 |
Restricted common share redemptions (112,683 shares) | — |  |  | — |  |  | (3,948 | ) |  | — |  |  | — |  |  | — |  |  | (3,948 | )
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT | — |  |  | — |  |  | (2,542 | ) |  | — |  |  | — |  |  | 2,542 |  |  | — |
Adjustments related to derivatives designated as cash flow hedges | — |  |  | — |  |  | — |  |  | — |  |  | (24,455 | ) |  | (2,562 | ) |  | (27,017 | )
Net loss | — |  |  | — |  |  | — |  |  | (35,448 | ) |  | — |  |  | (1,655 | ) |  | (37,103 | )
Dividends | — |  |  | — |  |  | — |  |  | (99,100 | ) |  | — |  |  | — |  |  | (99,100 | )
Distributions to owners of common and preferred units in the Operating Partnership | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (5,894 | ) |  | (5,894 | )
Contributions from noncontrolling interests in other consolidated entities | — |  |  | — |  |  | (23 | ) |  | — |  |  | — |  |  | 284 |  |  | 261 |
Distributions to noncontrolling interest in other consolidated entities | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (8 | ) |  | (8 | )
Balance at September 30, 2011 (71,986,936 common shares outstanding) | $ | 216,333 |  |  | $ | 720 |  |  | $ | 1,447,598 |  |  | $ | (416,342 | ) |  | $ | (28,618 | ) |  | $ | 87,932 |  |  | $ | 1,307,623 |
Balance at December 31, 2011 (72,011,324 common shares outstanding) | $ | 216,333 |  |  | $ | 720 |  |  | $ | 1,452,393 |  |  | $ | (532,288 | ) |  | $ | (1,733 | ) |  | $ | 82,640 |  |  | $ | 1,218,065 |
Conversion of common units to common shares (94,550 shares) | — |  |  | 1 |  |  | 1,187 |  |  | — |  |  | — |  |  | (1,188 | ) |  | — |
Preferred shares issued to the public (6,900,000 shares) | 172,500 |  |  | — |  |  | (6,838 | ) |  | — |  |  | — |  |  | — |  |  | 165,662 |
Costs associated with common shares issued to the public | — |  |  | — |  |  | (5 | ) |  | — |  |  | — |  |  | — |  |  | (5 | )
Redemption of preferred shares (2,200,000 shares) | (55,000 | ) |  | — |  |  | 1,827 |  |  | (1,827 | ) |  | — |  |  | — |  |  | (55,000 | )
Exercise of share options (44,624 shares) | — |  |  | — |  |  | 666 |  |  | — |  |  | — |  |  | — |  |  | 666 |
Share-based compensation | — |  |  | 1 |  |  | 9,191 |  |  | — |  |  | — |  |  | — |  |  | 9,192 |
Restricted common share redemptions (135,777 shares) | — |  |  | — |  |  | (3,279 | ) |  | — |  |  | — |  |  | — |  |  | (3,279 | )
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT | — |  |  | — |  |  | 373 |  |  | — |  |  | — |  |  | (373 | ) |  | — |
Adjustments related to derivatives designated as cash flow hedges | — |  |  | — |  |  | — |  |  | — |  |  | (3,955 | ) |  | (397 | ) |  | (4,352 | )
Increase in tax benefit from share-based compensation | — |  |  | — |  |  | 43 |  |  | — |  |  | — |  |  | — |  |  | 43 |
Net loss | — |  |  | — |  |  | — |  |  | (2,341 | ) |  | — |  |  | 414 |  |  | (1,927 | )
Dividends | — |  |  | — |  |  | — |  |  | (74,203 | ) |  | — |  |  | — |  |  | (74,203 | )
Distributions to owners of common and preferred units in the Operating Partnership | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,993 | ) |  | (3,993 | )
Distributions to noncontrolling interests in other consolidated entities | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (648 | ) |  | (648 | )
Balance at September 30, 2012 (72,157,635 common shares outstanding) | $ | 333,833 |  |  | $ | 722 |  |  | $ | 1,455,558 |  |  | $ | (610,659 | ) |  | $ | (5,688 | ) |  | $ | 76,455 |  |  | $ | 1,250,221 |

See accompanying notes to consolidated financial statements.
6

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)

| For the Nine Months Ended September 30,
| 2012 |  | 2011
Cash flows from operating activities |  |  |  |  |
Revenues from real estate operations received | $ | 363,877 |  |  | $ | 350,593 |
Construction contract and other service revenues received | 58,637 |  |  | 73,382 |
Property operating expenses paid | (137,644 | ) |  | (143,481 | )
Construction contract and other service expenses paid | (50,438 | ) |  | (73,009 | )
General and administrative and business development expenses paid | (14,257 | ) |  | (15,921 | )
Interest expense paid | (63,811 | ) |  | (69,237 | )
Previously accreted interest expense paid | — |  |  | (17,314 | )
Cash settlement of interest rate derivatives | (29,738 | ) |  | — |
Proceeds from sale of trading marketable securities | 18,975 |  |  | — |
Exit costs on property dispositions | (4,066 | ) |  | — |
Payments in connection with early extinguishment of debt | (2,637 | ) |  | (350 | )
Interest and other income received | 786 |  |  | 377 |
Income taxes paid | (8 | ) |  | (174 | )
Net cash provided by operating activities | 139,676 |  |  | 104,866 |
Cash flows from investing activities |  |  |  |  |
Purchases of and additions to properties |  |  |  |  |
Construction, development and redevelopment | (107,621 | ) |  | (169,873 | )
Acquisitions of operating properties | (48,308 | ) |  | (32,806 | )
Tenant improvements on operating properties | (20,924 | ) |  | (27,421 | )
Other capital improvements on operating properties | (9,571 | ) |  | (11,575 | )
Proceeds from sales of properties | 290,607 |  |  | 27,312 |
Proceeds from sale of equity method investment | — |  |  | 5,773 |
Mortgage and other loan receivables funded or acquired | (11,603 | ) |  | (20,401 | )
Mortgage and other loan receivables payments received | 119 |  |  | 5,203 |
Leasing costs paid | (7,289 | ) |  | (10,357 | )
Other | (1,646 | ) |  | (3,580 | )
Net cash provided by (used in) investing activities | 83,764 |  |  | (237,725 | )
Cash flows from financing activities |  |  |  |  |
Proceeds from debt |  |  |
Revolving Credit Facility | 262,000 |  |  | 1,110,000 |
Other debt proceeds | 399,296 |  |  | 438,619 |
Repayments of debt |  |  |
Revolving Credit Facility | (844,000 | ) |  | (734,000 | )
Scheduled principal amortization | (9,094 | ) |  | (10,647 | )
Other debt repayments | (51,850 | ) |  | (698,050 | )
Deferred financing costs paid | (3,210 | ) |  | (12,771 | )
Net proceeds from issuance of preferred shares | 165,662 |  |  | — |
Net proceeds from issuance of common shares | 661 |  |  | 147,781 |
Redemption of preferred shares | (55,000 | ) |  | — |
Common share dividends paid | (69,325 | ) |  | (84,971 | )
Preferred share dividends paid | (12,345 | ) |  | (12,076 | )
Distributions paid to noncontrolling interests in the Operating Partnership | (4,510 | ) |  | (5,937 | )
Restricted share redemptions | (3,279 | ) |  | (3,948 | )
Other | 1,004 |  |  | 261 |
Net cash (used in) provided by financing activities | (223,990 | ) |  | 134,261 |
Net (decrease) increase in cash and cash equivalents | (550 | ) |  | 1,402 |
Cash and cash equivalents |  |  |  |  |
Beginning of period | 5,559 |  |  | 10,102 |
End of period | $ | 5,009 |  |  | $ | 11,504 |

See accompanying notes to consolidated financial statements.
7

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(unaudited)

| For the Nine Months Ended September 30,
| 2012 |  | 2011
Reconciliation of net loss to net cash provided by operating activities: |  |  |  |  |
Net loss | $ | (1,927 | ) |  | $ | (37,103 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |
Depreciation and other amortization | 95,248 |  |  | 102,963 |
Impairment losses | 60,593 |  |  | 72,347 |
Settlement of previously accreted interest expense | — |  |  | (17,314 | )
Amortization of deferred financing costs | 4,696 |  |  | 5,090 |
Increase in deferred rent receivable | (7,939 | ) |  | (7,587 | )
Amortization of net debt discounts | 2,357 |  |  | 4,778 |
Gain on sales of real estate | (20,969 | ) |  | (4,166 | )
Gain on equity method investment | — |  |  | (2,452 | )
Share-based compensation | 8,262 |  |  | 8,156 |
(Gain) loss on early extinguishment of debt | (3,436 | ) |  | 1,670 |
Other | (459 | ) |  | 18 |
Changes in operating assets and liabilities: |  |  |  |
Decrease (increase) in accounts receivable | 10,063 |  |  | (1,311 | )
Decrease in restricted cash and marketable securities | 15,051 |  |  | 3,035 |
Decrease (increase) in prepaid expenses and other assets | 5,501 |  |  | (8,197 | )
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 3,413 |  |  | (11,699 | )
Decrease in rents received in advance and security deposits | (2,775 | ) |  | (3,362 | )
Decrease in interest rate derivatives in connection with cash settlement | (28,003 | ) |  | — |
Net cash provided by operating activities | $ | 139,676 |  |  | $ | 104,866 |
Supplemental schedule of non-cash investing and financing activities: |  |  |  |  |
(Decrease) increase in accrued capital improvements, leasing and other investing activity costs | $ | (11,627 | ) |  | $ | 25,314 |
Increase in property, debt and other liabilities in connection with acquisitions | $ | — |  |  | $ | 3,040 |
Decrease in property in connection with surrender of property in settlement of debt | $ | 12,812 |  |  | $ | — |
Decrease in debt in connection with surrender of property in settlement of debt | $ | 16,304 |  |  | $ | — |
Decrease in fair value of derivatives applied to AOCL and noncontrolling interests | $ | 4,398 |  |  | $ | 27,064 |
Dividends/distribution payable | $ | 26,954 |  |  | $ | 35,029 |
Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares | $ | 1,188 |  |  | $ | 1,276 |
Adjustments to noncontrolling interests resulting from changes in ownership of Operating Partnership by COPT | $ | 373 |  |  | $ | 2,542 |

See accompanying notes to consolidated financial statements.
8

Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Organization
Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company,” “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of strategic customers in the United States Government and defense information technology sectors. We acquire, develop, manage and lease office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in office markets that we believe possess growth opportunities. As of September 30, 2012, our investments in real estate included the following:

• | 206 operating office properties totaling 18.6 million square feet;

• | ten office properties under construction or redevelopment that we estimate will total approximately 1.2 million square feet upon completion, including two partially operational properties included above;

• | land held or under pre-construction totaling 1,696 acres (including 572 controlled but not owned) that we believe are potentially developable into approximately 19.8 million square feet; and

• | a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.

We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), of which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). A summary of our Operating Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of September 30, 2012 follows:

Common Units | 94 | %
Series H Preferred Units | 100 | %
Series I Preferred Units | 0 | %
Series J Preferred Units | 100 | %
Series K Preferred Units | 100 | %
Series L Preferred Units | 100 | %

Three of our trustees also controlled, either directly or through ownership by other entities or family members, an additional 5% of the Operating Partnership’s common units (“common units”) as of September 30, 2012.
In addition to owning real estate, the Operating Partnership also owns entities that provide real estate services such as property management and construction and development services primarily for our properties but also for third parties.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which we have 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 the entity’s operations but cannot control the entity’s operations.
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.
These interim financial statements should be read together with the financial statements and notes thereto as of and for the year ended December 31, 2011 included in our 2011 Annual Report on Form 10-K. The unaudited consolidated financial
9

statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. All adjustments are of a normal recurring nature except for the out-of-period adjustment described below. The consolidated financial statements have been prepared using the accounting policies described in our 2011 Annual Report on Form 10-K.
During the second quarter of 2012, we identified an error in the consolidated financial statements for the year ended December 31, 2011 and the quarter ended March 31, 2012. The error was attributable to the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012. The effect of this error was an overstatement of our income tax benefit and an understatement of our net loss for the year ended December 31, 2011 of $4.0 million ($0.05 per share). During the first quarter of 2012, we identified an error that impacted the above-referenced periods. The error was an over-accrual of incentive compensation cost. The effect of this error was an overstatement of general and administrative expenses and an overstatement of net loss for the year ended December 31, 2011 of $0.7 million ($0.01 per share). The net impact of these errors was an understatement of our net loss for the year ended December 31, 2011 of $3.3 million ($0.04 per share). We have determined that the errors were not material in 2011 and are not material to our expected annual results for the year ending December 31, 2012. Accordingly, this cumulative change is reported as an out-of-period adjustment in the three months ended March 31, 2012 and nine months ended September 30, 2012 as follows: a reduction in net income of $3.3 million ($0.04 per share); an increase in income tax expense of $4.0 million ($0.05 per share); and a decrease in general and administrative expenses of approximately $0.7 million ($0.01 per share) on our consolidated statements of operations.
Reclassifications
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity. Included among these reclassifications are retrospective changes in the presentation of:

• | our preferred shares of beneficial interest; these shares are reported on our consolidated balance sheets at their liquidation preference value after having been reported at par value in our 2011 Annual Report on Form 10-K; and

• | costs expensed in connection with properties not in operations; these costs are included in the line on our consolidated statements of operations entitled “business development expenses and land carry costs,” after having been included in property operating expenses in our 2011 Annual Report on Form 10-K.

