COPT Defense Properties (CDP) 2004 Q1 法說會逐字稿

Good day, everyone, thank you for holding the line and welcome to the Corporate Officer Properties Trust first quarter earnings release conference call. As reminder, today's call is being recorded. At this time I would like to turn the call over to the Vice President of Finance and Investor Relations, Ms Mary Ellen Fowler. Please go ahead.

Thank you and good afternoon, everyone. Yesterday area press release was faxed or emailed to each of you. If there is anyone on the call who needs a copy of the release or would like to get our quarterly supplemental package, please contact me after the call at 410-992-7324. Or you can access both documents from the investor relations section of our web site at www.copt.com. Within the supplemental package you will find a reconciliation package of nonGAAP financial measures to get measures referenced throughout this call.

With me today are Clay Hamlin, our CEO, Ran Griffin, our President and COO, and Roger Waesche, our CFO. In a few minutes they will review the results of the first quarter, and then the call will be open to questions.

First I must remind all of you at the outset that certain statements made during this call regarding anticipated operating results and future events or forward-looking statements within the meaning of the private securities litigation reform act of 1995. Although such statements and projections are base objected what we believe to be reasonable assumptions, actual results could different from those projected.

These factors that could cause results to different materially without limitations, the ability to renew or release space under favorable terms, regulatory changes, changes in the economy, the success and timely completion of acquisitions and development projects, changes in interest rates and other risks associated with the commercial real estate business as detailed in our filings from time to time with the SEC.

Now I would like to turn the call over to Clay Hamlin.

Thanks Mary Ellen, good afternoon, everyone.

We were pleased to report another quarter of consistent growth and performance for the company and that we are on track for the year. Total FFO for this quarter grew by 20% over the first quarter of last year. That represents an 8% increase on a per share basis. We've achieved this growth through improvement and same property NOI along with acquisitions placed into service.

As on overview comment we are seeing an improvement in our major markets overall. We view the job growth recently reported in the Washington Post for the greater Washington region as particular relevant. For the first quarter, the Washington area experienced an increase of 61,000 new jobs and a decrease in the unemployment rate from 3.2% to 3% compared to one year earlier.

Both the government and private sectors in the Washington area have been projected to increase jobs by 80,000 for all of 2004, which is an increase that goes back equivalent to 1999 levels. So we are already three-quarters of the way there for this year.

As we move through 2004, we are focused on four major components to achieve our growth. First, we focus on our occupancy. Using our leasing activity as a trim line for occupancy and with a 93.8% lease portfolio at the quarters end, we believe we are well on our way to meeting our objective of 94% occupancy by year-end. Ran will discuss this in more detail.

In addition to increasing our percentage leased, we also resolved the future leasing risk that we faced 2005 and 2006 at our One Dulles Tower property. We are seeing the importance of the strong tenant relationships with our ability to execute on a number of lease transactions. The two largest leases that we signed during the quarter were with existing top 20 tenants. [Inaudible] Hamilton and [NORTHRUP GRUMIN].

We have multiple leases with both of these tenants. Our second focus is on acquisition activity. So far this year we have acquired $98 million, and a total of approximately 800,000 square feet, which was 90% leased at acquisition.

We are ahead of our projections of $25 million [inaudible] per quarter and closing in on achieving on the state objective of acquiring $100 billion for the year, net of dispositions this year. These access reflect the implementation of our strategy of expanding in a new sub market where we can become a dominant owner. Randall will expand on this point in a second. With interest rates projected to increase later this year, we anticipate that acquisition opportunities may become more available as we move through the year.

Third, we focus on development. Part of our strategy has always been to have sufficient ground available in or contiguous to our office parks to accommodate tenant expansion through future development. This strategies that continued to work very well. We are seeing a strengthening in tenant demand and we are in a position to rapidly respond.

Fourth, turning to our balance sheet, we have taken several important steps this year, both on the debt and equity side. In terms of our debt, we close on a $300 million unsecured revolving line of credit, reducing our dent costs and adding nine new banks to our line. Secondly we recently completed a 2.8 million share common offing. The proceeds of the offering will be used to replace high cost debt and preferred equity. Roger will talk about this in a minute. As a result of these actions, we have adequate capital reserves in place to meet our mid-term growth objectives.

As for our earnings guidance. We are slightly adjusting the top side of your guidance to arrange of 166 per 170 per diluted share. This is due to the modest dilution from our common offering. This, of course, is before recognition of an anticipated 4 cent FSO charge per share during the third quarter as a result of the plan series B preferred redemption.

In summary, we are well on our way to achieving our goals for the year. We are confident that we will continue to achieve our FFO growth objectives while continuing to provide a stable increasing dividend and maintaining conservative payout ratios.

With that, I'll turn the call over to Roger.

Thanks, Clay. I'll start with our funds from operations. As a note all per share amounts are presented on a fully diluted basis and include the effects of FAS 141. FFO for the first quarter totaled $16.3 million or 40 cents per share as compared to the FFO for the first quarter last year of $13.6 million or 37 cent per share. Representing a 20% increase in total FFO. And an 8% increase on a per share basis.

After adjusting for capital expenditures, straight lining of rent and FAS 141 income are adjusted funds from operations for the total quarter $12.2 million compared to $9.1 million in AFFO during the first quarter of 2003, representing an increase of 33.6%.

During the quarter, the company distributed 23.5 cent per share in common dividends, equating to a 57% FFO payout ratio as compared to a 58% FFO ratio fore the first quarter of 2003. Our AFFO ratio improved from 76% from 87% in the first quarter in 2003, a quarter that had been impacted by higher straight line rents.

Looking at GAAP earnings for the first quarter, we recorded earnings of 14 cents per share versus 22 cents per share for the quarter of 2003. Included in the first quarter of 2003 was a gain of $3.4 million or 13 cents per share related to the sale of a property and adjacent land parcels.

In terms of same property net operating income. For the 108 comparative property, same property cash NOI increased by 4.5% over the first quarter of 2003. The increase was primarily attributable to a $1.7 million increase in base rental revenue due to higher occupancy and higher rental rate.

Turning to our balance sheet at March 31st, our total market cap was approximately $2 billion with $830 million of debt outstanding equating to a 41% debt to market cap ratio. During the quarter we replaced our existing $150 million secured revolving line of credit with a new $300 million unsecured revolving line.

The new line improved our financial flexibility and lowered our interest rate by 35 basis points at closing. As a result of the increase in the line, 26% of our debt was floating and 74% was fixed at March 31st. We expect the floating rate debt percentage to decrease because we are currently in the market with an 80 to $100 million fixed rate permanent loan package. In terms of planning for increased interest rates this year, we had included in our projected FFO guidance a 25 basis point per quarter increase in interest rates through 2004. As of March 31st, our weighted average interest costs have remained steady at about 5.75% over the past three quarters, down from 6% a year ago.

Turning to equity, we have had two significant transactions so far this year. First, the holder of our 544,000 series "D" convertible preferred shares converted 100% of the shares into common stock. That resulted in 1.2 million new common shares. Second, we issued 2.8 million common shares, obtaining net proceeds of $58.4 million.

Over the next several months, we plan to use $31 million of the proceeds to redeem our 10% series B preferred stock and $26 million to pay off a mortgage with a fixed rate of 7.8%. The common issuance will be 2 cent dilutive for the second quarter and 2 cents accretive on the annual basis upon the the series B redemption and mortgage repayment.

During the first quarter, in accordance with FIN 46, the company consolidated four joint ventures of which three had been previously treated under the equity method of accounting. The consolidation had the impact of increasing real estate assets by $15.7 million, debt by $10.2 million, and minority interest by $5.5 million. For the first quarter of 2004, the company's EBITDA to interest expense was 3.1 to 1, and our fixed charge EBITDA coverage continues at a solid 2.2 to 1 ratio. We expect the fixed charge coverage ratio to improve as we move through the year as the result of the series D conversion and the plan series B redemption.

Earlier Clay provided our FFO guidance for 2004. On a quarterly basis, we expect FFO for the second quarter to be 40 cent, which takes into account the temporary 2 cent dilution from the recent common offering. We are also expecting higher cap ex as we move occupancy to 94% as Randall will discuss in a few minutes.

Now I will turn the call over to Randall.

Thanks Roger and good afternoon everyone. As Clay stated earlier, we believe you should measure our performance in 2004 based on four aspects. Roger covered our capital strategy for the year. Next we look at our ability to increase occupancy. On March 31st, our portfolio ended the quarter at 91.9% occupied and 93.8% leased. This is the highest percentage leased level for our company since September 2002.