Recent Accounting Pronouncements
We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2012 related to the presentation of comprehensive income that requires us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted this guidance using retrospective application. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. Our adoption of this guidance did not affect our financial position, results of operations, cash flows or measurement of comprehensive income but did change the location of our disclosure pertaining to comprehensive income in our consolidated financial statements.
We adopted guidance issued by the FASB effective January 1, 2012 that amends measurement and disclosure requirements related to fair value measurements to improve consistency with International Financial Reporting Standards. In connection with our adoption of this guidance, we made an accounting policy election to use an exception provided for in the guidance with respect to measuring counterparty credit risk for derivative instruments; this election enables us to continue 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 at the measurement date. Our adoption of this guidance did not affect our financial position, results of operations or cash flows but did result in additional disclosure pertaining to our fair value measurements.
We adopted guidance issued by the FASB effective January 1, 2012 relating to the testing of goodwill for impairment that permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. This guidance eliminates the requirement to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Our adoption of this guidance did not materially affect our consolidated financial statements or disclosures.
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In July 2012, the FASB issued guidance on the testing of indefinite-lived intangible assets for impairment that permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of such an asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. This guidance permits an entity to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This guidance will be effective for us in 2013 and early adoption is permitted. We do not believe that this guidance will have a material effect on our consolidated financial statements or disclosures.
3. Fair Value Measurements
For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2011 Annual Report on Form 10-K.
Recurring Fair Value Measurements
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2012 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

Description |  | Quoted Prices in Active Markets for Identical Assets(Level 1) |  | Significant Other Observable Inputs(Level 2) |  | Significant Unobservable Inputs(Level 3) |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Marketable securities in deferred compensation plan (1) |  |  |  |  |  |  |  |  |  |  |  |
Mutual funds |  | $ | 6,161 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,161 |
Common stocks |  | 533 |  |  | — |  |  | — |  |  | 533 |
Other |  | 242 |  |  | — |  |  | — |  |  | 242 |
Common stock (1) |  | 438 |  |  | — |  |  | — |  |  | 438 |
Warrants to purchase common shares in KEYW (2) |  | — |  |  | 295 |  |  | — |  |  | 295 |
Assets |  | $ | 7,374 |  |  | $ | 295 |  |  | $ | — |  |  | $ | 7,669 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Deferred compensation plan liability (3) |  | $ | 6,936 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,936 |
Interest rate derivatives |  | — |  |  | 6,543 |  |  | — |  |  | 6,543 |
Liabilities |  | $ | 6,936 |  |  | $ | 6,543 |  |  | $ | — |  |  | $ | 13,479 |

(1) Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheet.
At December 31, 2011, we owned 1.9 million shares, or approximately 7%, of the common stock of The KEYW Holding Corporation (“KEYW”). During the nine months ended September 30, 2012, we completed the sale of all of these shares for $14.0 million. At September 30, 2012 and December 31, 2011, we owned warrants to purchase 50,000 shares of KEYW common stock at an exercise price of $9.25 per share.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. We estimated the fair values of our mortgage loans receivable as discussed in Note 7 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 8 to the consolidated financial statements, we estimated the fair value of our exchangeable senior notes based on quoted market prices 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 of 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 7 for mortgage loans receivable, Note 8 for debt and Note 9 for
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interest rate derivatives.
Nonrecurring Fair Value Measurements
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. Each quarter, we also review the reasonableness of changes in our estimated operating property fair values from amounts estimated in the prior quarter. If events or changes in circumstances indicate that the carrying values of certain operating properties, properties in development or land held for future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods. If the recovery analysis indicates that the carrying value of a tested property is not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans. Changes in holding periods may require us to recognize significant impairment losses.
Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. The estimated cash flows used 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 third party sources such as CoStar Group and real estate leasing and brokerage firms and our direct experience with the properties and their markets.
We recognized impairment losses on certain properties and other assets associated with such properties during the three and nine months ended September 30, 2012. Accordingly, certain properties and related assets were adjusted to fair value. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values (dollars in thousands):

|  |  |  |  |  |  |  |  |  | Impairment Losses
|  | Quoted Prices in |  |  |  | Significant |  |  |  | Recognized (1)
|  | Active Markets for |  | Significant Other |  | Unobservable |  |  |  | Three Months |  | Nine Months
|  | Identical Assets |  | Observable Inputs |  | Inputs |  |  |  | Ended |  | Ended
Description |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | Total |  | September 30, 2012 |  | September 30, 2012
Assets (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Properties, net |  | $ | — |  |  | $ | — |  |  | $ | 369,312 |  |  | $ | 369,312 |  |  | $ | 52,900 |  |  | $ | 60,593 |

(1) Represents impairment losses, excluding exit costs of $2.9 million for the three months ended September 30, 2012 and $4.2 million for the nine months ended September 30, 2012.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.
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The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):

Description |  | Fair Value on Measurement Date |  | Valuation Technique |  | Unobservable Input |  | Range (Weighted Average)
Properties on which impairment losses were recognized |  | $ | 369,312 |  |  | Bid for properties indicative of value |  | Indicative bid (1) |  | (1)
|  |  |  | Contract of sale |  | Contract price (1) |  | (1)
|  |  |  | Discounted cash flow |  | Discount rate |  | 10.1% to 11.0% (10.4%)
|  |  |  |  |  | Terminal capitalization rate |  | 8.7% to 10.0% (8.9%)
|  |  |  |  |  | Market rent growth rate |  | 3.0% (2)
|  |  |  |  |  | Expense growth rate |  | 3.0% (2)
|  |  |  | Yield Analysis |  | Yield |  | 12% (2)
|  |  |  |  |  | Market rent rate |  | $8.50 per square foot (2)
|  |  |  |  |  | Leasing costs |  | $20.00 per square foot (2)

(1) These fair value measurements were developed from third party sources, subject to our corroboration for reasonableness.
(2) Only one value applied to this unobservable input.
4. Properties, net
Operating properties, net consisted of the following (in thousands):

| September 30, 2012 |  | December 31, 2011
Land | $ | 427,559 |  |  | $ | 472,483 |
Buildings and improvements | 2,626,084 |  |  | 2,801,252 |
Less: accumulated depreciation | (565,724 | ) |  | (559,679 | )
Operating properties, net | $ | 2,487,919 |  |  | $ | 2,714,056 |

Projects we had in development or held for future development consisted of the following (in thousands):

| September 30, 2012 |  | December 31, 2011
Land | $ | 220,234 |  |  | $ | 229,833 |
Construction in progress, excluding land | 394,361 |  |  | 409,086 |
Projects in development or held for future development | $ | 614,595 |  |  | $ | 638,919 |

Dispositions and Impairments
Operating property dispositions during the nine months ended September 30, 2012 consisted of the following (dollars in thousands):
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Project Name |  | Location |  | Date of Sale |  | Number of Buildings |  | Total Rentable Square Feet |  | Transaction Value |  | Gain on Disposition
White Marsh Portfolio Disposition |  | White Marsh, Maryland |  | 1/30/2012 |  | 5 |  |  | 163,000 |  |  | $ | 19,100 |  |  | $ | 2,445 |
1101 Sentry Gateway |  | San Antonio, Texas |  | 1/31/2012 |  | 1 |  |  | 95,000 |  |  | 13,500 |  |  | 1,739 |
222 and 224 Schilling Circle |  | Hunt Valley, Maryland |  | 2/10/2012 |  | 2 |  |  | 56,000 |  |  | 4,400 |  |  | 102 |
15 and 45 West Gude Drive |  | Rockville, Maryland |  | 5/2/2012 |  | 2 |  |  | 231,000 |  |  | 49,107 |  |  | — |
11800 Tech Road |  | Silver Spring, Maryland |  | 6/14/2012 |  | 1 |  |  | 240,000 |  |  | 21,300 |  |  | — |
400 Professional Drive |  | Gaithersburg, Maryland |  | 7/2/2012 |  | 1 |  |  | 130,000 |  |  | 16,198 |  |  | — |
July 2012 Portfolio Disposition |  | Baltimore/Washington Corridor and Greater Baltimore |  | 7/24/2012 |  | 23 |  |  | 1,387,000 |  |  | 161,901 |  |  | 16,908 |
|  |  |  |  |  | 35 |  |  | 2,302,000 |  |  | $ | 285,506 |  |  | $ | 21,194 |

Each of the above dispositions represent property sales except for 400 Professional Drive, the disposition of which was completed in connection with a debt extinguishment, as described further below. We also had dispositions of non-operating properties during the nine months ended September 30, 2012 for aggregate transaction values totaling $28.1 million; in addition to the gain on sales reflected above, we also recognized impairment losses on certain of these sales that are disclosed below.
On July 2, 2012, the mortgage lender on a $15 million nonrecourse mortgage loan that was secured by our 400 Professional Drive property accepted a deed in lieu of foreclosure on the property. As a result, we transferred title to the property to the mortgage lender and we were relieved of the debt obligation plus accrued interest. As of the transfer date, the property had an estimated fair value of $11 million. Upon completion of this transfer, we recognized a gain on extinguishment of debt of $3.7 million, representing the difference between the mortgage loan and interest payable extinguished over the fair value of the property transferred as of the transfer date.
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, Pennsylvania because the properties no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, during the three months ended September 30, 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. These losses contemplate our expectation that we will incur future cash expenditures of approximately $25 million to complete the redevelopment of certain of these properties.
As discussed in our 2011 Annual Report on Form 10-K, we implemented a plan in 2011 (the “Strategic Reallocation Plan”) to dispose of office properties and land that are no longer closely aligned with our strategy. During the nine months ended September 30, 2012, we recognized aggregate net impairment losses in connection with the Strategic Reallocation Plan of $18.7 million ($23.5 million classified as discontinued operations and including $4.2 million in exit costs), including $6.9 million pertaining to certain properties in Colorado Springs, Colorado classified as held for sale at September 30, 2012. Approximately $5.1 million of these losses related to our disposition of an additional property from which the cash flows were not sufficient to recover its carrying value.
The table below sets forth the impairment losses and exit costs recognized in the nine months ended September 30, 2012 by period of recognition and by property classification (in thousands):

| Three Months Ended
| 9/30/2012 |  | 6/30/2012 |  | 3/31/2012 |  | Total
Operating properties | $ | 55,829 |  |  | $ | 2,354 |  |  | $ | 11,833 |  |  | $ | 70,016 |
Non-operating properties | — |  |  | — |  |  | (5,246 | ) |  | (5,246 | )
Total | $ | 55,829 |  |  | $ | 2,354 |  |  | $ | 6,587 |  |  | $ | 64,770 |

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2012 Acquisition
On July 11, 2012, we acquired 13857 McLearen Road, a 202,000 square foot office property in Herndon, Virginia that was 100% leased, for $48.3 million. The table below sets forth the allocation of the acquisition costs of this property (in thousands):

Land, operating properties |  | $ | 3,507 |
Building and improvements |  | 30,177 |
Intangible assets on real estate acquisitions |  | 14,993 |
Total assets |  | 48,677 |
Below-market leases |  | (369 | )
Total acquisition cost |  | $ | 48,308 |

Intangible assets recorded in connection with the above acquisition included the following (dollars in thousands):

|  |  | Weighted Average Amortization Period (in Years)
Tenant relationship value | $ | 7,472 |  |  | 10
In-place lease value | 7,109 |  |  | 5
Above-market leases | 412 |  |  | 5
| $ | 14,993 |  |  | 7

We expensed $229,000 in operating property acquisition costs during the nine months ended September 30, 2012 that are included in business development expenses and land carry costs on our consolidated statements of operations.
2012 Construction Activities
As of September 30, 2012, we had construction underway on eight office properties that we estimate will total 913,000 square feet upon completion, including four in the Baltimore/Washington Corridor, two in Huntsville, Alabama, one in Greater Baltimore and one in Northern Virginia. We also had redevelopment underway on two office properties in Greater Philadelphia that we estimate will total 297,000 square feet upon completion.
5. Real Estate Joint Ventures
During the nine months ended September 30, 2012, we had an investment in one unconsolidated real estate joint venture accounted for using the equity method of accounting. Information pertaining to this joint venture investment is set forth below (dollars in thousands):

Investment Balance at (1) |  | Date |  |  |  | Nature of |  | Maximum Exposure
September 30, 2012 |  | December 31, 2011 |  | Acquired |  | Ownership |  | Activity |  | to Loss (2)
$ | (6,420 | ) |  | $ | (6,071 | ) |  | 9/29/2005 |  | 20% |  | Operates 16 Buildings |  | $ | — |

(1) The carrying amount of our investment in this joint venture was lower than our share of the equity in the joint venture by $5.2 million at September 30, 2012 and December 31, 2011 due to our deferral of gain on the contribution by us of real estate into the joint venture upon its formation. A difference will continue to exist to the extent the nature of our continuing involvement in the joint venture remains the same.
(2) Derived from the sum of our investment balance and maximum additional unilateral capital contributions or loans required from us. Not reported above are additional amounts that we and our partner are required to fund when needed by this joint venture; these funding requirements are proportional to our respective ownership percentages. Also not reported above are additional unilateral contributions or loans from us, the amounts of which are uncertain, that we would be required to make if certain contingent events occur (see Note 16).
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The following table sets forth condensed balance sheets for this unconsolidated real estate joint venture (in thousands):

| September 30, 2012 |  | December 31, 2011
Properties, net | $ | 58,763 |  |  | $ | 59,792 |
Other assets | 4,223 |  |  | 3,529 |
Total assets | $ | 62,986 |  |  | $ | 63,321 |
Liabilities (primarily debt) | $ | 69,120 |  |  | $ | 67,710 |
Owners’ equity | (6,134 | ) |  | (4,389 | )
Total liabilities and owners’ equity | $ | 62,986 |  |  | $ | 63,321 |

The following table sets forth condensed statements of operations for this unconsolidated real estate joint venture (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Revenues | $ | 1,778 |  |  | $ | 1,905 |  |  | $ | 5,497 |  |  | $ | 5,719 |
Property operating expenses | (758 | ) |  | (904 | ) |  | (2,219 | ) |  | (2,869 | )
Interest expense | (1,138 | ) |  | (984 | ) |  | (3,291 | ) |  | (2,983 | )
Depreciation and amortization expense | (568 | ) |  | (578 | ) |  | (1,732 | ) |  | (1,753 | )
Net loss | $ | (686 | ) |  | $ | (561 | ) |  | $ | (1,745 | ) |  | $ | (1,886 | )

In October 2012, the holder of mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings.
The table below sets forth information pertaining to our investments in consolidated real estate joint ventures at September 30, 2012 (dollars in thousands):

|  |  |  | Ownership |  |  |  | September 30, 2012 | (1)
|  | Date |  | % at |  |  |  | Total |  | Pledged |  | Total
|  | Acquired |  | 9/30/2012 |  | Nature of Activity |  | Assets |  | Assets |  | Liabilities
LW Redstone Company, LLC |  | 3/23/2010 |  | 85% |  | Developing business park (2) |  | $ | 68,494 |  |  | $ | 16,146 |  |  | $ | 13,364 |
M Square Associates, LLC |  | 6/26/2007 |  | 50% |  | Operating two buildings and developing others (3) |  | 60,608 |  |  | 47,642 |  |  | 43,762 |
Arundel Preserve #5, LLC |  | 7/2/2007 |  | 50% |  | Operating one building (4) |  | 38,636 |  |  | 36,838 |  |  | 20,118 |
COPT-FD Indian Head, LLC |  | 10/23/2006 |  | 75% |  | Holding land parcel (5) |  | 6,538 |  |  | — |  |  | — |
MOR Forbes 2 LLC |  | 12/24/2002 |  | 50% |  | Operating one building (6) |  | 3,831 |  |  | — |  |  | 95 |
|  |  |  |  |  |  |  | $ | 178,107 |  |  | $ | 100,626 |  |  | $ | 77,339 |