We view our percentage leased as the lead indicator for portfolio occupancy and as such believe we are well on our way to reach our 94% occupancy target by year-end. As a point of reference, each 1% of occupancy equates to 4.5 cents of FFO on an annualized basis.

This percentage leased reflects not only improvements in major markets but also expanding relationships with our tenants. One good example is the recently signed 100,000 square foot lease with [NORTHRUP CRUMB] and at airport square one, which will add 1% to our occupancy later this year. Another example is the 242,000 square foot lease we signed with [inaudible] Hamilton at our One Dulles Tower building in Herndon, Virginia.

Recall that we had structured our purchase of this 100% leased, 13-story, 4004 square foot trophy property to accommodate the tenants' desire to downsize in 2005 and 2006. We were able to downsize size the existing tenant, verifying and will recognize a $3.5 million termination fee over their remaining lease term. And ahead of schedule, we replace placed their sign with Booze Allen on a long-term lease without any downtime or loss of revenue.

We also recently closed on an adjacent 5 acre parcel which can be developed into 225,000 square feet of office space to meet Booze Allen's future expansion needs, there by allowing us to accommodate their growth. This is an excellent and accretive transaction for us.

In addition to the verifying termination fee, we will also recognize a $1 million per quarter termination fee this year in connection with the termination of 143,000 square feet with AT&T at our Princeton Technology Park in New Jersey. We have agreed to get the space in January 2005, in return, we receive the termination fee, an extension and lease term and an extension on rental rate on another AT&T lease in this park.

In terms of leasing statistics we renewed and retenanted a total of 510,000 square feet for the quarter. Of this total renewed space was 277,000 square feet, equating to an 84% renewal rate at an average capital cost of $1.70 per square foot. Average rates for the renewed and retenanted space increased by about 3.3% for base rent and 3.1% for total rent on a straight line basis. Rental remain flat on a cash basis.

For renewed and retenanted space, the average capital cost was $7.75 and was comparable to previous quarters. We continue to be very pleased with our leasing and cost controls. Looking at our lease expiration schedule across our portfolio for the remainder of this year, we have 751,000 square feet scheduled to expire, which represents 7.5% of our total rental revenue, down from 9% at the beginning of the year. A majority of this space is comprised of three leases of 50,000 square feet or more. We believe that we will renew or retenant these large leases and that our retention rate for the year will be in the 70 to 75% range, looking ahead, our 2005 lease expirations are now 11% for the portfolio.

Our third measurement is acquisition activity. As Clay mentioned, we have worked diligently to expand our franchise into new sub markets. With the acquisition of the St. Mary's county portfolio in Maryland, we continue our strategy of entering a new sub market and buying portfolios of office properties strategically located next to key government agencies.

In this instance we paid $60 million for nine buildings, totaling 490,000 square feet along with 14 acres of developable ground and expect to close on one more building within the next 60 days. We have quickly established the dominant position in this sub market. And as the largest owner of class A space, owning 30% of the entire market.

All the buildings are located at or near the entrance to the [PATUCIN] River Naval Air station. This location is the headquarters of the naval air systems command and the naval air warfare center aircraft division which provides R&D air and ground testing and evaluation, aircraft logistics and maintenance management.

The naval base has grown from 5,000 employees to 20,000 employees over the past five years and continues to expand its important role. The tenants in our building support the base operations. And many of these tenants are the same tenants located at our other defense related parks. So we have excellent relationships to build upon.

In general we continue to outperform each of our core markets with respect to specific conditions. In the BWI sub market as of March 31st, they concede, including sub lease stood at 10.8%, down from 14.6% one year ago. Our BWI portfolio totaling 3.5 million square feet and representing 79% of the BWI sub market improved by 4% to reach 96.2% leased at March 31st.

Turning next to the Columbia sub market in Howard county at March 31st, vacancy with sub lease was 14.4%, down from 20.8% one year ago. Our properties in the Columbia market total 1.6 million square feet and are currently 92.4% leased. In the Dulles south sub market in northern Virginia, the vacancy rate continues to decrease, ending the first quarter at 13.3%, down from 20.6% one year ago. Our operating portfolios, six buildings, totaling just over 1 million square feet is 99.2% leased and occupied.

And lastly, we measure our development activity. As Clay indicated, we very active with 427,000 square feet under construction. By year-end be we will be completing 423 Forbes Boulevard, 220 NBP for the Titan Corporation at National Business Park and Greens 3 for the Aerospace Corporation at Westfield's Corporate office.