(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 Suburban Maryland region).
(4) This joint venture’s property is in Hanover, Maryland (in the Baltimore/Washington Corridor).
(5) This joint venture’s property is in Charles County, Maryland. In 2012, the joint venture exercised its option under a development agreement to require Charles County to repurchase the land parcel at its original acquisition cost. Under the terms of the agreement with Charles County, the repurchase is expected to occur by August 2014.
(6) This joint venture’s property is in Lanham, Maryland (in the Suburban Maryland region).
Our commitments and contingencies pertaining to our real estate joint ventures are disclosed in Note 16.
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6. Intangible Assets on Real Estate Acquisitions
Intangible assets on real estate acquisitions consisted of the following (in thousands):

|  | September 30, 2012 |  | December 31, 2011
|  | Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Amount |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Amount
In-place lease value |  | $ | 134,964 |  |  | $ | 89,808 |  |  | $ | 45,156 |  |  | $ | 151,361 |  |  | $ | 97,594 |  |  | $ | 53,767 |
Tenant relationship value |  | 46,827 |  |  | 22,192 |  |  | 24,635 |  |  | 45,940 |  |  | 23,246 |  |  | 22,694 |
Above-market cost arrangements |  | 12,416 |  |  | 3,789 |  |  | 8,627 |  |  | 12,416 |  |  | 2,857 |  |  | 9,559 |
Above-market leases |  | 8,925 |  |  | 7,278 |  |  | 1,647 |  |  | 10,118 |  |  | 8,037 |  |  | 2,081 |
Market concentration premium |  | 1,333 |  |  | 339 |  |  | 994 |  |  | 1,333 |  |  | 314 |  |  | 1,019 |
|  | $ | 204,465 |  |  | $ | 123,406 |  |  | $ | 81,059 |  |  | $ | 221,168 |  |  | $ | 132,048 |  |  | $ | 89,120 |

Amortization of the intangible asset categories set forth above totaled $16.2 million in the nine months ended September 30, 2012 and $20.7 million in the nine months ended September 30, 2011. The approximate weighted average amortization periods of the categories set forth above follow: in-place lease value: seven years; tenant relationship value: eight years; above-market cost arrangements: 27 years; above-market leases: four years; and market concentration premium: 30 years. The approximate weighted average amortization period for all of the categories combined is ten years. Estimated amortization expense associated with the intangible asset categories set forth above for the next five years is: $4.3 million for the three months ending December 31, 2012; $14.3 million for 2013; $12.3 million for 2014; $10.6 million for 2015; $9.5 million for 2016; and $7.1 million for 2017.
7. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):

| September 30, 2012 |  | December 31, 2011
Mortgage and other investing receivables | $ | 40,761 |  |  | $ | 27,998 |
Prepaid expenses | 24,396 |  |  | 20,035 |
Furniture, fixtures and equipment, net | 8,657 |  |  | 10,177 |
Deferred tax asset | 6,666 |  |  | 10,892 |
Lease incentives | 5,595 |  |  | 5,233 |
Other assets | 6,472 |  |  | 13,284 |
Prepaid expenses and other assets | $ | 92,547 |  |  | $ | 87,619 |

Mortgage and Other Investing Receivables
Mortgage and other investing receivables consisted of the following (in thousands):

| September 30, 2012 |  | December 31, 2011
Notes receivable from City of Huntsville | $ | 30,623 |  |  | $ | 17,741 |
Mortgage loans receivable | 10,138 |  |  | 10,257 |
| $ | 40,761 |  |  | $ | 27,998 |

Our notes receivable from the City of Huntsville funded infrastructure costs in connection with our LW Redstone Company, LLC joint venture (see Note 5). Our mortgage loans receivable reflected above consists of two loans secured by properties in Greater Baltimore and the Baltimore/Washington Corridor. We did not have an allowance for credit losses in connection with these receivables at September 30, 2012 or December 31, 2011. The fair value of our mortgage and other investing receivables totaled $40.7 million at September 30, 2012 and $28.0 million at December 31, 2011.
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Operating Notes Receivable
We had operating notes receivable due from tenants with terms exceeding one year totaling $373,000 at September 30, 2012 and $530,000 at December 31, 2011. We carried allowances for estimated losses for most of these balances.
8. Debt
Our debt consisted of the following (dollars in thousands):

| Maximum |  |  |  |  |  |  |  |
| Availability at |  | Carrying Value at |  |  |  | Scheduled Maturity
| September 30, 2012 |  | September 30, 2012 |  | December 31, 2011 |  | Stated Interest Rates at |  | Dates at
|  |  |  | September 30, 2012 |  | September 30, 2012
Mortgage and Other Secured Loans: |  |  |  |  |  |  |  |  |  |  |  |
Fixed rate mortgage loans (1) | N/A |  |  | $ | 978,461 |  |  | $ | 1,052,421 |  |  | 5.20% - 7.87% (2) |  | 2013-2034
Variable rate secured loans | N/A |  |  | 38,671 |  |  | 39,213 |  |  | LIBOR + 2.25% (3) |  | 2015
Other construction loan facilities | $ | 123,802 |  |  | 70,374 |  |  | 40,336 |  |  | LIBOR + 1.95% to 2.75% (4) |  | 2013-2015
Total mortgage and other secured loans |  |  |  | 1,087,506 |  |  | 1,131,970 |  |  |  |  |
Revolving Credit Facility (5) | 800,000 |  |  | 80,000 |  |  | 662,000 |  |  | LIBOR + 1.75% to 2.50% (6) |  | September 1, 2014
Term Loan Facilities (7) | 770,000 |  |  | 770,000 |  |  | 400,000 |  |  | LIBOR + 1.65% to 2.60% (8) |  | 2015-2019
Unsecured notes payable | N/A |  |  | 1,809 |  |  | 5,050 |  |  | 0% (9) |  | 2026
4.25% Exchangeable Senior Notes | N/A |  |  | 230,000 |  |  | 227,283 |  |  | 4.25% |  | April 2030 (10)
Total debt |  |  |  | $ | 2,169,315 |  |  | $ | 2,426,303 |  |  |  |  |

(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 $1.5 million at September 30, 2012 and $2.4 million at December 31, 2011.

(2) | The weighted average interest rate on these loans was 6.00% at September 30, 2012.

(3) | The interest rate on the loan outstanding was 2.48% at September 30, 2012.

(4) | The weighted average interest rate on these loans was 2.72% at September 30, 2012.

(5) | Effective August 10, 2012, we exercised our right to reduce the lenders’ aggregate commitment under the facility from $1.0 billion to $800 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.

(6) | The weighted average interest rate on the Revolving Credit Facility was 2.19% at September 30, 2012.

(7) | We have the ability to borrow an aggregate of an additional $180.0 million under these term loan facilities, provided that there is no default under the facilities and subject to the approval of the lenders. As described further below, we entered into new facilities in 2012.

(8) | The weighted average interest rate on these loans was 2.19% at September 30, 2012.

(9) | 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 $902,000 at September 30, 2012 and $1.8 million at December 31, 2011.

(10) | As described further in our 2011 Annual Report on Form 10-K, these notes have an exchange settlement feature that provides that the notes may, under certain circumstances, be exchangeable for cash and, at the Operating Partnership’s discretion, our 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 September 30, 2012 and is equivalent to an exchange price of $47.96 per common share). The carrying value of these notes included a principal amount of $240 million and an unamortized discount totaling $10.0 million at September 30, 2012 and $12.7 million at December 31, 2011. The effective interest rate under the notes, including amortization of the issuance costs, was 6.05%. Because the closing price of our common shares at September 30, 2012 and December 31, 2011 was less than the exchange price per common share applicable to these notes, the if-converted value of the notes did not exceed the principal amount. The table below sets forth interest expense recognized on these notes before deductions for amounts capitalized (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Interest expense at stated interest rate | $ | 2,550 |  |  | $ | 2,550 |  |  | $ | 7,650 |  |  | $ | 7,650 |
Interest expense associated with amortization of discount | 919 |  |  | 866 |  |  | 2,717 |  |  | 2,558 |
Total | $ | 3,469 |  |  | $ | 3,416 |  |  | $ | 10,367 |  |  | $ | 10,208 |

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
18

million under the term loan. The term loan matures on February 14, 2017. The variable interest rate on the loan is based on the LIBOR rate (customarily the 30-day rate) plus 1.65% to 2.40%, as determined by our leverage levels.
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 million under the term loan, with the ability for us to borrow an additional $80 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.
We capitalized interest costs of $3.4 million in the three months ended September 30, 2012, $4.5 million in the three months ended September 30, 2011, $10.8 million in the nine months ended September 30, 2012 and $13.1 million in the nine months ended September 30, 2011.
The following table sets forth information pertaining to the fair value of our debt (in thousands):

| September 30, 2012 |  | December 31, 2011
| Carrying |  | Estimated |  | Carrying |  | Estimated
| Amount |  | Fair Value |  | Amount |  | Fair Value
Fixed-rate debt |  |  |  |  |  |  |  |  |  |  |
4.25% Exchangeable Senior Notes | $ | 230,000 |  |  | $ | 240,335 |  |  | $ | 227,283 |  |  | $ | 238,077 |
Other fixed-rate debt | 980,270 |  |  | 992,977 |  |  | 1,057,471 |  |  | 1,054,424 |
Variable-rate debt | 959,045 |  |  | 959,944 |  |  | 1,141,549 |  |  | 1,139,856 |
| $ | 2,169,315 |  |  | $ | 2,193,256 |  |  | $ | 2,426,303 |  |  | $ | 2,432,357 |

9. Interest Rate Derivatives
The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):

|  |  |  |  |  |  |  |  |  | Fair Value at
Notional Amount |  | Fixed Rate |  | Floating Rate Index |  | Effective Date |  | Expiration Date |  | September 30, 2012 |  | December 31, 2011
$ | 100,000 |  |  | 0.6123 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2014 |  | $ | (671 | ) |  | $ | 55 |
100,000 |  |  | 0.6100 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2014 |  | (667 | ) |  | 56 |
100,000 |  |  | 0.8320 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2015 |  | (1,447 | ) |  | (66 | )
100,000 |  |  | 0.8320 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2015 |  | (1,447 | ) |  | (49 | )
38,671 |  | (1) | 3.8300 | % |  | One-Month LIBOR |  | 11/2/2010 |  | 11/2/2015 |  | (1,393 | ) |  | (1,054 | )
100,000 |  |  | 0.8055 | % |  | One-Month LIBOR |  | 9/2/2014 |  | 9/1/2016 |  | (262 | ) |  | — |
100,000 |  |  | 0.8100 | % |  | One-Month LIBOR |  | 9/2/2014 |  | 9/1/2016 |  | (272 | ) |  | — |
100,000 |  |  | 1.6730 | % |  | One-Month LIBOR |  | 9/1/2015 |  | 8/1/2019 |  | (123 | ) |  | — |
100,000 |  |  | 1.7300 | % |  | One-Month LIBOR |  | 9/1/2015 |  | 8/1/2019 |  | (261 | ) |  | — |
50,000 |  |  | 0.5025 | % |  | One-Month LIBOR |  | 1/3/2011 |  | 1/3/2012 |  | — |  |  | (1 | )
50,000 |  |  | 0.5025 | % |  | One-Month LIBOR |  | 1/3/2011 |  | 1/3/2012 |  | — |  |  | (1 | )
120,000 |  |  | 1.7600 | % |  | One-Month LIBOR |  | 1/2/2009 |  | 5/1/2012 |  | — |  |  | (552 | )
100,000 |  |  | 1.9750 | % |  | One-Month LIBOR |  | 1/1/2010 |  | 5/1/2012 |  | — |  |  | (532 | )
100,000 |  | (2) | 3.8415 | % |  | Three-Month LIBOR |  | 9/30/2011 |  | 9/30/2021 |  | — |  |  | (16,333 | )
75,000 |  | (2) | 3.8450 | % |  | Three-Month LIBOR |  | 9/30/2011 |  | 9/30/2021 |  | — |  |  | (12,275 | )
100,000 |  | (2) | 2.0525 | % |  | Three-Month LIBOR-Reverse |  | 12/30/2011 |  | 9/30/2021 |  | — |  |  | 345 |
75,000 |  | (2) | 2.0525 | % |  | Three-Month LIBOR-Reverse |  | 12/30/2011 |  | 9/30/2021 |  | — |  |  | 260 |
|  |  |  |  |  |  |  |  |  |  |  | $ | (6,543 | ) |  | $ | (30,147 | )

(1) | The notional amount of this instrument is scheduled to amortize to $36.2 million.

(2) | As described further in our 2011 Annual Report on Form 10-K, on January 5, 2012, we settled these instruments, along with interest accrued thereon, for an aggregate of $29.7 million. Our policy is to present payments to terminate interest rate swaps entered into in order to hedge forecasted interest payments as operating activities on our consolidated statement of cash flows. Accordingly, the payments to settle these instruments were included in net cash provided by operating activities on our consolidated statement of cash flows.