With respect to new buildings at the National Business Park, we continue to have very strong tenant demand for additional space. We are started construction on 318 NBP. A 126,000 square foot building. This is the first building in phase two, which when complete, will total 1.3 million square feet.

Since the end of the first quarter, we have also started construction on 191 NBP. A 104,000 square foot building, that is the last building in phase one. We also expect to start shortly on the construction of 304 NBP. A 163,000 square foot building, the second building in phase two. We expect two of the three buildings to be become operational by year-end 2005, and the third to be operational first quarter of 2006. We have one building under letter of intent and solid proposals out for the other two buildings.

Our buildings in Westfields' Corporate Center in northern Virginia are full and based on tenant demand we expect to start construction by July on Washington Tech Park II. A 216,000 square foot expansion tied into Washington Tech Park I. We are also in the design stage on the first building at Park Center. The 32 acre parcel in Westfield that we purchased during 2002.

Also, as a result of increased activity in northern Virginia, we have added two new positions to our team. Derek BOGNER, a former director of real estate at Titan Corporation has joined us as a Vice President in Asset Management and Leasing with overall responsibility for leasing of our northern Virginia properties.

Meg McGer has joined us as Director of Development and Construction to oversee the development and construction activities in this market. With these two editions and coupled with our existing strong team in place, we well in position to continue our growth in this market.

In summary, we continue to implement our strategy of expanding within the greater Washington region and developing to meet tenant demand. Underlying our success is our commitment to providing our tenants with the best possible service.

To that end, last month's CEO and associates announced the result of their annual national independent tenant survey. We again ranked very high. In fact, we ranked third in the nation for 2003 in our peer group of large office landlords and achieved an outstanding rating in every key category. In addition, 64 of our office buildings were rewarded their highest honor which is an A-list ranking.

Needless to say, all of us at Corporate Office Properties take great pride in this accomplishment and we think that this pride continues to positively impacts our bottom line. With that we will open up the call for your questions.

If anyone does have a question today, you may ask it by pressing the star key followed by the digit one on your telephone keypad. We will take questions in the order that you signal us and we will pause for a moment to assemble the roster. If you are even speaker phone, please pick up the hand set in order to reach our equipment. Again, if you do have a question at this time, please press star one now.

We will start with Frank Graywit with Key McDonald.

Good afternoon, guys. You can talk about any additional capital requirements that you may need during the year year, and if they're included in your guidance.

Well, most of the capital retirements, Frank, that we will need will be -- well, in terms of investment hours, we have -- as Ran mentioned, $100 million of development starting and we have funded all the equity for that through ownership of the land and will now be entering into construction loans to fund those assets. And we're also positioned because of our recent equity raise to do another 50 to $75 million of acquisitions before having to raise any more equity. So not understanding exactly how acquisition also come down for us for the balance of the year, at this point, we are situated to make it through the year without any additional equity, subject to acquisition pipeline picking up.

Okay. On the development front, at NBP, for the space that you've started and expect to start, do they cover all the contracts that are currently out for bid by the NSA?

Well, typically, frank, what happens is when contractors are responding to a request, they come to us and issue an RFP. And that RFP will respond to, say, 100,000 square feet. What's the rental rate? When you can deliver it? And that's included in the cost of their contract. The figures that I've outlined, which include the three -- you know, buildings underway plus those that have already been leased to the Titan Corporation, do not total all of the sort of firm RFP interests, it's just the amount that we prudently think we should be starting at this point in time.

There is another level of demand, fairly significant demand stacked up right after those. And our expectation is that we have these buildings underway, see how the leasing proceeds, and as that leasing firms up, we would then most likely have to start additional building, dependant upon that lease up to continue to meet the demand.

Okay. What were the -- as far as lease term fee that's going to be paid by [inaudible]. Do you have any idea of the timing of this?

It's being paid out over an 18-month period, starting now -- partially now and over the next 18 to 24 month, and we will recognize it over the balance of their lease which is? Now until July 31st of 2014. So it will be about $300,000 a year.

Okay. Were there any lease termination fees during the quarter?

In terms of same-store lease termination fees, we had AT&T for just under $1 million, and the first quarter of last year, we had one 1. -- almost $2 million from Verizon in northern Virginia.

And finally, I was wondering if you could talk about any additional external growth opportunities in St. Mary's county either on the development or acquisition side.