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Each of the one-month LIBOR interest rate swaps set forth in the table above was designated as cash flow hedges 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 sheet (in thousands):

|  | September 30, 2012 |  | December 31, 2011
Derivatives |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Interest rate swaps designated as cash flow hedges |  | Prepaid expenses and other assets |  | $ | — |  |  | Prepaid expenses and other assets |  | $ | 111 |
Interest rate swaps not designated as hedges |  | N/A |  | — |  |  | Prepaid expenses and other assets |  | 605 |
Interest rate swaps designated as cash flow hedges |  | Interest rate derivatives |  | (6,543 | ) |  | Interest rate derivatives |  | (2,255 | )
Interest rate swaps not designated as hedges |  | N/A |  | — |  |  | Interest rate derivatives |  | (28,608 | )

The table below presents the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Amount of loss recognized in accumulated other comprehensive loss (“AOCL”) (effective portion) | $ | (2,760 | ) |  | $ | (21,869 | ) |  | $ | (7,386 | ) |  | $ | (30,463 | )
Amount of loss reclassified from AOCL into interest expense (effective portion) | (632 | ) |  | (1,179 | ) |  | (3,034 | ) |  | (3,446 | )

Over the next 12 months, we estimate that approximately $2.6 million will be reclassified from AOCL as an increase to interest expense.
We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on any of our indebtedness, we could also be declared in default on our derivative obligations. These agreements also incorporate the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparties. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of September 30, 2012, the fair value of interest rate derivatives in a liability position related to these agreements was $6.5 million, excluding the effects of accrued interest. As of September 30, 2012, 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 $7.1 million.
10. Shareholders’ Equity
On June 27, 2012, we completed the public offering of 6.9 million Series L Cumulative Preferred Shares of beneficial interest (“Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after June 27, 2017. Holders of these shares are entitled to cumulative dividends, payable quarterly (as and if declared by the Board of Trustees). Dividends accrue from the date of issue at the annual rate of $1.84375 per share, which is equal to 7.375% of the $25.00 per share ($172.5 million in the aggregate) liquidation preference. We contributed the net proceeds from the sale to our Operating Partnership in exchange for 6.9 million Series L Preferred Units. The Series L Preferred Units carry terms that are substantially the same as the Series L Preferred Shares.
On August 6, 2012, we redeemed all of our outstanding 8.0% Series G Preferred Shares of beneficial interest (the “Series G Preferred Shares”) at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption. We recognized a $1.8 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series G Preferred Shares at the time of the redemption.
During the nine months ended September 30, 2012, holders of 94,550 common units in our Operating Partnership converted their units into common shares on the basis of one common share for each common unit.
See Note 12 for disclosure of common share activity pertaining to our share-based compensation plans.
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11. Information by Business Segment
We have ten reportable operating office property segments (comprised of: the Baltimore/Washington Corridor; Northern Virginia; San Antonio; Washington, DC — Capitol Riverfront; St. Mary’s and King George Counties; Greater Baltimore; Suburban Maryland; Colorado Springs; Greater Philadelphia; and other). We also have an operating wholesale data center segment. On January 1, 2012, we revised our reportable segments to include only operating properties. Accordingly, we revised net operating income from real estate operations (“NOI from real estate operations”) to exclude operating expenses not related to operating properties, revised our definition of segment assets to include only long-lived assets associated with operating properties and revised our definition of additions to long-lived assets to include only additions to existing operating properties (excluding acquisitions and transfers from non-operating properties). Financial information for prior periods has been presented in conformity with this revision.
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.

| Operating Office Property Segments |  |  |  |
| Baltimore/ Washington Corridor |  | Northern Virginia |  | San Antonio |  | Washington, DC - Capitol Riverfront |  | St. Mary’s & King George Counties |  | Greater Baltimore |  | Suburban Maryland |  | Colorado Springs |  | Greater Philadelphia |  | Other |  | Operating Wholesale Data Center |  | Total
Three Months Ended September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 55,799 |  |  | $ | 20,363 |  |  | $ | 8,125 |  |  | $ | 4,389 |  |  | $ | 4,085 |  |  | $ | 11,918 |  |  | $ | 2,371 |  |  | $ | 6,278 |  |  | $ | 2,541 |  |  | $ | 3,589 |  |  | $ | 1,806 |  |  | $ | 121,264 |
Property operating expenses | 19,069 |  |  | 7,313 |  |  | 4,337 |  |  | 1,959 |  |  | 1,292 |  |  | 4,662 |  |  | 1,058 |  |  | 2,528 |  |  | 736 |  |  | 716 |  |  | 1,346 |  |  | 45,016 |
NOI from real estate operations | $ | 36,730 |  |  | $ | 13,050 |  |  | $ | 3,788 |  |  | $ | 2,430 |  |  | $ | 2,793 |  |  | $ | 7,256 |  |  | $ | 1,313 |  |  | $ | 3,750 |  |  | $ | 1,805 |  |  | $ | 2,873 |  |  | $ | 460 |  |  | $ | 76,248 |
Additions to long-lived assets | $ | 4,454 |  |  | $ | 54,781 |  |  | $ | — |  |  | $ | 414 |  |  | $ | 355 |  |  | $ | 1,055 |  |  | $ | 36 |  |  | $ | 548 |  |  | $ | 195 |  |  | $ | (35 | ) |  | $ | — |  |  | $ | 61,803 |
Transfers from non-operating properties | $ | 12,431 |  |  | $ | 12,979 |  |  | $ | — |  |  | $ | — |  |  | $ | 24 |  |  | $ | 99 |  |  | $ | (88 | ) |  | $ | 315 |  |  | $ | 1,843 |  |  | $ | 548 |  |  | $ | (5 | ) |  | $ | 28,146 |
Three Months Ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 54,744 |  |  | $ | 18,640 |  |  | $ | 7,701 |  |  | $ | 4,507 |  |  | $ | 3,508 |  |  | $ | 18,193 |  |  | $ | 5,648 |  |  | $ | 6,037 |  |  | $ | 1,701 |  |  | $ | 3,167 |  |  | $ | 1,283 |  |  | $ | 125,129 |
Property operating expenses | 19,628 |  |  | 7,278 |  |  | 3,824 |  |  | 1,808 |  |  | 1,143 |  |  | 7,553 |  |  | 1,975 |  |  | 2,465 |  |  | 417 |  |  | 849 |  |  | 1,054 |  |  | 47,994 |
NOI from real estate operations | $ | 35,116 |  |  | $ | 11,362 |  |  | $ | 3,877 |  |  | $ | 2,699 |  |  | $ | 2,365 |  |  | $ | 10,640 |  |  | $ | 3,673 |  |  | $ | 3,572 |  |  | $ | 1,284 |  |  | $ | 2,318 |  |  | $ | 229 |  |  | $ | 77,135 |
Additions to long-lived assets | $ | 3,410 |  |  | $ | 5,420 |  |  | $ | — |  |  | $ | (227 | ) |  | $ | 197 |  |  | $ | 2,034 |  |  | $ | 4,126 |  |  | $ | 1,369 |  |  | $ | 694 |  |  | $ | 26,769 |  |  | $ | 51 |  |  | $ | 43,843 |
Transfers from non-operating properties | $ | 17,625 |  |  | $ | 7 |  |  | $ | 87 |  |  | $ | — |  |  | $ | — |  |  | $ | 343 |  |  | $ | 11 |  |  | $ | 209 |  |  | $ | 48 |  |  | $ | — |  |  | $ | 13,515 |  |  | $ | 31,845 |
Nine Months Ended September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 167,726 |  |  | $ | 57,974 |  |  | $ | 23,563 |  |  | $ | 12,515 |  |  | $ | 12,436 |  |  | $ | 41,954 |  |  | $ | 12,680 |  |  | $ | 18,880 |  |  | $ | 7,171 |  |  | $ | 10,977 |  |  | $ | 4,660 |  |  | $ | 370,536 |
Property operating expenses | 58,285 |  |  | 21,889 |  |  | 12,177 |  |  | 5,585 |  |  | 3,689 |  |  | 16,357 |  |  | 5,461 |  |  | 7,107 |  |  | 2,083 |  |  | 2,201 |  |  | 3,728 |  |  | 138,562 |
NOI from real estate operations | $ | 109,441 |  |  | $ | 36,085 |  |  | $ | 11,386 |  |  | $ | 6,930 |  |  | $ | 8,747 |  |  | $ | 25,597 |  |  | $ | 7,219 |  |  | $ | 11,773 |  |  | $ | 5,088 |  |  | $ | 8,776 |  |  | $ | 932 |  |  | $ | 231,974 |
Additions to long-lived assets | $ | 9,393 |  |  | $ | 57,161 |  |  | $ | 259 |  |  | $ | 116 |  |  | $ | 815 |  |  | $ | 5,390 |  |  | $ | 1,219 |  |  | $ | 1,334 |  |  | $ | 285 |  |  | $ | 124 |  |  | $ | 11 |  |  | $ | 76,107 |
Transfers from non-operating properties | $ | 42,488 |  |  | $ | 12,979 |  |  | $ | 464 |  |  | $ | — |  |  | $ | 218 |  |  | $ | 493 |  |  | $ | 793 |  |  | $ | 2,611 |  |  | $ | 11,233 |  |  | $ | 394 |  |  | $ | 57,675 |  |  | $ | 129,348 |
Segment assets at September 30, 2012 | $ | 1,187,700 |  |  | $ | 535,521 |  |  | $ | 119,752 |  |  | $ | 106,090 |  |  | $ | 97,977 |  |  | $ | 283,996 |  |  | $ | 53,395 |  |  | $ | 173,918 |  |  | $ | 66,301 |  |  | $ | 111,426 |  |  | $ | 100,471 |  |  | $ | 2,836,547 |
Nine Months Ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 160,856 |  |  | $ | 55,359 |  |  | $ | 22,453 |  |  | $ | 13,349 |  |  | $ | 10,606 |  |  | $ | 53,651 |  |  | $ | 16,582 |  |  | $ | 17,869 |  |  | $ | 5,315 |  |  | $ | 8,567 |  |  | $ | 3,769 |  |  | $ | 368,376 |
Property operating expenses | 58,669 |  |  | 22,144 |  |  | 10,775 |  |  | 5,092 |  |  | 3,118 |  |  | 23,238 |  |  | 6,814 |  |  | 6,788 |  |  | 1,180 |  |  | 2,409 |  |  | 2,592 |  |  | 142,819 |
NOI from real estate operations | $ | 102,187 |  |  | $ | 33,215 |  |  | $ | 11,678 |  |  | $ | 8,257 |  |  | $ | 7,488 |  |  | $ | 30,413 |  |  | $ | 9,768 |  |  | $ | 11,081 |  |  | $ | 4,135 |  |  | $ | 6,158 |  |  | $ | 1,177 |  |  | $ | 225,557 |
Additions to long-lived assets | $ | 14,631 |  |  | $ | 10,234 |  |  | $ | — |  |  | $ | 585 |  |  | $ | 1,038 |  |  | $ | 14,237 |  |  | $ | 7,631 |  |  | $ | 3,190 |  |  | $ | 690 |  |  | $ | 26,773 |  |  | $ | 51 |  |  | $ | 79,060 |
Transfers from non-operating properties | $ | 43,648 |  |  | $ | 4 |  |  | $ | 846 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,184 |  |  | $ | 396 |  |  | $ | 211 |  |  | $ | 3,598 |  |  | $ | — |  |  | $ | 20,169 |  |  | $ | 77,056 |
Segment assets at September 30, 2011 | $ | 1,200,407 |  |  | $ | 485,450 |  |  | $ | 115,001 |  |  | $ | 112,865 |  |  | $ | 84,781 |  |  | $ | 438,041 |  |  | $ | 145,677 |  |  | $ | 212,415 |  |  | $ | 101,432 |  |  | $ | 115,777 |  |  | $ | 43,904 |  |  | $ | 3,055,750 |

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The following table reconciles our segment revenues to total revenues as reported on our consolidated statements of operations (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Segment revenues from real estate operations | $ | 121,264 |  |  | $ | 125,129 |  |  | $ | 370,536 |  |  | $ | 368,376 |
Construction contract and other service revenues | 15,283 |  |  | 18,729 |  |  | 53,812 |  |  | 67,854 |
Less: Revenues from discontinued operations (Note 14) | (6,403 | ) |  | (17,151 | ) |  | (33,849 | ) |  | (51,363 | )
Total revenues | $ | 130,144 |  |  | $ | 126,707 |  |  | $ | 390,499 |  |  | $ | 384,867 |

The following table reconciles our segment property operating expenses to property operating expenses as reported on our consolidated statements of operations (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Segment property operating expenses | $ | 45,016 |  |  | $ | 47,994 |  |  | $ | 138,562 |  |  | $ | 142,819 |
Less: Property operating expenses from discontinued operations (Note 14) | (2,217 | ) |  | (6,325 | ) |  | (12,223 | ) |  | (19,684 | )
Total property operating expenses | $ | 42,799 |  |  | $ | 41,669 |  |  | $ | 126,339 |  |  | $ | 123,135 |

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 Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Construction contract and other service revenues | $ | 15,283 |  |  | $ | 18,729 |  |  | $ | 53,812 |  |  | $ | 67,854 |
Construction contract and other service expenses | (14,410 | ) |  | (18,171 | ) |  | (51,302 | ) |  | (65,698 | )
NOI from service operations | $ | 873 |  |  | $ | 558 |  |  | $ | 2,510 |  |  | $ | 2,156 |

The following table reconciles our NOI from real estate operations for reportable segments and NOI from service operations to (loss) income from continuing operations as reported on our consolidated statements of operations (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
NOI from real estate operations | $ | 76,248 |  |  | $ | 77,135 |  |  | $ | 231,974 |  |  | $ | 225,557 |
NOI from service operations | 873 |  |  | 558 |  |  | 2,510 |  |  | 2,156 |
Interest and other income | 1,095 |  |  | (242 | ) |  | 3,152 |  |  | 3,682 |
Equity in loss of unconsolidated entities | (246 | ) |  | (159 | ) |  | (522 | ) |  | (223 | )
Income tax (expense) benefit | (106 | ) |  | 457 |  |  | (4,296 | ) |  | 6,043 |
Other adjustments: | — |  |  |  |  |  | — |  |  |  |
Depreciation and other amortization associated with real estate operations | (28,698 | ) |  | (31,269 | ) |  | (84,920 | ) |  | (84,205 | )
Impairment losses | (46,096 | ) |  | — |  |  | (41,260 | ) |  | (42,983 | )
General and administrative expenses | (5,061 | ) |  | (6,154 | ) |  | (19,820 | ) |  | (19,251 | )
Business development expenses and land carry costs | (1,632 | ) |  | (1,751 | ) |  | (4,506 | ) |  | (4,322 | )
Interest expense on continuing operations | (23,239 | ) |  | (24,176 | ) |  | (71,909 | ) |  | (74,861 | )
NOI from discontinued operations | (4,186 | ) |  | (10,826 | ) |  | (21,626 | ) |  | (31,679 | )
Loss on early extinguishment of debt | (768 | ) |  | (1,611 | ) |  | (937 | ) |  | (1,636 | )
(Loss) income from continuing operations | $ | (31,816 | ) |  | $ | 1,962 |  |  | $ | (12,160 | ) |  | $ | (21,722 | )

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The following table reconciles our segment assets to total assets (in thousands):

| September 30, 2012 |  | September 30, 2011
Segment assets | $ | 2,836,547 |  |  | $ | 3,055,750 |
Non-operating property assets | 616,526 |  |  | 727,268 |
Other assets | 144,583 |  |  | 182,374 |
Total assets | $ | 3,597,656 |  |  | $ | 3,965,392 |

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 and impairment losses 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 loss of unconsolidated entities, income taxes and noncontrolling interests because these items represent general corporate or non-operating property items not attributable to segments.
12. Share-Based Compensation
Performance Share Units (“PSUs”)
On March 1, 2012, our Board of Trustees granted 54,070 PSUs with an aggregate grant date fair value of $1.8 million to executives. The PSUs have a performance period beginning on January 1, 2012 and concluding on the earlier of December 31, 2014 or the date of: (1) termination by the Company without cause, death or disability of the executive or constructive discharge of the executive (collectively, “qualified termination”); or (2) a sale event. The number of PSUs earned (“earned PSUs”) at the end of the performance period will be determined based on the percentile rank of the Company’s total shareholder return relative to a peer group of companies, as set forth in the following schedule:

Percentile Rank |  | Earned PSUs Payout %
75th or greater |  | 200% of PSUs granted
50th or greater |  | 100% of PSUs granted
25th |  | 50% of PSUs granted
Below 25th |  | 0% of PSUs granted

If the percentile rank exceeds the 25th percentile and is between two of the percentile ranks set forth in the table above, then the percentage of the earned PSUs will be interpolated between the ranges set forth in the table above to reflect any performance between the listed percentiles. At the end of the performance period, we, in settlement of the award, will issue a number of fully-vested 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 the Company for cause, all PSUs are forfeited. PSUs do not carry voting rights.
We computed a grant date fair value of $32.77 per PSU using a Monte Carlo model, which included assumptions of, among other things, the following: baseline common share value of $24.39; expected volatility for our common shares of 43.2%; and risk-free interest rate of 0.41%. We are recognizing the grant date fair value in connection with these PSU awards over the performance period.
All PSUs granted on March 4, 2010 and outstanding at December 31, 2011 were held by Mr. Randall M. Griffin, our former Chief Executive Officer, and were terminated upon his retirement on March 31, 2012. Based on the Company’s total shareholder return relative to its peer group of companies, there was no payout value in connection with the termination of the PSUs.
The PSUs granted to our executives on March 3, 2011, as described in our 2011 Annual Report on Form 10-K, were
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outstanding at September 30, 2012.
Restricted Shares
During the nine months ended September 30, 2012, certain employees as well as nonemployee members of our Board of Trustees were granted a total of 156,924 restricted shares with an aggregate grant date fair value of $3.7 million (weighted average of $23.54 per share). Restricted shares 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. The grants of restricted shares to nonemployee Trustees vest on the first anniversary of the grant date provided that the Trustee remains in his or her position. During the nine months ended September 30, 2012, forfeiture restrictions lapsed on 362,959 previously issued common shares; these shares had a weighted average grant date fair value of $32.96 per share, and the aggregate intrinsic value of the shares on the vesting dates was $8.8 million.
Options
During the nine months ended September 30, 2012, 44,624 options to purchase common shares (“options”) were exercised. The weighted average exercise price of these options was $14.94 per share, and the aggregate intrinsic value of the options exercised was $393,000.
13. Income Taxes
We own a taxable REIT subsidiary (“TRS”) that is subject to Federal and state income taxes. Our TRS’s provision for income taxes consisted of the following (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Deferred |  |  |  |  |  |  |  |  |
Federal | $ | (87 | ) |  | $ | 427 |  |  | $ | (3,517 | ) |  | $ | 4,993 |
State | (19 | ) |  | 95 |  |  | (779 | ) |  | 1,105 |
| (106 | ) |  | 522 |  |  | (4,296 | ) |  | 6,098 |
Current |  |  |  |  |  |  |  |  |
Federal | — |  |  | (53 | ) |  | — |  |  | (45 | )
State | — |  |  | (12 | ) |  | — |  |  | (10 | )
| — |  |  | (65 | ) |  | — |  |  | (55 | )
Total income tax (expense) benefit | $ | (106 | ) |  | $ | 457 |  |  | $ | (4,296 | ) |  | $ | 6,043 |

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.
Our TRS’s combined Federal and state effective tax rate was 38.6% for the three and nine months ended September 30, 2012 and 2011.
14. Discontinued Operations and Assets Held for Sale
Income from discontinued operations primarily includes revenues and expenses associated with the following:

• | 1344 and 1348 Ashton Road and 1350 Dorsey Road in the Baltimore/Washington Corridor that were sold on May 24, 2011;

• | 216 Schilling Circle in Greater Baltimore that was sold on August 23, 2011;

• | four properties comprising the Towson Portfolio in Greater Baltimore that were sold on September 29, 2011;

• | 11011 McCormick Road in Greater Baltimore that was sold on November 1, 2011;

• | 10001 Franklin Square Drive in Greater Baltimore that was sold on December 13, 2011;

• | 13 properties comprising the Rutherford Business Center portfolio in Greater Baltimore that were sold on December 15, 2011;

• | five properties in White Marsh, Maryland (in the Greater Baltimore region) that were sold on January 30, 2012;

• | 1101 Sentry Gateway in San Antonio that was sold on January 31, 2012;

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• | 222 and 224 Schilling Circle in Greater Baltimore that were sold on February 10, 2012;

• | 15 and 45 West Gude Drive in Suburban Maryland that were sold on May 2, 2012;

• | 11800 Tech Road in Suburban Maryland that was sold on June 14, 2012;

• | 400 Professional Drive in Suburban Maryland for which the title to the property was transferred to the mortgage lender on July 2, 2012 (see Note 4);

• | 23 operating properties in the Baltimore/Washington Corridor and Greater Baltimore regions that were sold on July 24, 2012; and

• | 16 operating properties in Colorado Springs and an operating property in Suburban Maryland classified as held for sale at September 30, 2012.

The table below sets forth the components of discontinued operations reported on our consolidated statements of operations (in thousands):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Revenue from real estate operations | $ | 6,403 |  |  | $ | 17,151 |  |  | $ | 33,849 |  |  | $ | 51,363 |
Property operating expenses | (2,217 | ) |  | (6,325 | ) |  | (12,223 | ) |  | (19,684 | )
Depreciation and amortization | (1,926 | ) |  | (4,763 | ) |  | (8,457 | ) |  | (16,896 | )
Impairment losses | (9,733 | ) |  | — |  |  | (23,510 | ) |  | (29,364 | )
Business development and land carry costs | — |  |  | (17 | ) |  | (24 | ) |  | (56 | )
Interest expense | (127 | ) |  | (1,453 | ) |  | (2,107 | ) |  | (4,526 | )
Gain on sales of real estate | 16,913 |  |  | 1,299 |  |  | 20,948 |  |  | 1,438 |
Gain (loss) on early extinguishment of debt | 1,738 |  |  | (384 | ) |  | 1,736 |  |  | (384 | )
Discontinued operations | $ | 11,051 |  |  | $ | 5,508 |  |  | $ | 10,212 |  |  | $ | (18,109 | )

The table below sets forth the components of assets held for sale on our consolidated balance sheets (in thousands):

| September 30, 2012 |  | December 31, 2011
Properties, net | $ | 126,789 |  |  | $ | 108,356 |
Deferred rent receivable | 3,733 |  |  | 2,800 |
Intangible assets on real estate acquisitions, net | 4,417 |  |  | 1,737 |
Deferred leasing and financing costs, net | 2,781 |  |  | 3,723 |
Lease incentives | 95 |  |  | — |
Assets held for sale | $ | 137,815 |  |  | $ | 116,616 |

15. Earnings Per Share (“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 our 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.

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Summaries of the numerator and denominator for purposes of basic and diluted EPS calculations are set forth below (in thousands, except per share data):

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Numerator: |  |  |  |  |  |  |  |  |
(Loss) income from continuing operations | $ | (31,816 | ) |  | $ | 1,962 |  |  | $ | (12,160 | ) |  | $ | (21,722 | )
Gain on sales of real estate, net | — |  |  | — |  |  | 21 |  |  | 2,728 |
Preferred share dividends | (6,546 | ) |  | (4,025 | ) |  | (14,738 | ) |  | (12,076 | )
Issuance costs associated with redeemed preferred shares | (1,827 | ) |  | — |  |  | (1,827 | ) |  | — |
Loss (income) from continuing operations attributable to noncontrolling interests | 1,616 |  |  | (581 | ) |  | 124 |  |  | 540 |
Income from continuing operations attributable to restricted shares | (111 | ) |  | (262 | ) |  | (357 | ) |  | (781 | )
Numerator for basic EPS from continuing operations attributable to COPT common shareholders | (38,684 | ) |  | (2,906 | ) |  | (28,937 | ) |  | (31,311 | )
Dilutive effect of common units in the Operating Partnership on diluted EPS from continuing operations | — |  |  | — |  |  | — |  |  | (2,025 | )
Numerator for diluted EPS from continuing operations attributable to COPT common shareholders | $ | (38,684 | ) |  | $ | (2,906 | ) |  | $ | (28,937 | ) |  | $ | (33,336 | )
Numerator for basic EPS from continuing operations attributable to COPT common shareholders | $ | (38,684 | ) |  | $ | (2,906 | ) |  | $ | (28,937 | ) |  | $ | (31,311 | )
Discontinued operations | 11,051 |  |  | 5,508 |  |  | 10,212 |  |  | (18,109 | )
Discontinued operations attributable to noncontrolling interests | (623 | ) |  | (323 | ) |  | (538 | ) |  | 1,115 |
Numerator for basic EPS on net (loss) income attributable to COPT common shareholders | (28,256 | ) |  | 2,279 |  |  | (19,263 | ) |  | (48,305 | )
Dilutive effect of common units in the Operating Partnership | — |  |  | — |  |  | — |  |  | (3,188 | )
Numerator for diluted EPS on net (loss) income attributable to COPT common shareholders | $ | (28,256 | ) |  | $ | 2,279 |  |  | $ | (19,263 | ) |  | $ | (51,493 | )
Denominator (all weighted averages): |  |  |  |  |  |  |  |  |
Denominator for basic EPS (common shares) | 71,688 |  |  | 71,312 |  |  | 71,590 |  |  | 68,718 |
Dilutive effect of common units | — |  |  | — |  |  | — |  |  | 4,371 |
Denominator for basic and diluted EPS | 71,688 |  |  | 71,312 |  |  | 71,590 |  |  | 73,089 |
Basic EPS: |  |  |  |  |  |  |  |  |
Loss from continuing operations attributable to COPT common shareholders | $ | (0.54 | ) |  | $ | (0.04 | ) |  | $ | (0.40 | ) |  | $ | (0.46 | )
Discontinued operations attributable to COPT common shareholders | 0.15 |  |  | 0.07 |  |  | 0.13 |  |  | (0.24 | )
Net (loss) income attributable to COPT common shareholders | $ | (0.39 | ) |  | $ | 0.03 |  |  | $ | (0.27 | ) |  | $ | (0.70 | )
Diluted EPS: |  |  |  |  |  |  |  |  |
Loss from continuing operations attributable to COPT common shareholders | $ | (0.54 | ) |  | $ | (0.04 | ) |  | $ | (0.40 | ) |  | $ | (0.46 | )
Discontinued operations attributable to COPT common shareholders | 0.15 |  |  | 0.07 |  |  | 0.13 |  |  | (0.24 | )
Net (loss) income attributable to COPT common shareholders | $ | (0.39 | ) |  | $ | 0.03 |  |  | $ | (0.27 | ) |  | $ | (0.70 | )

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):

| Weighed Average Shares Excluded from Denominator
| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
Conversion of common units | 4,233 |  |  | 4,336 |  |  | 4,256 |  |  | — |
Conversion of convertible preferred units | 176 |  |  | 176 |  |  | 176 |  |  | 176 |
Conversion of convertible preferred shares | 434 |  |  | 434 |  |  | 434 |  |  | 434 |

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The following share-based compensation securities were excluded from the computation of diluted EPS because their effect was antidilutive:

• | weighted average restricted shares for the three months ended September 30, 2012 and 2011 of 420,000 and 629,000, respectively, and for the nine months ended September 30, 2012 and 2011 of 475,000 and 635,000, respectively; and

• | weighted average options for the three months ended September 30, 2012 and 2011 of 752,000 and 697,000, respectively, and for the nine months ended September 30, 2012 and 2011 of 780,000 and 655,000, respectively.

As discussed in Note 8, we have outstanding senior notes that have an exchange settlement feature but did not affect our diluted EPS reported above since the weighted average closing price of our common shares during each of the periods was less than the exchange prices per common share applicable for such periods.
16. Commitments and Contingencies
Litigation
In the normal course of business, we are involved in legal actions arising from our ownership and administration of properties. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management does not anticipate that any liabilities that may result from such proceedings will have a materially adverse effect on our financial position, operations or liquidity. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.
Environmental
We are subject to various Federal, state and local environmental regulations related to our property ownership and operation. We have performed environmental assessments of our properties, the results of which have not revealed any environmental liability that we believe would have a materially adverse effect on our financial position, operations or liquidity.
Joint Ventures
In connection with our 2005 contribution of properties to an unconsolidated partnership in which we hold a partnership interest, we entered into standard nonrecourse loan guarantees (environmental indemnifications and guarantees against fraud and misrepresentation, and springing guarantees of partnership debt in the event of a voluntary bankruptcy of the partnership). The maximum amount we could be required to pay under the guarantees is approximately $65 million. We are entitled to recover 20% of any amounts paid under the guarantees from an affiliate of our partner pursuant to an indemnity agreement so long as we continue to manage the properties. In the event that we no longer manage the properties, the percentage that we are entitled to recover is increased to 80%. In October 2012, the holder of the mortgage debt encumbering all of the joint venture’s properties initiated foreclosure proceedings. Management considered this event and estimates that the aggregate fair value of the guarantees would not exceed the amounts included in distributions received in excess of investment in unconsolidated real estate joint venture reported on the consolidated balance sheets.
We are party to a contribution agreement that formed a joint venture relationship with a limited partnership to develop up to 1.8 million square feet of office space on 63 acres of land located in Hanover, Maryland. As we and the joint venture partner agree to proceed with the construction of buildings in the future, our joint venture partner would contribute land into newly-formed entities and we would make cash capital contributions into such entities to fund development and construction activities for which financing is not obtained. We owned a 50% interest in one such joint venture as of September 30, 2012.
We may be required to make our pro rata share of additional investments in our real estate joint ventures (generally based on our percentage ownership) in the event that additional funds are needed. In the event that the other members of these joint ventures do not pay their share of investments when additional funds are needed, we may then deem it appropriate to make even larger investments in these joint ventures.
Tax Incremental Financing Obligation
In August 2010, Anne Arundel County, Maryland issued $30 million in tax incremental financing bonds to third-party investors in order to finance public improvements needed in connection with our project known as National Business Park North. The real estate taxes on increases in assessed value of a development district encompassing National Business Park
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North are to be transferred to a special fund pledged to the repayment of the bonds. We recognized a $3.6 million liability through September 30, 2012 representing the estimated fair value of our 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.
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 for 15 years after the tenant’s acquisition of the property from us. 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.