Well, I think, Frank, that market is about 1.6 million square feet of office space, and included in our acquisition of when we finished this other building of the ten buildings, there are other buildings that we are continuing to look at. We have been approached by some people interested in selling, and others are tenants that have come to us, which is typical in our situation and said that they would love for us to be owning the building. So we would expect to try and add to our critical mass there and be as we are now, a major owner with 30% of the mark we would hope over time to add to that. Which has been the pattern that we have demonstrated pretty consistently in other markets that we have entered.

Thanks a lot, guys.

And again, if you would like to ask questions today, you may do so by pressing the star key followed by the one on your telephone keypad. We will move next to Dave Upshawn, AG Edwards.

Thanks, Roger, I'm not sure I understand the accounting treatment of the leased termination fee versus booking all those this year, is it because both of those tenants remained within the portfolio that you can now amortize it over the life of the new leases?

That's what the accounting firm based on SEC guidance is telling us that as a result of those tenants still remaining in our buildings or in an adjacent building that those revenues will be recognized over the terms of those leases, if we had a single building with a single tenant and that tenant left, we would recognize it immediately.

Then you're actually -- you have not received a lump sum this year. You will receive that amount of cash per year over the life of the lease?

Know, actually, in the case of AT&T, we already have $2.1 million in the bank we will get another $2.1 million January of '05. In the case of [VERISIGN], we will have a couple hundred thousand in the bank, and we will receive the other $3.1 million over a 24-month period. In cash, that is. But we will recognize it over a much longer period of time. From an accounting stand point.

So in terms of reconciling [inaudible] of your guidance, how should we look at that?

Well, we had assumed -- historically, for the last two years, we have received about $4 million a year in termination fees, and so we think that that's a good number for this year.

That's good.

Ran, giving the assuming demand you have now on the development side, are you saying yields increase your return pick up at all?

No. I think our philosophy is not to gouge. It's to be fair. And certainly we probably could move it beyond what some might deem reasonable levels. But we try and price it such that it's a consistent return. The last few buildings have been at a 12% plus going on cash on cash yield. I think you'll see that slip slightly it's a combination of some of the force protection measures that we are sort of experimenting with and the decision to go green on buildings. It adds a little bit of cost, but saves on operating. But we're sort of in that learning curve.

And secondly, as everyone I sure has been experiencing, there has been an increase in construction costs related to some materials, steel has gone up. It was very hard to get steel studs. People are hoarding that and long lead items and a few things like that. We hope that's a little temporary. And as the China slowdown does occur. That should put some of the pressure off of that and those other plants gear up capacity. But it's been relatively minor. But enough that it's maybe shaved 50 basis point or so off some of those cash on on cash.

So you're still in the 12% range, singly?

11 to 12. We have typically in the past shot for 11s and maybe achieved a little higher. So maybe we're coming back into those historic levels.

Okay. On the acquisition side, I think the commentary we have heard consistently from others, as well as yourself. The competition for assets is pretty fierce, particularly in the D.C. area. Is your return threshold there going to get expressed there, or do you still see your ability to make acquisitions for the next 12 to 18 months still pretty attractive?

There's some pressure, although I think we have tended to loose a fair amount of those deals, we are not too good at the auction process, and those pricings have generally gotten away from us. A lot of the transactions that we have been doing have not been, per se, on the market. In that instance, you might have a little bit less efficiency and a little bit more attractive prices.

Last year we did $165 million roughly a 10 cap. This year, on $100 million debt or $98 that we've done so far, we are probably more in the 9 and 3/4 range. You know, we very -- Clay is rigorous in the discipline of looking at the replacement costs, and we watch because we're in the development mode, we understand that very comfortably. So we just won't go past replacement costs on the bids that we're doing, and we think those people that do are being somewhat short sited and that has kept a nice discipline, and it's just caused us to not be into a feeding frenzy that a number of people have participated in.

Has the reviews change at all on the asset sale side on the properties that you're looking at. Maybe giving a change in the environment that we're seeing over the last month?

Well, we keep looking at that, and somewhat it's maybe an issue of -- you know, of leasing, the properties aren't quite ready or may have a loan that needs to roll off. It's a little unfavorable interest rates. But the reality is we don't have a lot of properties for sale. I mean, all but six of our properties are located in -- you know, core office parks and those are very critical to the company.

So you know, we said we would do roughly $25 million this year and unlike -- you know, some of the others [inaudible] out there, it may have gone fairly widely scattered on portfolios and now I have an opportunity to get out of those. We don't have that situation and have only six properties over the next -- you know, period of time. We would be selling.

My last question has to do with the average rent on the 2005 expirations. It looks to be $1.00 to $1.50 higher that your rents that are expiring this year. Is that due to specific buildings in some markets and higher quality space or do we expect a lower mark to market in the year.

I think it had to do with in '04, we had maturities in Harrisburg, which tends to have lower rental rates than the balance of our portfolio. So it's really just an average thing.

Thank you.

We will move to David Fick, Legg Mason.

Yes. Good afternoon.

I was wondering if you could just comment on your current perspective on the I-83 corridor now that you've sort of beefed up your presence there. I'm wandering if you've got any volume creating opportunities on the horizon.

Well, we're always looking for volume creation. I think the article you wrote today that we've seen and in the further explanation of that -- you know, we viewed the AI building as a value ad opportunity by itself, in that it had leasing gaps. It was generally unappreciated in the marketplace because it was a very large floor plates. And previous owners were reluctant to spend any money. And secondly reluctant to break up the floors. We have figured out a way to do that very comfortably, and we're comfortable.

We bought it at attractive enough price ha we can afford spruce the building up and improve its marketing appearance and raise the rental rates. That in and of itself is an excellent value add opportunity. Unfortunately, we don't comment on the reports you read in the paper related to the opportunity to purchase the additional acreage up there. And we will see how events unfold there. But would I not believe everything you read in the paper.

Okay. I had a chance to drive through that property earlier today, and I'm just wondering with respect to the building that you purchased, does that include the structured parking there?

Yes. That is, there's a park -- Dave is referring to the north of of this property is a large structure parking facility. And that is the major support for this building. If you saw to the west, there's an empty parking lot that can be further expanded, a portion of it can be sold off. You can add to the deck and sell that entire property off. So it's an interesting property, recent land sales in that area have been going for $1.8 million per acre. It's very hard to find land. So in addition to the value created just from leasing the building well, we think there are some other opportunities to more effectively utilize some of that land.

That building is surrounded by sort of industrial steel buildings, very flex oriented still a lot of secured areas there. Where is the land physically located that's for sale there?

It's to the northwest -- In other words, if you looked behind the parking garage, if you saw a fence, and then there's another building that's part of the AI complex, and 26 acres is just beyond there and connects north to the next street. The main access point is to the next street to the north.

Thanks a lot.

Okay. Dave.

We will go to Timothy Gobble with Wreath.

Hi, guys. Question.

Penalties on prepayments of the mortgage, is there anything going to flow through earnings on that?

No. Actually the mortgage matures August 1st. We have the ability to prepay it beginning June 1st without penalty, and that's the day we plan to pay off the mortgage.

And did you talk about cap rates on the acquisitions?

I responded to this, Ran.

I responded to the question when they said are you getting pressure on cap rates. We said we saw it come down into the 9.75 range. Cap rates are an interesting phenomena. Because you could look at a property that has very low rental rates and under the count market and run your IRR runs and decide you're going to pay a lower cap rate, because you're going to over the period of time holding can get a significant upside. Other times, people may be buying for -- You know, rounding out of certain strategic property or an opportunity to see there's adjacent land. People sometimes misconstrue cap rates, and they are more complex than a lot of people tend to understand. But generally, we have seen a slight erosion on cap rates from our previous years.

Okay. And these acquisitions in the quarter, are they roughly in line with that?

Yes.

Then on the lease terminations, you can help quantify the drop off in rental income that that's going to create?

That won't occur until '05. AT&T is still obligated to pay rent on the one building through January 31st of '05. But beginning them, then, the rental rate on that building is approximately $20 a square foot times 143,000 square feet, so $2.8 million.

In other words, there is no drop off in register rate.

Right. And prospects are releasing that, the AT&T space?

We have a couple of prospects. We feel pretty good about. And we have time and we're accelerating our marketing plan, and we are reasonably optimistic that we won't have a lot of down time.

Very good. Thanks.

We will move to Rich Henderson with Max Core Financial.

Thank. With regard to the acquisition guidance of $100 million. Should we expect sort of 25 and 25 acquisitions in dispositions? Or do you think -- you know, there could be an uptic into your guidance for the remainder of 2004?