17. Subsequent Event
On October 16, 2012, we completed a public offering of 8.6 million common shares at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are an office real estate investment trust (“REIT”) that focuses primarily on serving the specialized requirements of strategic customers in the United States Government and defense information technology sectors. We acquire, develop, manage and lease office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in office parks that we believe possess growth opportunities.
During the nine months ended September 30, 2012, we:

• | completed dispositions of 35 operating properties totaling 2.3 million square feet and non-operating properties for aggregate transaction values totaling $313.6 million. The $291 million in net proceeds from these sales after secured debt repayment and other transaction costs were used primarily to pay down our Revolving Credit Facility;

• | acquired a property in Herndon, Virginia totaling 202,000 square feet that was 100% leased for $48.3 million on July 11, 2012;

• | issued 6.9 million Series L Cumulative Preferred Shares (the “Series L Preferred Shares”) at a price of $25.00 per share for net proceeds of $165.7 million after underwriting discounts but before offering expenses. These shares are nonvoting and redeemable for cash at $25.00 per share at our option on or after June 27, 2017. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes;

• | redeemed all of our Series G Preferred Shares of beneficial interest (the “Series G Preferred Shares”) at a price of $25.00 per share, or $55.0 million in the aggregate, plus accrued and unpaid dividends thereon through the date of redemption;

• | entered into unsecured term loan agreements, under which we borrowed $370 million in the aggregate. The net proceeds from these borrowings were used to pay down our Revolving Credit Facility;

• | exercised our right to reduce the lenders’ aggregate commitment under our unsecured revolving credit facility from $1.0 billion to $800 million, with the ability, subject to certain conditions, for us to increase the lenders’ aggregate commitment to $1.3 billion;

• | finished the period with occupancy of our portfolio of operating office properties at 88.1%;

• | had an increase of $6.4 million as compared to the nine months ended September 30, 2011 in our net operating income (“NOI”) from real estate operations (defined below) attributable to our Same Office Properties (also defined below); and

• | had a decrease in net loss attributable to common shareholders of $28.6 million as compared to the nine months ended September 30, 2011, due in large part to an increase in gain on sales of properties and a decrease in impairment losses, as discussed further below.

On October 16, 2012, we completed a public offering of 8.6 million common shares at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes.
We discuss significant factors contributing to changes in our net income attributable to common shareholders and diluted earnings per share over the prior year period in the section below entitled “Results of Operations.” 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

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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 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;

• | our ability to sell properties included in our Strategic Reallocation Plan;

• | 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; 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:

| September 30, 2012 |  | December 31, 2011
Occupancy rates at period end |  |  |  |  |
Total | 88.1 | % |  | 86.2 | %
Baltimore/Washington Corridor | 89.0 | % |  | 87.9 | %
Northern Virginia | 87.9 | % |  | 84.8 | %
San Antonio | 96.5 | % |  | 90.7 | %
Washington, DC - Capitol Riverfront | 89.0 | % |  | 91.6 | %
St. Mary’s and King George Counties | 85.4 | % |  | 87.3 | %
Greater Baltimore | 84.3 | % |  | 84.5 | %
Suburban Maryland | 94.1 | % |  | 79.6 | %
Colorado Springs | 76.5 | % |  | 74.9 | %
Greater Philadelphia | 100.0 | % |  | 99.7 | %
Other | 100.0 | % |  | 100.0 | %
Average contractual annual rental rate per square foot at period end (1) | $ | 27.73 |  |  | $ | 26.59 |

(1) | Includes estimated expense reimbursements.

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| Rentable Square Feet |  | Occupied Square Feet
| (in thousands)
December 31, 2011 | 20,514 |  |  | 17,685 |
Square feet vacated upon lease expiration (1) | — |  |  | (681 | )
Square feet retenanted after lease expiration (2) | — |  |  | 552 |
Square feet constructed or redeveloped | 184 |  |  | 450 |
Acquisition | 202 |  |  | 202 |
Dispositions | (2,302 | ) |  | (1,833 | )
Other changes | (7 | ) |  | 4 |
September 30, 2012 | 18,591 |  |  | 16,379 |

(1) | Includes lease terminations and space reductions occurring in connection with lease renewals.

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

As the table above reflects, much of the increase in our total occupancy from December 31, 2011 to September 30, 2012 was attributable to our disposition of properties with lower occupancy rates. Occupancy of our Same Office Properties was 89.3% at September 30, 2012, down slightly from 89.5% at December 31, 2011.
During the nine months ended September 30, 2012, we completed 1.9 million square feet of leasing, including 614,000 of construction, redevelopment and other first generation (never before occupied) space, and renewed 58% of the square footage of our lease expirations (including the effect of early renewals) for the period. In addition, on October 5, 2012, we leased an aggregate of approximately 363,000 square feet in a newly constructed property and two properties to be constructed in Huntsville, Alabama.
The tepid economic recovery and continuing uncertainty regarding future defense spending cuts have contributed to a challenging lease environment in 2012. The Budget Control Act passed in 2011, which imposed caps on the Federal budget in order to achieve targeted spending levels over the 2013-2021 fiscal years, continues to cause uncertainty regarding future government spending reductions. The Budget Control Act currently requires that $110 billion be sequestered from the United States Government's funding levels for the 2013 fiscal year, approximately 50% of which could come from defense; this could feasibly begin to occur as early as January 2013, although we believe that such sequestrations, if they occur at all, will likely be deferred. Although future defense spending cuts could reduce demand for office space at our business parks, we do not believe that such spending decreases, were they to occur, would significantly affect existing defense information technology programs at the installations adjacent to our business parks. In addition, if military construction spending is cut, government demand to lease space in our business parks could possibly increase if the government decides to lease space instead of build it. We continue to believe that our customer and market strategies are competitive advantages in the current leasing environment because we expect the United States Government and defense information technology sectors to fuel economic growth in many of our regions.
Wholesale Data Center Property
Our shell-complete wholesale data center property, which upon completion and stabilization is expected to have a critical load of 18 megawatts, had three megawatts in operations at September 30, 2012 and December 31, 2011 that was leased to tenants with further expansion rights of up to a combined five megawatts. During the nine months ended September 30, 2012, we completed a new lease that provides for an initial commitment of one megawatt with further expansion rights for one additional megawatt.
Results of Operations
We evaluate the operating performance of our properties using NOI from real estate operations, our segment performance measure which is 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 office properties placed into service that were not 100% operational throughout the current and prior year

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reporting periods;

• | office properties included in the Strategic Reallocation Plan that were not sold as of September 30, 2012;

• | office properties in the Greater Philadelphia region. In September 2012, we shortened the holding period for these properties because they no longer meet our strategic investment criteria; and

• | property dispositions.

Refer to Note 14 of the consolidated financial statements for a summary of operating properties that were either disposed or classified as held for sale and therefore are included in discontinued operations.
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.
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The table below reconciles NOI from real estate operations and NOI from service operations to operating (loss) income reported on our consolidated statement of operations:

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
| (in thousands)
NOI from real estate operations | $ | 76,248 |  |  | $ | 77,135 |  |  | $ | 231,974 |  |  | $ | 225,557 |
NOI from service operations | 873 |  |  | 558 |  |  | 2,510 |  |  | 2,156 |
NOI from discontinued operations | (4,186 | ) |  | (10,826 | ) |  | (21,626 | ) |  | (31,679 | )
Depreciation and amortization associated with real estate operations | (28,698 | ) |  | (31,269 | ) |  | (84,920 | ) |  | (84,205 | )
Impairment losses | (46,096 | ) |  | — |  |  | (41,260 | ) |  | (42,983 | )
General and administrative expense | (5,061 | ) |  | (6,154 | ) |  | (19,820 | ) |  | (19,251 | )
Business development expenses and land carry costs | (1,632 | ) |  | (1,751 | ) |  | (4,506 | ) |  | (4,322 | )
Operating (loss) income | $ | (8,552 | ) |  | $ | 27,693 |  |  | $ | 62,352 |  |  | $ | 45,273 |

Comparison of the Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011
| For the Three Months Ended September 30,
| 2012 |  | 2011 |  | Variance
| (in thousands)
Revenues |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 114,861 |  |  | $ | 107,978 |  |  | $ | 6,883 |
Construction contract and other service revenues | 15,283 |  |  | 18,729 |  |  | (3,446 | )
Total revenues | 130,144 |  |  | 126,707 |  |  | 3,437 |
Expenses |  |  |  |  |  |  |  |
Property operating expenses | 42,799 |  |  | 41,669 |  |  | 1,130 |
Depreciation and amortization associated with real estate operations | 28,698 |  |  | 31,269 |  |  | (2,571 | )
Construction contract and other service expenses | 14,410 |  |  | 18,171 |  |  | (3,761 | )
Impairment losses | 46,096 |  |  | — |  |  | 46,096 |
General and administrative expense | 5,061 |  |  | 6,154 |  |  | (1,093 | )
Business development expenses and land carry costs | 1,632 |  |  | 1,751 |  |  | (119 | )
Total operating expenses | 138,696 |  |  | 99,014 |  |  | 39,682 |
Operating (loss) income | (8,552 | ) |  | 27,693 |  |  | (36,245 | )
Interest expense | (23,239 | ) |  | (24,176 | ) |  | 937 |
Interest and other income (loss) | 1,095 |  |  | (242 | ) |  | 1,337 |
Loss on early extinguishment of debt | (768 | ) |  | (1,611 | ) |  | 843 |
Equity in loss of unconsolidated entities | (246 | ) |  | (159 | ) |  | (87 | )
Income tax (expense) benefit | (106 | ) |  | 457 |  |  | (563 | )
(Loss) income from continuing operations | (31,816 | ) |  | 1,962 |  |  | (33,778 | )
Discontinued operations | 11,051 |  |  | 5,508 |  |  | 5,543 |
Net (loss) income | (20,765 | ) |  | 7,470 |  |  | (28,235 | )
Net loss (income) attributable to noncontrolling interests | 993 |  |  | (904 | ) |  | 1,897 |
Preferred share dividends | (6,546 | ) |  | (4,025 | ) |  | (2,521 | )
Issuance costs associated with redeemed preferred shares | (1,827 | ) |  | — |  |  | (1,827 | )
Net (loss) income attributable to COPT common shareholders | $ | (28,145 | ) |  | $ | 2,541 |  |  | $ | (30,686 | )

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NOI from Real Estate Operations
| For the Three Months Ended September 30,
| 2012 |  | 2011 |  | Variance
| (Dollars in thousands, except per square foot data)
Revenues |  |  |  |  |  |  |  |
Same Office Properties | $ | 102,088 |  |  | $ | 99,798 |  |  | $ | 2,290 |
Constructed office properties placed in service | 3,925 |  |  | 2,338 |  |  | 1,587 |
Acquired office properties | 2,233 |  |  | 502 |  |  | 1,731 |
Strategic Reallocation Plan Properties Held | 7,028 |  |  | 6,741 |  |  | 287 |
Greater Philadelphia properties | 2,541 |  |  | 1,701 |  |  | 840 |
Dispositions | 1,588 |  |  | 12,765 |  |  | (11,177 | )
Other | 1,861 |  |  | 1,284 |  |  | 577 |
| 121,264 |  |  | 125,129 |  |  | (3,865 | )
Property operating expenses |  |  |  |  |  |  |  |
Same Office Properties | 37,929 |  |  | 37,195 |  |  | 734 |
Constructed office properties placed in service | 1,008 |  |  | 533 |  |  | 475 |
Acquired office properties | 341 |  |  | 56 |  |  | 285 |
Strategic Reallocation Plan Properties Held | 2,537 |  |  | 2,640 |  |  | (103 | )
Greater Philadelphia properties | 736 |  |  | 417 |  |  | 319 |
Dispositions | 909 |  |  | 5,961 |  |  | (5,052 | )
Other | 1,556 |  |  | 1,192 |  |  | 364 |
| 45,016 |  |  | 47,994 |  |  | (2,978 | )
NOI from real estate operations |  |  |  |  |  |  |  |
Same Office Properties | 64,159 |  |  | 62,603 |  |  | 1,556 |
Constructed office properties placed in service | 2,917 |  |  | 1,805 |  |  | 1,112 |
Acquired office properties | 1,892 |  |  | 446 |  |  | 1,446 |
Strategic Reallocation Plan Properties Held | 4,491 |  |  | 4,101 |  |  | 390 |
Greater Philadelphia properties | 1,805 |  |  | 1,284 |  |  | 521 |
Dispositions | 679 |  |  | 6,804 |  |  | (6,125 | )
Other | 305 |  |  | 92 |  |  | 213 |
| $ | 76,248 |  |  | $ | 77,135 |  |  | $ | (887 | )
Same Office Properties rent statistics |  |  |  |  |  |  |  |
Average occupancy rate | 89.4 | % |  | 90.7 | % |  | -1.3 | %
Average straight-line rent per occupied square foot (1) | $ | 5.97 |  |  | $ | 5.89 |  |  | $ | 0.08 |

(1) | Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the three month periods set forth above.

Impairment Losses
We recognized the impairment losses described below in the current period:

• | in September 2012, our Board of Trustees approved a plan by Management to shorten the holding period for all of our office properties and developable land in Greater Philadelphia, Pennsylvania because the properties no longer meet our strategic investment criteria. We determined that the carrying amounts of these properties will not likely be recovered from the cash flows from the operations and sales of such properties over the likely remaining holding period. Accordingly, during the three months ended September 30, 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 primarily with the Strategic Reallocation Plan, we recognized aggregate impairment losses of $9.7 million in the current period, including $6.9 million pertaining to properties in Colorado Springs classified as held for sale and included in discontinued operations.