Rich, it's Clay.

I don't think we can comment on that. We have certain things going on. But they're not mature, and we never know the acquisitions, whether we're going to be able to accomplish them or not. All I can say, as I said before, that based on what's happened so far, we feel certain that we're going to make the $100 million gross number pretty quickly. And that obviously it puts us in a good position to exceed the acquisitions that we had projected to do this year.

Thank you for that.

With regard to the equity offering, did you have to adjust the number of shares that you issued in response to the stock coming down four points in -- two weeks prior to the offing?

No. We had a very specific amount in mind, which was geared to the use of proceeds which was the total of the paying off of the series "B" preferred $31 million and then the loan, the money loan at $26 million. So we were right on the money. We didn't try and overdo it. We were just trying to match it very specifically against those use of proceeds. And it was a very accretive.

I know you commented in your write-up about questionable timing, but unfortunately be you don't have the luxury with all of the various filings and so on to just choose to go whenever you would like. You have a fairly narrow window of time. And we did the best ha we could within that window of time, and certainly, given the choppiness in the market to date, I think that it was a good execution, and certainly the investors that bought it are appreciate of being at that level versus at the 25 level that could have occurred if we had tried do it earlier.

That I'll give you. What do you say is keeping other participants from entering for the development of the so-called secured facility that you guys are particularly skilled at? Is it a special skill set? Obviously it takes more money. But do you see more players coming into that specific niche in the marketplace in.

No, not really. A lot of thing -- we can't comment on that because of the situation. It's a unique skill set. There's no such thing as just common space. It's according to each of the requirements of the tenants. You know, you don't rush out and build speck skit space so that it has some unique requirements from that perspective. And, frankly, it's just not something that a lot of people understand and have the skill set.

What do you suppose you give up in rent from exchange fort high credit of federal government?

We don't give up anything.

If you were to lease that suffice a non-government tenant? What do give up do you think?

Clearly they are our number one customer and there is some discount to the contractor universe, but it's not significant. It's consistent with the value that we give them and the value that they give us.

But would you say that there's a lower sort of growth potential from property housing federal government versus a non-government tied tenant?

No, I wouldn't say so because we're not over improving the property. So in the long run we are getting just about equivalent rent and in the future we should have a good net residual value from the property. And those properties are located in our business parks anyway.

Last question in the News and Journal. Lockheed Martin was awarded a $5 billion contract for missile development. How long does it take for companies to sort of ramp up head count with something like that? Does it just move too slow or do you actually start to see them hire more people fairly quickly after an announcement like that?

Our general experience is that it -- you know, there's sort of three phases. I mean there's an anticipation of the winning they of ramp up a little bit. There's a fairly immediate ramp up. But most of it occurs within about a year. They need go out and get additional space that's wrapped up in the contract.

So in the instance of Titan Corporation, for example, and others that we've seen, they anticipate being at full strength by the time they're occupying a building, maybe a year after they have won the award. They start into the hiring process for that ramp-up fairly quickly. They need -- and depending on the -- particularly the markets they are in, the success rate of getting those people that's what will have the impact of housing those people.

So you start talking to them -- you know, you've already been talk talking this contract and inquiring about additional space needs already with them, would you say?

We don't know. You know, we have had this ongoing discussion all the time with our top 20. They are not quite in the top 20 list. But we -- they are valuable client.

So we never know in those discussions that are just ongoing constantly whether it's geared to that specific contract or not. A lot of times, after they have won, then you will get some occasion and impact that it could have on you. But not beforehand.

Thanks very much.

We'll take a follow-up from Frank Graywit.

Just a quick on the loan that you are marketing now. The 80 to $100 million loan. Do you have an approximate timing and pricing on that?

I think the loan will close in the fourth quarter, and it will have is a rate of -- you know, high fives, probably.

And that's midway through the fourth quarter?

Yes.

Okay. Thanks a lot.

There are no further questions at this time. Did any of our speak verse concluding comments today?

Yes. I just wanted to thank everyone for their participation. We appreciate. It and Ran, Mary Ellen and Roger are available to answer any questions you might have. I wanted to tell you that we intend to hold our second quarterly conference call on July 29th. And, also, for those of you who are interested, we are holding our annual meeting one week from today on May 13th, so there's free coffee there. And thanks again for your participation.

Now we will conclude today's audio conference. Again we do thank everyone for their participation.