General and Administrative Expenses
The decrease in general and administrative expenses was attributable in large part to share based compensation
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arrangements in place during the prior period that were not applicable to the current period.
Discontinued Operations
The change in discontinued operations was due primarily to an additional $15.6 million in gain on sales of real estate in the current period, offset in part by $9.7 million in impairment losses in the current period in connection with the Strategic Reallocation Plan.
Preferred Share Dividends
The increase in preferred share dividends was due to dividends on the newly issued Series L Preferred Shares, partially offset by the decrease in dividends attributable to the Series G Preferred Shares redeemed on August 6, 2012.
Issuance Costs Associated With Redeemed Preferred Shares
During the current period, we recognized a $1.8 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series G Preferred Shares that were redeemed.
Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended September 30, 2011

| For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | Variance
| (in thousands)
Revenues |  |  |  |  |  |  |  |
Revenues from real estate operations | $ | 336,687 |  |  | $ | 317,013 |  |  | $ | 19,674 |
Construction contract and other service revenues | 53,812 |  |  | 67,854 |  |  | (14,042 | )
Total revenues | 390,499 |  |  | 384,867 |  |  | 5,632 |
Expenses |  |  |  |  |  |  |  |
Property operating expenses | 126,339 |  |  | 123,135 |  |  | 3,204 |
Depreciation and amortization associated with real estate operations | 84,920 |  |  | 84,205 |  |  | 715 |
Construction contract and other service expenses | 51,302 |  |  | 65,698 |  |  | (14,396 | )
Impairment losses | 41,260 |  |  | 42,983 |  |  | (1,723 | )
General and administrative expense | 19,820 |  |  | 19,251 |  |  | 569 |
Business development expenses and land carry costs | 4,506 |  |  | 4,322 |  |  | 184 |
Total operating expenses | 328,147 |  |  | 339,594 |  |  | (11,447 | )
Operating income | 62,352 |  |  | 45,273 |  |  | 17,079 |
Interest expense | (71,909 | ) |  | (74,861 | ) |  | 2,952 |
Interest and other income | 3,152 |  |  | 3,682 |  |  | (530 | )
Loss on early extinguishment of debt | (937 | ) |  | (1,636 | ) |  | 699 |
Equity in loss of unconsolidated entities | (522 | ) |  | (223 | ) |  | (299 | )
Income tax (expense) benefit | (4,296 | ) |  | 6,043 |  |  | (10,339 | )
Loss from continuing operations | (12,160 | ) |  | (21,722 | ) |  | 9,562 |
Discontinued operations | 10,212 |  |  | (18,109 | ) |  | 28,321 |
Gain on sales of real estate, net of income taxes | 21 |  |  | 2,728 |  |  | (2,707 | )
Net loss | (1,927 | ) |  | (37,103 | ) |  | 35,176 |
Net (income) loss attributable to noncontrolling interests | (414 | ) |  | 1,655 |  |  | (2,069 | )
Preferred share dividends | (14,738 | ) |  | (12,076 | ) |  | (2,662 | )
Issuance costs associated with redeemed preferred shares | (1,827 | ) |  | — |  |  | (1,827 | )
Net loss attributable to COPT common shareholders | $ | (18,906 | ) |  | $ | (47,524 | ) |  | $ | 28,618 |

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NOI from Real Estate Operations

| For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | Variance
| (Dollars in thousands, except per square foot data)
Revenues |  |  |  |  |  |  |  |
Same Office Properties | $ | 302,602 |  |  | $ | 294,687 |  |  | $ | 7,915 |
Constructed office properties placed in service | 10,869 |  |  | 5,680 |  |  | 5,189 |
Acquired office properties | 4,207 |  |  | 502 |  |  | 3,705 |
Strategic Reallocation Plan Properties Held | 21,004 |  |  | 20,008 |  |  | 996 |
Greater Philadelphia properties | 7,171 |  |  | 5,315 |  |  | 1,856 |
Dispositions | 19,877 |  |  | 38,408 |  |  | (18,531 | )
Other | 4,806 |  |  | 3,776 |  |  | 1,030 |
| 370,536 |  |  | 368,376 |  |  | 2,160 |
Property operating expenses |  |  |  |  |  |  |  |
Same Office Properties | 112,429 |  |  | 110,911 |  |  | 1,518 |
Constructed office properties placed in service | 2,838 |  |  | 1,205 |  |  | 1,633 |
Acquired office properties | 656 |  |  | 56 |  |  | 600 |
Strategic Reallocation Plan Properties Held | 7,374 |  |  | 7,439 |  |  | (65 | )
Greater Philadelphia properties | 2,083 |  |  | 1,180 |  |  | 903 |
Dispositions | 9,248 |  |  | 19,344 |  |  | (10,096 | )
Other | 3,934 |  |  | 2,684 |  |  | 1,250 |
| 138,562 |  |  | 142,819 |  |  | (4,257 | )
NOI from real estate operations |  |  |  |  |  |  |  |
Same Office Properties | 190,173 |  |  | 183,776 |  |  | 6,397 |
Constructed office properties placed in service | 8,031 |  |  | 4,475 |  |  | 3,556 |
Acquired office properties | 3,551 |  |  | 446 |  |  | 3,105 |
Strategic Reallocation Plan Properties Held | 13,630 |  |  | 12,569 |  |  | 1,061 |
Greater Philadelphia properties | 5,088 |  |  | 4,135 |  |  | 953 |
Dispositions | 10,629 |  |  | 19,064 |  |  | (8,435 | )
Other | 872 |  |  | 1,092 |  |  | (220 | )
| $ | 231,974 |  |  | $ | 225,557 |  |  | $ | 6,417 |
Same Office Properties rent statistics |  |  |  |  |  |  |  |
Average occupancy rate | 89.5 | % |  | 90.3 | % |  | (0.8 | )%
Average straight-line rent per occupied square foot (1) | $ | 17.83 |  |  | $ | 17.62 |  |  | $ | 0.21 |

(1) | Includes minimum base rents, net of abatements, and lease incentives on a straight-line basis for the nine month periods set forth above.

The increase in revenues from our Same Office Properties was due primarily to increases in rental revenue and directly reimbursable tenant expenses. The increase in property operating expenses from our Same Office Properties was primarily due to the increases in expenses directly reimbursable from tenants, offset in part by decreases in snow removal and utility expenses resulting from a milder winter and spring in the Mid-Atlantic region.
Impairment Losses
We recognized the impairment losses described below in the current and prior periods:

• | as described above for the three month periods, we recognized $46.1 million impairment loss related to properties in Greater Philadelphia;

• | we recognized aggregate net impairment losses in connection with Strategic Reallocation Plan properties of $18.7 million in the current period ($23.5 million classified as discontinued operations and including $4.2 million in exit costs) and $44.6 million in the prior period ($29.4 million classified as discontinued operations); and

• | as described further in our 2011 Annual Report on Form 10-K, we recognized an impairment loss of $27.7 million on Fort Ritchie in the prior period.

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The table below sets forth impairment losses (recoveries) recognized by property classification:

| For the Nine Months Ended September 30,
| 2012 |  | 2011
| (in thousands)
Operating properties | $ | 70,016 |  |  | $ | 31,031 |
Non-operating properties | (5,246 | ) |  | 41,316 |
Total | $ | 64,770 |  |  | $ | 72,347 |

Income Tax (Expense) Benefit
The income tax expense recognized in the current period was due primarily to the impact of an out-of-period adjustment. See Note 2 of the consolidated financial statements for additional information. The income tax benefit in the prior period was due primarily to a $4.6 million benefit on impairment losses recognized by our taxable REIT subsidiary in connection with the Strategic Reallocation Plan.
Discontinued Operations
The change in discontinued operations was due primarily to an additional $19.5 million in gain on sales of real estate and a $5.9 million decrease in impairment losses recognized in the current period in connection with the Strategic Reallocation Plan.
Preferred Share Dividends
The increase in preferred share dividends was due to dividends on the newly issued Series L Preferred Shares, partially offset by the decrease in dividends attributable to the Series G Preferred Shares redeemed on August 6, 2012.
Issuance Costs Associated With Redeemed Preferred Shares
During the current period, we recognized a $1.8 million decrease to net income available to common shareholders pertaining to the original issuance costs incurred on the Series G Preferred Shares that were redeemed.
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
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allocable to restricted shares. With these adjustments, Basic FFO represents FFO available to common shareholders and common unitholders. Common units in the Operating Partnership are substantially similar to our common shares and are exchangeable into common shares, subject to certain conditions. We believe that Basic FFO is useful to investors due to the close correlation of common units to common shares. We believe that net income is the most directly comparable GAAP measure to Basic FFO. Basic FFO has essentially the same limitations as FFO; management compensates for these limitations in essentially the same manner as described above for FFO.
Diluted FFO available to common share and common unit holders (“Diluted FFO”) is Basic FFO adjusted to add back any changes in Basic FFO that would result from the assumed conversion of securities that are convertible or exchangeable into common shares. We believe that Diluted FFO is useful to investors because it is the numerator used to compute Diluted FFO per share, discussed below. We believe that the numerator for diluted EPS is the most directly comparable GAAP measure to Diluted FFO. Since Diluted FFO excludes certain items includable in the numerator to diluted EPS, reliance on the measure has limitations; management compensates for these limitations by using the measure simply as a supplemental measure that is weighed in the balance with other GAAP and non-GAAP measures. Diluted FFO is not necessarily an indication of our cash flow available to fund cash needs. Additionally, it should not be used as an alternative to net income when evaluating our financial performance or to cash flow from operating, investing and financing activities when evaluating our liquidity or ability to make cash distributions or pay debt service.
Diluted FFO, as adjusted for comparability is defined as Diluted FFO adjusted to exclude operating property acquisition costs, gains on sales of, and impairment losses on, properties other than previously depreciated operating properties, net of associated income tax, gain or loss on early extinguishment of debt, loss on interest rate swaps and issuance costs associated with redeemed preferred shares. We believe that the excluded items are not reflective of normal operations and, as a result, we believe that a measure that excludes these items is a useful supplemental measure in evaluating our operating performance. We believe that the numerator to diluted EPS is the most directly comparable GAAP measure to this non-GAAP measure. This measure has essentially the same limitations as Diluted FFO, as well as the further limitation of not reflecting the effects of the excluded items; we compensate for these limitations in essentially the same manner as described above for Diluted FFO.
Diluted FFO per share is (1) Diluted FFO divided by (2) the sum of the (a) weighted average common shares outstanding during a period, (b) weighted average common units outstanding during a period and (c) weighted average number of potential additional common shares that would have been outstanding during a period if other securities that are convertible or exchangeable into common shares were converted or exchanged. We believe that Diluted FFO per share is useful to investors because it provides investors with a further context for evaluating our FFO results in the same manner that investors use 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 our Operating Partnership 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.
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The table below sets forth the computation of the above stated measures for the three and nine months ended September 30, 2012 and 2011 and provides reconciliations to the GAAP measures associated with such measures:

| For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
| 2012 |  | 2011 |  | 2012 |  | 2011
| (Dollars and shares in thousands, except per share data)
Net (loss) income | $ | (20,765 | ) |  | $ | 7,470 |  |  | $ | (1,927 | ) |  | $ | (37,103 | )
Add: Real estate-related depreciation and amortization | 30,624 |  |  | 36,032 |  |  | 93,377 |  |  | 101,101 |
Add: Depreciation and amortization on unconsolidated real estate entities | 113 |  |  | 116 |  |  | 346 |  |  | 350 |
Add: Impairment losses on previously depreciated operating properties | 55,829 |  |  | — |  |  | 70,016 |  |  | 31,031 |
Less: Gain on sales of previously depreciated operating properties, net of income taxes | (16,913 | ) |  | (1,299 | ) |  | (20,936 | ) |  | (1,449 | )
FFO | 48,888 |  |  | 42,319 |  |  | 140,876 |  |  | 93,930 |
Less: Noncontrolling interests-preferred units in the Operating Partnership | (165 | ) |  | (165 | ) |  | (495 | ) |  | (495 | )
Less: Noncontrolling interests-other consolidated entities | (411 | ) |  | (561 | ) |  | (939 | ) |  | (1,038 | )
Less: Preferred share dividends | (6,546 | ) |  | (4,025 | ) |  | (14,738 | ) |  | (12,076 | )
Less: Issuance costs associated with redeemed preferred shares | (1,827 | ) |  | — |  |  | (1,827 | ) |  | — |
Less: Depreciation and amortization allocable to noncontrolling interests in other consolidated entities | (160 | ) |  | (276 | ) |  | (312 | ) |  | (566 | )
Basic and Diluted FFO allocable to restricted shares | (214 | ) |  | (263 | ) |  | (728 | ) |  | (782 | )
Basic and Diluted FFO | $ | 39,565 |  |  | $ | 37,029 |  |  | $ | 121,837 |  |  | $ | 78,973 |
Operating property acquisition costs | 222 |  |  | 77 |  |  | 229 |  |  | 152 |
Gain on sales of non-operating properties, net of income taxes | — |  |  | — |  |  | (33 | ) |  | (2,717 | )
Impairment (recoveries) losses on other properties | — |  |  | — |  |  | (5,246 | ) |  | 41,316 |
Income tax expense on impairment recoveries (losses) on other properties | — |  |  | — |  |  | 4,642 |  |  | (4,598 | )
(Gain) loss on early extinguishment of debt | (970 | ) |  | 1,995 |  |  | (799 | ) |  | 2,020 |
Issuance costs associated with redeemed preferred shares | 1,827 |  |  | — |  |  | 1,827 |  |  | — |
Diluted FFO, as adjusted for comparability | $ | 40,644 |  |  | $ | 39,101 |  |  | $ | 122,457 |  |  | $ | 115,146 |
Weighted average common shares | 71,688 |  |  | 71,312 |  |  | 71,590 |  |  | 68,718 |
Conversion of weighted average common units | 4,233 |  |  | 4,336 |  |  | 4,256 |  |  | 4,371 |
Weighted average common shares/units - Basic FFO | 75,921 |  |  | 75,648 |  |  | 75,846 |  |  | 73,089 |
Dilutive effect of share-based compensation awards | 73 |  |  | 52 |  |  | 48 |  |  | 147 |
Weighted average common shares/units - Diluted FFO | 75,994 |  |  | 75,700 |  |  | 75,894 |  |  | 73,236 |
Diluted FFO per share | $ | 0.52 |  |  | $ | 0.49 |  |  | $ | 1.61 |  |  | $ | 1.08 |
Diluted FFO per share, as adjusted for comparability | $ | 0.53 |  |  | $ | 0.52 |  |  | $ | 1.61 |  |  | $ | 1.57 |
Numerator for diluted EPS | $ | (28,256 | ) |  | $ | 2,279 |  |  | $ | (19,263 | ) |  | $ | (51,493 | )
Add: Income allocable to noncontrolling interests-common units in the Operating Partnership | (1,569 | ) |  | 178 |  |  | (1,020 | ) |  | — |
Add: Real estate-related depreciation and amortization | 30,624 |  |  | 36,032 |  |  | 93,377 |  |  | 101,101 |
Add: Depreciation and amortization of unconsolidated real estate entities | 113 |  |  | 116 |  |  | 346 |  |  | 350 |
Add: Impairment losses on previously depreciated operating properties | 55,829 |  |  | — |  |  | 70,016 |  |  | 31,031 |
Add: Numerator for diluted EPS allocable to restricted shares | 111 |  |  | 262 |  |  | 357 |  |  | 781 |
Less: Depreciation and amortization allocable to noncontrolling interests in other consolidated entities | (160 | ) |  | (276 | ) |  | (312 | ) |  | (566 | )
Less: Basic and diluted FFO allocable to restricted shares | (214 | ) |  | (263 | ) |  | (728 | ) |  | (782 | )
Less: Gain on sales of previously depreciated operating properties, net of income taxes | (16,913 | ) |  | (1,299 | ) |  | (20,936 | ) |  | (1,449 | )
Basic and Diluted FFO | $ | 39,565 |  |  | $ | 37,029 |  |  | $ | 121,837 |  |  | $ | 78,973 |
Operating property acquisition costs | 222 |  |  | 77 |  |  | 229 |  |  | 152 |
Gain on sales of non-operating properties, net of income taxes | — |  |  | — |  |  | (33 | ) |  | (2,717 | )
Impairment (recoveries) losses on other properties | — |  |  | — |  |  | (5,246 | ) |  | 41,316 |
Income tax expense on impairment recoveries on other properties | — |  |  | — |  |  | 4,642 |  |  | (4,598 | )
Loss on early extinguishment of debt | (970 | ) |  | 1,995 |  |  | (799 | ) |  | 2,020 |
Issuance costs associated with redeemed preferred shares | 1,827 |  |  | — |  |  | 1,827 |  |  | — |
Diluted FFO, as adjusted for comparability | $ | 40,644 |  |  | $ | 39,101 |  |  | $ | 122,457 |  |  | $ | 115,146 |
Denominator for diluted EPS | 71,688 |  |  | 71,312 |  |  | 71,590 |  |  | 73,089 |
Weighted average common units | 4,233 |  |  | 4,336 |  |  | 4,256 |  |  | — |
Anti-dilutive EPS effect of share-based compensation awards | 73 |  |  | 52 |  |  | 48 |  |  | 147 |
Denominator for diluted FFO per share measures | 75,994 |  |  | 75,700 |  |  | 75,894 |  |  | 73,236 |

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Property Additions
The table below sets forth the major components of our additions to properties for the nine months ended September 30, 2012 (in thousands):

Construction, development and redevelopment | $ | 108,313 |  |  |
Acquisition of operating properties | 33,684 |  |  | (1)
Tenant improvements on operating properties | 11,568 |  |  | (2)
Capital improvements on operating properties | 8,285 |  |  |
| $ | 161,850 |  |  |

(1) Excludes intangible assets and liabilities associated with such acquisition.
(2) 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 $34.8 million when comparing the nine months ended September 30, 2012 and 2011 due primarily to: an increase in cash flow received from real estate operations, which was affected by the timing of cash receipts; an increase in cash flow associated with the timing of cash flow from third-party construction projects; $19.0 million in proceeds in the current period from the sale of our KEYW common stock, including $5.1 million received from sales completed in 2011; and $17.3 million in previously accreted interest paid in the prior period in connection with our repurchase of exchangeable senior notes; offset in part by $29.7 million paid to cash settle interest rate swaps in the current period.
Net cash flow provided by investing activities increased $321.5 million when comparing the nine months ended September 30, 2012 and 2011 due mostly to a $263.3 million increase from sales of properties primarily in connection with the Strategic Reallocation Plan and lower levels of development spending.
Net cash flow used in financing activities in 2012 was $224.0 million and included the following:

• | net repayments of debt of $243.6 million;

• | proceeds from the issuance of the Series L Preferred Shares of $165.7 million;

• | payments to redeem the Series G Preferred Shares of $55.0 million; and

• | dividends and distributions of $86.2 million.

Net cash flow provided by financing activities in 2011 was $134.3 million and included the following:

• | net borrowings of $105.9 million;

• | proceeds from the issuance of common shares of $147.8 million; and

• | dividends and distributions of $103.0 million.

Liquidity and Capital Resources
Our primary cash requirements are for operating expenses, debt service, development of new properties, improvements to existing properties and acquisitions. We expect to continue to use cash flow provided by operations as the primary source to meeting our short-term capital needs, including property operating expenses, general and administrative expenses, interest expense, scheduled principal amortization of debt, dividends to our shareholders, distributions to our noncontrolling interest holders of preferred and common units in the Operating Partnership and improvements to existing properties. We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements without necessitating property sales. However, we expect to generate cash by selling properties included in the Strategic Reallocation Plan through 2013.
We have historically relied on fixed-rate, non-recourse mortgage loans from banks and institutional lenders for long-term financing and to restore availability on our Revolving Credit Facility. In recent years, we have relied more on unsecured bank loans and publicly issued, convertible unsecured debt for long-term financing. We also periodically access the public equity markets to raise capital by issuing common and/or preferred shares.
We often use our Revolving Credit Facility to initially finance much of our investing activities. We then 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,
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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 Revolving Credit Facility matures on September 1, 2014, 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 0.20% of the total availability of the facility. As of September 30, 2012, the maximum borrowing capacity under this facility totaled $800.0 million, of which $701.5 million was available.
We also have construction loan facilities that provide for aggregate borrowings of up to $123.8 million, $53.4 million of which was available at September 30, 2012 to fund future construction costs at specific projects.
The following table summarizes our contractual obligations as of September 30, 2012 (in thousands):

| For the Periods Ending December 31, |  |
| 2012 |  | 2013 |  | 2014 |  | 2015 |  | 2016 |  | Thereafter |  | Total
Contractual obligations (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balloon payments due upon maturity | $ | — |  |  | $ | 179,368 |  |  | $ | 231,681 |  |  | $ | 790,194 |  |  | $ | 274,605 |  |  | $ | 670,621 |  |  | $ | 2,146,469 |
Scheduled principal payments | 2,890 |  |  | 9,874 |  |  | 6,660 |  |  | 5,548 |  |  | 4,037 |  |  | 3,257 |  |  | 32,266 |
Interest on debt (3) | 22,853 |  |  | 86,261 |  |  | 75,422 |  |  | 57,989 |  |  | 33,834 |  |  | 12,229 |  |  | 288,588 |
New construction and redevelopment obligations (4)(5) | 19,863 |  |  | 52,228 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 72,091 |
Third-party construction and development obligations (5)(6) | 26,468 |  |  | 2,941 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 29,409 |
Capital expenditures for operating properties (5)(7) | 9,892 |  |  | 19,715 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 29,607 |
Operating leases (8) | 272 |  |  | 1,065 |  |  | 996 |  |  | 873 |  |  | 814 |  |  | 70,479 |  |  | 74,499 |
Other purchase obligations (9) | 902 |  |  | 3,161 |  |  | 2,032 |  |  | 1,088 |  |  | 565 |  |  | 98 |  |  | 7,846 |
Total contractual cash obligations | $ | 83,140 |  |  | $ | 354,613 |  |  | $ | 316,791 |  |  | $ | 855,692 |  |  | $ | 313,855 |  |  | $ | 756,684 |  |  | $ | 2,680,775 |

(1) | The contractual obligations set forth in this table generally exclude property operations contracts that had a value of less than $20,000. Also excluded are contracts associated with the operations of our properties that may be terminated with notice of one month or less, which is the arrangement that applies to most of our property operations contracts.

(2) | Represents scheduled principal amortization payments and maturities only and therefore excludes a net discount of $9.4 million.

(3) | Represents interest costs for debt at September 30, 2012 for the terms of such debt. For variable rate debt, the amounts reflected above used September 30, 2012 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. Construction and redevelopment activities underway at September 30, 2012 included the following:

Activity |  | Number of Properties |  | Square Feet (in thousands) |  | Estimated Remaining Costs(in millions) |  | Expected Year For Costs to be Incurred Through
Construction of new office properties |  | 8 |  | 913 |  | $ | 77.0 |  |  | 2014
Redevelopment of existing office properties |  | 2 |  | 297 |  | 25.2 |  |  | 2014

(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 $70.0 million on construction and development costs and approximately $20.0 million on improvements to operating properties (including the commitments set forth in the table above) during the remainder of 2012. We expect to fund these costs and our debt maturities during the remainder of 2012 using primarily a combination of borrowings under our Revolving Credit Facility and existing construction loan facilities.
As discussed above, subsequent to September 30, 2012, we completed a public offering of 8.6 million common shares at a price of $24.75 per share for net proceeds of $204.9 million after underwriter discounts but before offering expenses. The net proceeds were used to pay down our Revolving Credit Facility and for general corporate purposes.
Certain of our debt instruments require that we comply with a number of restrictive financial covenants, including
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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 September 30, 2012, we were well within the compliance requirements of these financial covenants.
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 2011 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, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, the most predominant of which is 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 September 30, 2012 our debt obligations and weighted average interest rates for fixed rate debt by expected maturity date (dollars in thousands):

| For the Periods Ending December 31, |  |
| 2012 |  | 2013 |  | 2014 |  | 2015 |  | 2016 |  | Thereafter |  | Total
Long term debt: (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed rate debt (2) | $ | 2,695 |  |  | $ | 129,102 |  |  | $ | 157,526 |  |  | $ | 347,847 |  |  | $ | 278,642 |  |  | $ | 303,878 |  |  | $ | 1,219,690 |
Weighted average interest rate | 6.26 | % |  | 5.62 | % |  | 6.41 | % |  | 4.67 | % |  | 6.57 | % |  | 5.52 | % |  | 5.64 | %
Variable rate debt | $ | 195 |  |  | $ | 60,140 |  |  | $ | 80,815 |  |  | $ | 447,895 |  |  | $ | — |  |  | $ | 370,000 |  |  | $ | 959,045 |

(1) | Maturities include $59.4 million in 2013, $80.0 million in 2014 and $411.8 million in 2015 that may each be extended for one year, subject to certain conditions.

(2) | Represents principal maturities only and therefore excludes net discounts of $9.4 million.

The fair market value of our debt was $2.2 billion at September 30, 2012. If interest rates had been 1% lower, the fair value of our fixed-rate debt would have increased by approximately $70 million at September 30, 2012.
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The following table sets forth information pertaining to interest rate swap contracts in place as of September 30, 2012 and December 31, 2011 and their respective fair values (dollars in thousands):

Notional |  | Fixed |  | Floating Rate |  | Effective |  | Expiration |  | Fair Value at
Amount |  | Rate |  | Index |  | Date |  | Date |  | September 30, 2012 |  | December 31, 2011
$ | 100,000 |  |  | 0.6123 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2014 |  | $ | (671 | ) |  | $ | 55 |
100,000 |  |  | 0.6100 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2014 |  | (667 | ) |  | 56 |
100,000 |  |  | 0.8320 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2015 |  | (1,447 | ) |  | (66 | )
100,000 |  |  | 0.8320 | % |  | One-Month LIBOR |  | 1/3/2012 |  | 9/1/2015 |  | (1,447 | ) |  | (49 | )
38,671 |  | (1) | 3.8300 | % |  | One-Month LIBOR |  | 11/2/2010 |  | 11/2/2015 |  | (1,393 | ) |  | (1,054 | )
100,000 |  |  | 0.8055 | % |  | One-Month LIBOR |  | 9/2/2014 |  | 9/1/2016 |  | (262 | ) |  | — |
100,000 |  |  | 0.8100 | % |  | One-Month LIBOR |  | 9/2/2014 |  | 9/1/2016 |  | (272 | ) |  | — |
100,000 |  |  | 1.6730 | % |  | One-Month LIBOR |  | 9/1/2015 |  | 8/1/2019 |  | (123 | ) |  | — |
100,000 |  |  | 1.7300 | % |  | One-Month LIBOR |  | 9/1/2015 |  | 8/1/2019 |  | (261 | ) |  | — |
50,000 |  |  | 0.5025 | % |  | One-Month LIBOR |  | 1/3/2011 |  | 1/3/2012 |  | — |  |  | (1 | )
50,000 |  |  | 0.5025 | % |  | One-Month LIBOR |  | 1/3/2011 |  | 1/3/2012 |  | — |  |  | (1 | )
120,000 |  |  | 1.7600 | % |  | One-Month LIBOR |  | 1/2/2009 |  | 5/1/2012 |  | — |  |  | (552 | )
100,000 |  |  | 1.9750 | % |  | One-Month LIBOR |  | 1/1/2010 |  | 5/1/2012 |  | — |  |  | (532 | )
100,000 |  | (2) | 3.8415 | % |  | Three-Month LIBOR |  | 9/30/2011 |  | 9/30/2021 |  | — |  |  | (16,333 | )
75,000 |  | (2) | 3.8450 | % |  | Three-Month LIBOR |  | 9/30/2011 |  | 9/30/2021 |  | — |  |  | (12,275 | )
100,000 |  | (2) | 2.0525 | % |  | Three-Month LIBOR-Reverse |  | 12/30/2011 |  | 9/30/2021 |  | — |  |  | 345 |
75,000 |  | (2) | 2.0525 | % |  | Three-Month LIBOR-Reverse |  | 12/30/2011 |  | 9/30/2021 |  | — |  |  | 260 |
|  |  |  |  |  |  |  |  |  |  |  | $ | (6,543 | ) |  | $ | (30,147 | )

(1) | The notional amount of this instrument is scheduled to amortize to $36.2 million.

(2) | As described further in our 2011 Annual Report on Form 10-K, on January 5, 2012, we cash settled these instruments, along with interest accrued thereon, for an aggregate of $29.7 million.

Based on our variable-rate debt balances, including the effect of interest rate swap contracts, our interest expense would have increased by $4.0 million in the nine months ended September 30, 2012 if short-term interest rates were 1% higher.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure 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 September 30, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2012 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 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.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
We are not currently involved in any material litigation nor, to our knowledge, is any material litigation currently threatened against the Company. This does not include routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by liability insurance.
Item 1A. Risk Factors
There have been no material changes to the risk factors included in our 2011 Annual Report on Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) | During the three months ended September 30, 2012, 40,000 of the Operating Partnership’s common units were exchanged for 40,000 common shares in accordance with the Operating Partnership’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.

(b) Not applicable
(c) Not applicable
Item 3. Defaults Upon Senior Securities
(a) Not applicable
(b) Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits:

EXHIBIT NO. |  | DESCRIPTION
31.1 |  | 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).
31.2 |  | 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).
32.1 |  | 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).
32.2 |  | 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).
101.INS |  | XBRL Instance Document (furnished herewith).
101.SCH |  | XBRL Taxonomy Extension Schema Document (furnished herewith).
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith).
101.LAB |  | XBRL Extension Labels Linkbase (furnished herewith).
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith).
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith).

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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 thereunto duly authorized.

|  |  | CORPORATE OFFICE PROPERTIES TRUST
Date: | October 26, 2012 | By: | /s/ Roger A. Waesche, Jr.
|  |  | Roger A. Waesche, Jr.
|  |  | President and Chief Executive Officer
Date: | October 26, 2012 | By: | /s/ Stephen E. Riffee
|  |  | Stephen E. Riffee
|  |  | Executive Vice President and Chief Financial Officer

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